United Nations involvement in ocean mining

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United Nations involvement in ocean miningAlexandra M. Post aa Hochschule der Bundeswehr , Munich, West GermanyPublished online: 16 Nov 2009.

To cite this article: Alexandra M. Post (1982) United Nations involvement in ocean mining, Ocean Development &International Law, 10:3-4, 275-313, DOI: 10.1080/00908328209545682

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United Nations Involvementin Ocean Mining

Alexandra M. PostHochschule der BundeswehrMunich, West Germany

Abstract Developing country governments seek implementa-tion of the New International Economic Order (NIEO) through themedium of United Nations involvement in ocean mining. To under-stand the debate over the Draft Treaty it is important to identify thevarious functions that a UN authority could perform. There is, forexample, no full precedent for a joint venture in which one of theparties, the Enterprise, is an international organization. Moreover, acentral question regarding the proposed Seabed Authority is whetherboth promotion and control of commercial activity can be performedappropriately by the same agency. The essay considers a miningregime as envisaged under the Draft Treaty and alternatively as it maybe under an interim reciprocal regime in the event of nonratification.Whatever the outcome of LOS III, another alternative, incrementalimplementation, should be rereviewed carefully.

I. Introduction

Parallel to increased activity in land-based minerals extraction, develop-ing country governments are attempting to perform a greater role inocean mining through the medium of a United Nations organizationalinvolvement. This trend represents one arm of the pragmatic implemen-tation of a New International Economic Order (NIEO). Its more im-mediate domain is the building of a new legal and economic regime forthe oceans. The outcome of this effort depends on: 1) the nature of

Ocean Development and International Law Journal. Volume 10, Numbers 3/40090-8320/82/010275-00$02.00/OCopyright © 1982 Crane, Russak & Company, Inc.

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276 Alexandra M. Post

specific contractual terms between an international authority and theindividual contractors for ocean mining, and their ratification as part of anew international Law of the Sea Treaty; or in the event of nonratifica-tion, on 2) reciprocal interim legislation enforced by ocean mining states(coupled with precedents in international customary law) until morecomprehensive international measures can be negotiated. Other alterna-tives include: 3) the possibility that ocean mining will not occur at all; 4)the possibility that ocean mining will occur without international in-volvement whatsoever; and 5) the possibility that due to unreconcilabledifferences in ocean mining treaty-making, a step-by-step approach forincreasing UN involvement in ocean mining will be considered. Asalternatives to a treaty world (or an ocean mining world governed bynational legislation), the possibilities of no ocean mining, or inversely,of no international control, are deemed less likely to occur given theextent of development of ocean mining technology and the extent ofinternational ocean mining negotiations to date.

The following essay considers the fifth alternative—incrementalimplementation—in a two-track discussion of regulation and servicecontracting. We firmly maintain thafeven if one of the first two legalformats for ocean mining occurs, the salient features of the discussionbelow should be reviewed for purposes of incorporation.

A twelve-year experience in elaborate interest bargaining in the LOSseabed arena has generated few directly applicable results (even thoughexperience has been gained from the negotiating process itself, andprecedents may be established for customary international law in someareas). Even though an informal Draft Convention has emerged (A/Conf. 62/WP. 10/Rev. 3, 1980), one that is more embellished withsubstantive detail than its predecessors, the likelihood of its ratificationstill remains unclear. Furthermore, the Draft includes a detailed oceanmining "contract of work" that deals with an industry that still does notexist. However, as the world resource scale slowly tips in favor of thedeveloping countries (indicated, among other things, by historicalchanges in the terms of minerals agreements), and as capital financingevermore requires new, imaginative solutions fora world of increasingpolitical risk, the pressure to find solutions for bottlenecks in oceanresources exploitation and in international trade and investment ingeneral can be expected to increase. In addition, industrialized marketeconomies increasingly realize the need to defend their own resource

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United Nations Involvement in Ocean Mining 277

import needs. Developing economies, on the other hand, are concur-rently witnessing the setbacks of higher capital costs. Viewed together,these trends indicate a foreseeable transition from "aid" to "trade-offs. ' ' Because of these and similar pressures, cooperation in the pursuitof common global interests perhaps will keep abreast with logrolling inthe pursuit of particularistic national interests, the sum of which rarelyequates with global concern.

As the LOS world waits for an ocean mining industry to materialize,the establishment of a legal and institutional precedent for the UNregulation of one of the global commons is imaginable. Based on thisassumption, a UN regulatory role is outlined below as well as a moreextensive role through service or management contracting. As Mollersuccinctly states:

The fundamental precondition for an undisturbed world economic order isnot present—namely concurrence of responsibility, involvement, affected-ness, and decision-making authority. . . . The development of a newinternational economic order . . . will largely depend on a willingness toaccept pragmatic and partial solutions.l

The establishment of a regulatory role for an International SeabedAuthority (ISA) is a conceivable first and partial step in this direction—until a later and more comprehensive solution can be worked out.

For until a basic conflict-of-interest is resolved, treaty-making suc-cess may be delayed or thwarted. This conflict is one concerningwhether it is more desirable to institutionalize an immediate redistribu-tion of resources and income, or^long-term reorientation of the presentstatus quo in international production and trade channels. It is a conflictabout the desired rate of change. The Group of 77 essentially representsthe entry of new, (though non-homogeneous),2 change-oriented,interest-seeking participants into the ocean mining domain—instigatingdemands on the basis of a voting majority in international organizations.Their demand for "Kooperation" in new order building parallels theincrease of their political visibility (and vociferousness) in an existing("transition-oriented") status quo. But their assertions comprise a"Kampf" against existing power distributions and a desire for radicalchange. Change is the battle cry of the young—and the cry of thepostwar baby-nation boom is apexing in adolescent frustration with

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often not-so-old parents who are now witnessing the repercussions ofprolonged scolding.

Industrial nations, in contrast, opt for a systemic readjustment in apositive-sum game with relative gains, i.e., the North will have more,and the South will have somewhat more. Cooperation here impliesgradual systemic change vis-a-vis a gradually shifting ratio of power andresource distribution. It implies a slower evolution, rather than a rapidrevolution, in interest handling (consistent, perhaps, with the LOS' 'committee system " in a parliamentary—albeit adversary—format). Ina world of growing economic and political interdependence in whichlegal regimes are being framed in order to close the "gap between lawand technology,' '3 anticipating a high score on the basis of one's votingor economic power is perhaps a way of losing rather near the beginningof the game. Should an impasse be reached because of interest conflictsregarding shifting control patterns, a final alternative resort would be thereference to common global interests that do not extend so far but that, inany case, constitute a beginning in an oft heralded but less manifestedmarch toward cooperation.

The observations in the following paper concern various functionsthat a UN authority could perform in the ocean mining field. Some of theconfusion surrounding the ocean mining debate stems from the mixingup of these functions; it is therefore important to set apart agencyfunctions related to commercial activity in discussing an Authorityocean mining role, keeping in mind that host country governments haveoften assumed new functions as public expertise grows and industriesbecome more mature.4

• No Authority Function. Theabsence of a UN ocean mining author-ity is politically improbable simply in view of the extent of negotia-tions to date. Unlike other parts of the Draft, without a final treatythe Articles and Annexes for ocean mining may not hold asprecedential under international customary law because of legalquestions and ideological cleavages concerning the viability ofunprecedented activity in economic production. Ocean miningnations could enact "interim" national legislation5 while stallingon the negotiating front, but in the long run it can be anticipatedthat global social and political pressures would demand more. The

. die for increased UN involvement has been cast.

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• Regulation. A starting point for a successive UN involvement ineconomic production in the global commons could be the regula-tory supervision of mining entities according to agency-set stan-dards. Areas of plausible regulation in order of increasing politicalmagnitude are: environmental monitoring (tailings/waste dis-posal); the creation of a multi-use maritime satellite system; coor-dination of multi-use ocean transportation networks; stipulation ofconditions and rights of entry in ocean mining; specification of ascheme or standards for stimulating inter-state cooperation; dis-pute mediation (judicial); price and production guidelines.6 Thepermit and license-granting competence of the Authority as well asthe site allocation scheme could be classified in the regulatorycategory.

• Taxation. A further addition to an established and successfulregulatory function would be the subsequent establishment of ataxing authority whose revenues could be applied to administrativecosts and to the funding of agency projects.7

• Investment Promotion. A further incrementally adaptable functionwould be agency assistance for ocean mining finance. Agencyinvolvement in this area could include arranging for concessionarylending as a guarantor or sales agent for insured project bonds, oras a classic investment trust that holds ocean mining debt andequity issues for new project entities, or guarantees some percen-tage of original purchase.8 As sales agent, the agency could per-form the further function of:

• Allocation of Benefits. The agency could manage an (interest-or) income-paying bond distribution whereby payment is tieredaccording to an economic indicator such as GNP per capita. Forexample, least developed countries receive bonds on a highlyconcessionary basis ( e. g., no payment required), whereas highGNP p.c. countries pay the full price, partially covering the costsof the concessionary bonds which could also be covered by futureocean mining income. Further benefit-allocative performance isincorporated in the regulatory function whereby accessibility toocean mining and to potential ocean satellites communications,not to forget to a cleaner ocean, is guaranteed.

• Equity Participation in Joint Ventures: Partial Ownership. A• • further agency involvement is sharing in corporate ownership with

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commensurate management responsibility. Through the formingof joint ventures, this type of participation is largely envisioned tooccur in the "reserved areas" of the high seas between privatecompanies (or state enterprises) and a Draft Treaty-envisioned"Enterprise" production arm of the Authority.9 Financing hereand in the domain of total ownership becomes a central facet as theagency is no longer investment facilitator or capital intermediarybut an owner with its own capital requirements.

• Total Ownership. The Authority retains total ownership rights,contracting for services from private firms (or state enterprises) ona fee- or production-sharing basis, or, for example, on a turnkeybasis whereby a complete, ready-to-go ocean mining operation issupplied to the Authority on a purchase basis. This "unitaryapproach" could eventually be introduced, according to DraftTreaty prescript, at a future ' 'Review Conference'' so that (more ifnot total control) of ocean mining would enter into UN hands.

As previously stated, we deem it too early in the history of interna-tional organizations/or total UN authority control on financial as well aspolitical grounds. The following discussion is thus oriented towardregulation, on the one hand, and the joint venture approach, on theother, with special consideration given finance and tax regimes.

Legal issues concerning exploitation and the sharing of control andrevenue are considered first (Part II). Thereafter, economic issues con-cerning a resource policy and the problem of assistance to land-basedproducers are discussed (Part HI). Finally, the relationship betweenocean mining and new international economic ordering is considered(Part IV).

II. The Deep-Sea Mining Debate

1. The Right to Enter into Contractual Arrangements

Much has been written about the ability of the UN to enter into treaties,but less has been mentioned about that organization's ability to concludebusiness contracts. In international law there seems to be no generallyaccepted definition concerning what a joint venture is.10 Joint ventures,however, are often created pursuant to a treaty or agreement between

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participating states. The constituent instrument generally defines objec-tives, legal powers, immunities, operational aspects, and financialprovisions11—much as does the Draft Treaty. Joint ventures are grantedjuridical personality under the national legislation of the parties con-cerned, or they are incorporated into one or more of the contractingstates and have the same status as any other company in that state. Inother cases, the constituent instrument itself grants the joint venturelegal power to conclude contracts.12

Since there are apparently no full precedents in international law forthe establishment of a joint venture in which one of the parties is aninternational organization,13 it remains unclear how an InternationalSeabed Authority (ISA) would gain legal capacity to do so. According tothe Draft Treaty, legal personality is created by the constituent instru-ment itself. According to this text, in the (international) "Area," it isfairly clear that the governing law is the treaty itself (plus implementingtreaties):

' "The law applicable to the contract shall be the provision of Part XI. . . . the rules and regulations prescribed by the Authority, the termsand conditions of the contract, and other rules of international law notimcompatible with this Convention. "14 In contrast, "The Authority, itsproperty and assets, shall enjoy immunity from legal process except tothe extent that the Authority shall have expressly waived such immunityin a particular case."15 However, the above is conditioned "To enablethe Enterprise to fulfil the functions with which it is entrusted, thestatus, immunities and privileges set forth herein shall be accorded to theEnterprise in the territories of States Parties. To give effect to thisprinciple the Enterprise and States Parties may, where necessary, enterinto special agreements for this purpose."16

A partial precedent was set in this domain by the International FinanceCorporation (IFC)—that part of the World Bank Group granting finan-cial aid to the private sector. The IFC is unique in that—as much as it is abusiness promotion agency—it is the only universal international orga-nization making investments directly in the private enterprise sectors ofdeveloping countries. Since 1961, the IFC has also been empowered notonly to lend but also to make equity investments, or, in other words, toact as a shareholder. Thus, although the IFC does not wish to become adirect party to a joint venture, through its ability to buy ownership in thecompany through equity purchase, the IFC can take an effective role in

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sponsoring private business projects. It supports joint ventures, al-though it does not overtly enter into them.17 The IFC, however, does notundertake managerial responsibilities; it rarely exercises its votingrights; it is unwilling to be a dominant shareholder, and normally insiststhat its holdings be less than 25 percent.18 The IFC also supports"mixed" enterprises, i.e., joint ventures between private enterprisesand a government.

Thus it can be seen that direct participation in the business sector bythe IFC precedes ISA involvement, but to nowhere near the same extent.In comparison, the ISA and its operating arm, the Enterprise can enterinto joint venture arrangements with private or state entities underAnnex IV. 13 (2):

' 'The Enterprise shall have the legal capacity as is necessary for theperformance of its functions and the fulfilment of its purposes."19

Similar to the IFC, ' 'Actions may be brought against the Enterprise onlyin a court of competent jurisdiction in the territories of a member inwhich the Enterprise has an office, has appointed an agent for thepurpose of accepting service or notice of process, has entered into acontract for goods or services, has issued securities, or is otherwiseengaged in commercial activity.' '20 The above provisions notably grantthe ISA the right to issue securities for companies established throughjoint arrangements. Furthermore, "Activities in the Area shall be . . .carried out. . . by the Authority on behalf of mankind as a whole. . .by the Enterprise, and . . . in association with the Authority by StatesParties or State Entities, or persons natural or juridical which possess thenationality of States Parties.)>21 Finally, "Every plan of work approvedby the Authority shall. . . ensure control by the Authority of activitiesin the Area. "22 The ISA through the Enterprise also "shall have title toall minerals and processed substances produced by it"23 insofar as "allrights in the resources of the Area are vested in mankind as a whole, onwhose behalf the Authority shall act. " M

Thus, an ICNT-created Authority would initiate two innovations ininternational law: 1) the right of a UN organization to enter into acontract for the purpose of joint economic undertaking and to issuesecurities, and 2) the right of a UN organization as the representative ofmankind to hold title to raw materials. Thus, the Authority will have ageographical domain and asset or raw material product that the ISA willprovide in joint arrangements. Coupled with the facts that the treatyitself is the constituent instrument and creates an Authority that exer-

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cises ultimate control in the Area and that it is immune in many instancesfrom legal process, an international agency with potentially awesome (atleast statutory) power would be created by the Draft Treaty. The issuehere is not which nations will yield such power through sanctionedvoting formulas in Authority organs, but whether the granting of suchpower to a UN agency is timely and realistic.

2. The Changing Nature of the Minerals Contract

An underlying assumption of the UNCTAD efforts to establish a' 'Common Fund'' and of the ISA resource policy and production controlsystem is that a New International Economic Order (NIEO) must andcan be erected through the rationalization of international tradingchannels. This goal was indeed appropriate for the 1970s—a decade oferratic if not critical stock market activity and financial vagaries imply-ing recession, energy cartel price hikes producing untamable petrodol-lars and deficit development budgets and predictions of global financialcollapse if debts could not be repaid. The NIEO goal may be even moreappropriate in the 1980s.

The institutionalization of an NIEO has met with some success, aspolarized producers and consumers have reached accord concerning thefinancing and structuring of a "super fund" for several commoditiespooled together in an intraproduct price stabilization scheme.25 Theassumption of discretionary rationalization of international trade can beconfronted with another assumption that the NIEO is a self-engenderingprocess that is at least two decades old and occurs not only throughmacro-intergovernmental planning and regulation but also in micro-international business agreements.26 This assumption is somewhat sub-stantiated by the recent and rapid evolution of mineral agreementsbetween Western mining companies and Third World governments andfirms. The stipulation of contractual terms for ocean mining in therevised Draft Treaty belongs to this trend. A clearer understanding of thepalette of possible contractual arrangements for ocean mining can begained by elucidating highlights of the history of the minerals agree-ment.27

The Traditional Concession. In the earlier part of this century, themining company as a "concession holder" usually provided alltechnological and financial resources and assumed all risks for a mining

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project. In exchange, the company acquired the right to dispose ofresources mined; almost unrestricted rights were granted within themining "enclave"; local host country intervention in mining operationswas negligible. The paltry number of obligations of the company in-cluded the payment of a nominal royalty, typically based on the numberof physical units of output or on the value of output, payable to thegovernment in boom or bust. The advantages of concessions agreementsare that 1) they are relatively easy to administer and 2) the host countrygovernment is ensured through the royalty system of a regular incomefrom mining, even if minerals prices should falter.—In recent years thetraditional concession has been modified to ensure that the host countryreceives a larger percentage of the benefits of exploitation through rateincreases and the assurance of additional benefits, such as "local con-tent" clauses .e.g., goods and services are to be purchased locally, localpersonnel must be hired, and so on. A significant step further in thisdirection is profit sharing, or allotting a share of profits to the hostgovernment, often through an income tax scheme levied together with aroyalty. The reasoning behind this approach is that "each party makesits contribution—the producing countries contributing the natural re-source and certain facilities and the (oil) company contributing capital,knowledge and markets—with the profits of the enterprise being equallyor substantially shared between them. " ^ The same, however, does notapply to risk which the mining company was expected to assume.

Government Equity Participation. In the late 1960s governments in-creasingly abandoned this passive stance and began to seek more profitsand more control in mining agreements, usually by acquiring companyshares, or by contributing in some way to a new joint venture establishedfor this purpose. Governmental participation in this case comprises allow-ing access within the sovereign domain to resources, now often undergovernment title. Company and government thus became' 'partners'' ina joint venture arrangement. The magic formula for state equity partici-pation was often 51 percent—supposedly granting local participants amajor portion of voting power and thus control in management deci-sions. The aim of government participation in ownership was control ofmanagement and profits, although governments often discovered' 'posthumously'' that risk and loss were included in the equity purchaseprice. Control, meanwhile, often drifted away into the hands of transna-

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tional operations managers and in-house corporate planners.29 It is nowbetter understood that equity take-over does not necessarily guarantee atake-over of management control. Other measures have thus beensought by local governments and local entrepreneurs to gain more realpower in management.30 Local governments have begun to realize thatholding equity is in essence a trading of tax income for stock dividends.In general, holding 50 percent of a company's equity is, in purelyfinancial terms, less attractive to the government than having an incometax of 50 percent, the reason being that income from shares is onlyreceived after all current debts have been paid off, whereas taxes arecollected before debt payment.

The Service Contract. The separation of equity ownership fromcontrol—and later of control from capital financing, operations man-agement, and the provision of technology—is symptomatic of the ' 'un-bundling of services"31 which opened the path for a variety of newcontractual forms that experienced host country negotiators were nowwilling to explore. A predominant form is the service contract wherebythe contractor as a "supplier of services" provides management, capi-tal, and technology. These services are contracted for by the govern-ment, which retains overall control. The contractor is paid a fee orpercentage of profits or sometimes receives a reimbursement of costs.Payment in kind occurs in production-sharing agreements. This type ofcontracting form is envisioned in the Draft Treaty: "To the extent thatthe Enterprise does not at any time possess the goods and servicesrequired for its operations, it may procure and employ them . . . by theaward of contracts . . . based on tender."32 Similar is also the man-agement contract—often negotiated after a multinational firm has beennationalized—whereby the contractor receives a flat fee and/or percen-tage of profits and gross sales proceeds for services rendered. Thecontractor acquires no rights of ownership or disposal over the resourcesproduced, but must still assume all risks and liabilities. According toVernon's "obsolescing bargaining" principle, host country govern-ments would be foreign investors with attractive investment terms.Once, however, that operations are successful, the host country feelsexploited and (often unilaterally) "renegotiates" more favorable termsfor itself, usually by raising taxes, often by 60-70 percent.33 High fixedcosts which must be recovered act as a source of vulnerability, requiring

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256' Alexandra M. Post

the mining multinational to accept more stringent contractual terms.34

Due to the high frequency of contract violations, the question remainswhether a nonproducer-dominated ISA would not follow suit, therebyincreasing political risk and dissuading if not causing the cessation ofocean mining investment. On the other hand, mining operations havebeen known to realize windfall profits in the early years of production,causing host country governments to forfeit tax income because of taxincentives in the early years of production. A partial solution mentionedbelow is the introduction of flexible sliding-scale tax structures thatrespond in time to changes in corporate net cash flows. Another partialsolution has been the spreading of risk among outside creditors andguarantors and resort to long-term, fixed-price supply contracts withbuyers. However, the problem of guaranteeing investment security andat the same time engendering satisfactory income distribution remains athorny one and could constitute a major stumbling block in reaching adeep-sea mining accord.

3. Power Migration to the Third World

The question of why power as well as control over mining extraction ismigrating to the Third World and especially to state enterprises is theinverse of the question of why profits from natural resources were earliertransferred from the colonies to metropolitan centers. Raul Prebisch,Tietzel, and others would have us believe that profit transfer in thecolonial era occurred because of higher price elasticities in the indus-trialized center, i.e., for any change in supply, metropolitan consumerscould adjust demand.35 However, the above discussion also suggeststhat the determination of who gains profits and control is also largely anoutcome of the contractual bargaining process, itself dependent uponrelative bargaining power.

No wonder, then, that so much time and effort in UNCLOS discus-sions have been consumed in negotiating the terms of a mining contract,i.e., in the Draft Treaty. The Group of 77 has gained much experience incontractual bargaining in the last twenty years. The rises in oil andbauxite prices are but two results. The Third World is learning to drive aharder bargain. For example, in the Draft Treaty, the IS A organs and thehigh seas are largely treated as a quasi-national government in a fabri-cated area of "international sovereignty"—in the name of mankind.

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Furthermore, through its title to minerals, the envisioned ISA wouldhave a substantial say in the control of an industrial sector includingprocessing and marketing, in order to effectuate a resource policyconceived within the overall format of the NIEO. A new term could becoined to fit this trend, i.e., downstream political integration. Perhapsthe UN Charter should be amended to grant an international governmentreal sanctions such as taxing authority and a right to enter into businessventures so that new-found international power has an equivalent legalbasis, if real political strength on the international level is indeeddesired.

III. New Approaches and Old Precedents

1. A UN Regulatory Agency for Ocean Mining

The history of UNCLOS model-making has been dominated by threefactors: 1) an early trend toward a unitary system, 2) the lack ofacceptance of this system by ocean mining nations, and 3) a resultingimpasse in ocean mining negotiations. A parallel historicaldevelopment—the evolution of the mining agreement—has also beenelucidated (supra II.2). Holding these two separate but interwovenhistorical developments in mind, let us now outline two basic ap-proaches to ISA involvement in ocean mining that might provide a freshoutlook on the political future of ocean mining. The two approaches arenot meant to be models—which have often proven to be no more thanover-complex solutions inappropriate as bargaining instruments—butrather as general observations regarding probable future alternatives.

If the deep-sea mining impasse continues and recent efforts at recon-ciliation fail, it is conceivable that the UNCLOS draft treaty will bereadied for ratification without provisions for ocean mining. This wouldleave a seabed without an authority. An arrangement that could serveuntil final agreement on ocean mining can be reached would representno more than a small, technically-oriented regulatory function.

Regulation is a normal function at the interface between governmentand industry in a market economy. The concept of regulation hasevolved significantly, for example, in the United States since the estab-lishment of one of the first American regulatory agencies, the Interstate

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Commerce Commission, in 1887, to ensure the equitable use andmanagement of the national railroad system.36 Regulatory measures canbe differentiated from government policy, executive orders, judicialdecisions, and other government decisions concerning the economicsphere by the factor of independence of aregulatory commission, whichis allowed to function rather autonomously within the governmenthierarchy. The factor of independence is critical for the performance ofthe following regulatory functions: 1) to protect the consumer fromindustrial malpractice; 2) to protect the industry from itself by prevent-ing destructive competition; 3) to represent the interests of industry ingovernment echelons. The regulatory agency thus acts as overseer andprotector of industrial interests at the same time. It also performsquasi-judical, -executive and -legislative functions by the instrumentali-zation of its daily control functions.

An International Seabed Regulatory Commission would have prece-dents not only in the public sector (UN regulation of postal services andtelecommunications, etc.) but also in the private sector. Developingcountry governments, for example, employ technical committees tomonitor the activity of an operator working under management contract;such a committee may provide technical information and analysis neces-sary to government representatives for making management decisions .37

According to D. Smith and L. T. Wells, this approach has its parallel inthe United States, where the idea of an independent staff of technicaladvisers for outside directors has been put forward.38 A Seabed Regula-tory Commission would not have title of ownership to resources, norwould it have the legal power to enter into contracts for the undertakingof ocean mining operations. However, following the normal regulatoryapproach, it would be authorized to set standards that could be incorpo-rated into an "ocean mining code." Environmental and other monitor-ing activity conducted by a new multipurpose maritime satellite systemwould single out violators who would be fined accordingly.

Furthermore, similar to the U.S. Forest Service,39 the agency couldregulate applications for ocean mining on a fee basis, ensuring at thesame time multiple sea-use coordination in conjunction with otherinternational agencies. In the license application could be stipulated thatocean miners guarantee to give special consideration to Land-BasedProducers (LBPs), especially those in developing countries. Finally,licensing procedures might impose a maximum ceiling on the number of

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sites that one operator can exploit as an antitrust mechanism to ensureaccess on a competitive basis to future entrants and to discourage anoligopolistic position of any one country in ocean mining. Since theeffectuation of a regulatory commission might be construed as conflict-ing with the Moratorium Resolution of 1969, a park system pattern(similar to a forest reserve or game preserve system)40 could be intro-duced whereby reserved areas—some of the choicest potential sites—are set aside until future negotiations clarify the ISA role in oceanmining.

The advantage of an incremental, step-by-step approach to establish-ing an authority through a regulatory intermediary is that legal, institu-tional, and financial prerequisites would be reduced in the short run.Upon the basis of experience acquired, a more extensive role for an ISAcould be developed at a later and perhaps more appropriate time.

2. A Service or Management Contract Approach

However, if forthcoming LOS negotiations prove that the politicalatmosphere is ripe for incorporating an authority function of the cur-rently considered service or management contract variety, several issuesmust be further considered in detail:

Taxation. Parallel to land-based minerals contracting, three patterns instructuring an ocean mining tax regime—a focal point of recentdiscussion—can be delineated. Firstly, a mixed levy system as opposedto a single back- or front-end load has gained wide currency in that a taxpackage spreads the tax burden for the investor and provides severalcollection points in time for the taxing authority. Secondly, it is becom-ing more accepted that economic and political costs for the miningcontractor generated by a government agency result in lower income(i.e., less taxes) for government as well as the contractor.41 Thirdly, dueto the uncertainty in seabed mining "in its technical feasibility, the sizeand timing of the initial innvestment, the level of operating costs and themovement of world metal markets,"42 Sebenius et al. have attemptedto introduce flexibility in ocean mining taxation schemes that adjustthrough a sliding scale mechanism to fluctuations in actual cash flow andthe value of money over time.43

A closer synchronization between tax base and corporate net proceeds

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would almost inevitably serve to lessen grounds for dispute and reducepolitical uncertainty by providing probable maximal levels of govern-ment income in boom periods and tax relief for the mining corporation inslow periods. But even though such measures propitiate a conciliatoryenvironment, future political and commercial uncertainties still remainonly partially encountered.44 A further solution might be the coupling oftaxation and income distribution with financial mechanisms so thatnegative risk (loss) must be shared (and not just in the form of less or notax income) as well as positive risk (profits) .4S Only when the allure andcoercion of market forces are commonly distributed will the success ofocean mining represent a common interest of mankind.46 The questionof taxation can hardly be decoupled from the question of financing—whether through contributions, equity distribution, loans, bonds, or aspecial fund47 sponsored by the ISA or another internationalintermediary—by linking risk guarantees and losses with profit remit-tances.

A Legal Basis for Joint Venture Arrangements. A legal precedent for aUN agency's participation in a joint venture does not exist in full, asmentioned above (at II. 1), and must be clarified.

A Standard Contractual Format. According to the Draft Treaty, con-tracts will be negotiated between the ISA and mining entities incorpo-rated under the Draft Treaty and/or the national law of state participants.It remains unclear what the general contracting rules are and what casesdeserve special treatment. Furthermore, the introduction of a bankingsystem whereby a contractor is enabled to mine one site prospectedwhile an analogous site is put in an ISA "bank" for eventual exploita-tion "by mankind" served as a useful bridge at a time when widelydiffering ideologies concerning the nature of proper economic activitybeyond the limits of national jurisdiction disrupted LOS negotiations. Itseems reasonable now to question if negotiations have not proceeded farenough to consider whether it is desirable to have more than a vestigialexclusive jurisdiction a la crown colonial Spain and Portugal here, and atimeworn res communis a la England and Holland there.48 As Katzmentions,' 'the time-honored technique of 'splitting the difference' doesnot work very well in a negotiation where underlying economic realities

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must be meshed with political aspirations."49 For example, is there asubstantive difference between a powerful administrative arm that con-tracts goods and services in the nonreserved area, and a capital andtechnology poor operative arm that must contract the same (out ofnecessity) in the reserved area?

The Case for Total ISA Equity Ownership. A management contractapproach whereby services are supplied on a fee basis to an ISA whichclaims total equity ownership would be more realizable than a joint-venture-equity-sharing scheme whereby "partners" are continuouslyfaced with profit repatriation, dividends receivable, and so on. Man-agement contracts have proven lucrative to investors in petroleum,copper, bauxite and coal, even though they do not offer the mining firma perpetual stream of return reflecting the assumption of initial risk as innormal equity investment.50 Management contracts have also proveninteresting to host governments because of the control factor implied.Under a management contract, an ISA could hold equity ' 'in the name ofmankind."

A great deal of latitude is provided when the ISA holds all equity onthe basis of its title to ownership of Area resources: firstly, this approachis consistent with the common heritage concept in that mankind'sminerals are owned by a UN authority—much like timber reserves in anational forest; secondly, returns on equity could be earmarked for adevelopment and/or administrative fund, the latter to cover ISA costs,and the former to be applied to one more of the following purposes: 1)short-term Land-Based-Producers (LBPs) adjustment assistance for5-10 years supported by UNDP or mining firm investment studies inother growth industries of the threatened LBP economy; 2) an invest-ment guarantee fund for mining consortia; and/or 3) an application offund resources to truly universal interests such as measures to guaranteea safe environment in accordance with Articles 145 and also Sections 5and 6 of the Draft Treaty; rationalized sea use; and improved maritimecommunications, and maritime satellite services such as remote sensingleased to ocean mining firms so that the fund would be income-generating.51 Here a linkage would be established with the emerginglegal regime of outer space.S2 A further advantage of total ISA equityownership is that since the ISA must function in a world without

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international organizational sanctions, incentives for member states tosupport the ISA and ocean mining in general could be significantly put inpractice through a common benefit-sharing scheme.

The Case for Securities Distribution. An alternative to total ISA equitycontrol is a stock distribution underwritten by the IFC; a designation of acertain percentage of total shares distributed to certain categories ofcountries would ensure that the most disadvantaged groups, such as theThird World LBPs, would be guaranteed a percentage share. Alterna-tively, ISA bonds paying income as well as interest could be issued,especially if it is deemed unacceptable to distribute ' 'equity ownership''to member states, on the assumption that the "common nodule heri-tage" cannot be divided up (inevitably inequitably) to particular mem-ber states. These two alternatives have been treated in a distributionscheme developed by this author that links securities ownership withrisk-sharing and management participation.53

The Questions of Access and Transfer of Technology. It must further beconsidered that an emerging Group of 77 elite—with capital and oftensubstantial oil or other offshore resources (the exploitation and use ofwhich, especially since 1973, does not mesh with a common heritageconcept)—has potentially more interest in access to deep-sea miningtechnology through partnership or other contractual forms than in profitdistribution per se, especially when future nodule reserves are adjacentto their national markets. A mechanism for integrating these interestsand coordinating them with poorer LDC interests is desirable. Further-more, a contradiction is inherent in the transfer of technology between"fair" and "reasonable" terms as stated in Article 1442(a) of the DraftTreaty, the first term implying "equity" and the second "commercialfeasibility."

3. Promotion versus Control

A frequently overlooked factor is that if the ISA is engaged directly inocean mining, it must by necessity act as a promoter of ocean mining. Aconflict of interest would thus be engendered between the ISA's controlof ocean mining as a regulator and its promotion of deep-sea mining as aproducer. This dysfunction is magnified by the proposed Enterprise

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system in which the ISA would not only regulate all deep-sea miningproduction, but would also directly participate in production. A producerwith vested interests in production cannot indiscriminately regulatecompetitors in the same field. The Wirtschaftsvereinigung Bergbau(Bonn) asserted, for example, that corporate in-house information can-not be disclosed to a "partner" in the public sector who might misusethis information simply by representing the interests of consumers andof industry as a whole.S4 Furthermore, a producer, such as the Enter-prise, cannot be expected to regulate its own activity with great discre-tion.

However, the contradiction between the promoting and controllingfunctions of a regulatory agency can exist without an agency's perfor-mance of a production function. According to L. Jaffe's "arterio-sclerosis theory," for example, the longer the life of an agency, themore it deemphasizes its original commitment to control industry in thepublic interest, and the more it tends to represent or promote the interestsof industry which the agency supposedly regulates.55 Similarly, formerU.S. Attorney Olney stated a few years after the Interstate CommerceCommission came into existence in 1887 that "the older such a commis-sion gets to be, the more inclined it will be found to take the business. . . view of things."56

This conflict-of-interest inherent in ISA activity can only be resolvedby an institutional separation of the control and promotion functions. Infact, in the long run, it might not be "mankind" that needs protectionagainst inter-firm collusion, but the global minerals consumer that needsprotection against an ISA-contractor collusion: "Just as business andlabor, in Galbraith's equation, could collude rather than compete andthus together divert income from consumers, so could the equilibrium ofhost country (or ISA) and multinational (or ocean mining consortium)simply result in two-party joint maximization.'>S7 Furthermore, ' 'coop-eration and collusion built up in one . . . arena have a way of spillingover quickly into others."58

Who is going to protect the consumer from inadvertent or expresscollusion between the ISA and ocean mining firms, from the threat ofproduction controls and price supports, and from the costs of an ISAbureaucracy that could grow to cancerous proportions? Whether an ISAengages in ocean mining or not, the need for a separate regulatoryfunction should be clear. This leads to the questions of how to in-

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stitutionalize a seabed authority in a regulatory if not active managementrole, and how to define and instigate a resource policy for ocean mining.

4. The Question of a UN Resource Policy

The term "resource policy" usually refers to government participationin marketing channels to secure a resource base, to prevent overcompeti-tion among producers, to provide adjustment assistance to threatenedindustries, and to stabilize market prices so that sharp changes inconsumer demand do not overly affect production. The purpose of thefollowing paragraphs is not to elaborate the numerous technicalities andapproaches involved in resource policy making, but rather to examineresource policy issues that affect the composition and functioning of anISA.

It is a common fallacy to consider all developing countries as majorworld suppliers of minerals with interests identical to a Third Worldsubcategory of land-based producers (LBPs). Based on this tendency, acommon cornerstone of both LOS and NIEO discussions has been thefldvocation of market control mechanisms to benefit minerals produc-ers. Although many developing countries are dependent primarily uponthe export of one commodity for foreign exchange earnings, however,these countries also tend to be net importers of a wide selection ofdifferent minerals. Furthermore, 9/10 of the Third World minerals arelocated in countries with 1/4 of the Third World population; 3/4 of theThird World population would receive no benefits from productioncontrols.59 The latter help producers, i.e., primarily developed coun-tries.

5. The Pros and Cons of Production Controls

Production controls, such as quantitative limits on production output,price controls based on long-term changes in demand, and quotas onentry have several advantages. First of all, they protect firms from pricewars and other downward pressures on price due to excessive competi-tion. Secondly, higher prices encourage the use of substitutes (e.g.,synthetic rubber for war-restricted supplies of natural rubber; coal andnuclear energy for oil). Thirdly, production controls provide somedegree of protection to LBPs in the form of price supports. Fourthly,higher prices would reduce consumption in a supposed future world of

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resource scarcity. Finally, analogous to government controls: "Highcartel prices induce middle-term capacity expanding investments, bringpreviously marginal deposits up to an economic level and thus produce ahigh long-term price supply elasticity.' '60

The disadvantages of production controls are higher prices for theconsumer, an uncertainty of steady supplies for importers that can leadto political instability due to government import policy restraints, and alesser rate of discovery of new applications of a mineral that would havebeen available at lower costs.61 Furthermore, production controls toachieve stabilization, for example, may even hurt the producer

Incompatibilities can arise, in that the stabilization of one factor (such asexport or production prices, terms of trade, money and real income ofproducers and exporters, national income, etc.) does not necessarily implythe stabilization of the other factors. For example, if fluctuations in produc-tion are the cause for changes in money income, price stabilization couldproduce contrary destabilizing effects; given unstable price development,real income through stabilization of raw material prices or of money incomewould not be stabilized.62

To understand the mechanics of production control, considerationshould be made about what makes a cartel (a basic form of marketcollusion, usually among private producers in an oligopolistic market)successful, and what are its limitations. Conditions that lead to thesuccess of a cartel, such as OPEC in the 1970s, are:

• A monopoly position in the industry. Most of the major producersmust be in the cartel. For ocean minerals this means that developedas well as developing nations must support cartel agreements. Fornickel, INCO, a Canadian firm that up until the recent present hastraditionally set price changes for nickel, would conceivably beagainst any production controls that conflicted with its lead role inthe industry. The supply base for copper is so diversified thatcollusion proves difficult. For example, CEPEC, a copper produc-ers ' cartel, was not able to fully sustain and stabilize the price ofcopper. For cobalt, Zaire has a near-monopoly position in thenon-Eastern bloc supply of the mineral.

• The price elasticity for the commodity concerned must ensure thathigher prices imposed by the cartel would be passed on to the

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consumer, rather than be thrown back at the producer in the form ofdrastically reduced sales. Most of the ocean minerals have fewsubstitutes and generally have inelastic demand elasticities. Hereproduction controls would work, given that the consumer wascapable of paying the higher price.

• Cheating must be dissuaded, i.e., the incentives for members tobreak commodity agreements must be matched by stronger penal-ties and enforcement mechanisms. "Once a member starts tocheat, moreover, any member that does not will lose out. Over thelong run, the high prices of a successful cartel merely stimulate thesearch for new sources of supply and substitutes. Members may beworse off than before."63

• The product must be uniform, i.e., capable of standardization.This is not always the case for nodule ore which requires differentprocessing techniques, for example, than land-based ore. Forexample, manganese, for which the price elasticity of demand isrelatively low,64 is normally consumed in the form of ferroman-ganese by the steel industry; the market forpure nodule manganesemetal is relatively small; therefore, creating one cartel for allmanganese minerals would be like creating just one cartel for milkand sour cream.

• The supply sources of the commodity outside the cartel must beinelastic in the long run so that cartel prices can be maintainedwithout destabilizing competition from noncartel members. Min-erals usually exhibit low supply elasticities because of the capitalcosts and long lead times associated with new or increased produc-tion.

• Similarly, there can be no close substitutes for the commodity,which is the case for most nodule minerals. However, if the priceof cobalt falls significantly due to nodule mining, it could replacenickel in many applications, leaving nickel supplies free for agrowing number of industrial applications.

However, there has been an "absence of enduring successes among thelarge number of attempts at cartel formation during the past hundredyears."65 Some of the reasons are evidenced by OPEC which nowsuffers from: (1) competition from new sources (especially offshoredrilling) from noncartel members; (2) competition from substitutes suchas nuclear energy and coal, and (3) the ongoing development of alterna-

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tives to oil such as solar energy and improved insulation. Furthermore,member states have been tempted to ' 'cheat" and sell below the OPEC-set price (Venezuela). It could be added that because host governmentshave assumed so much control over oil production, Western refiners andimporters—no longer tied to one in-country plant—can ' 'shop around"for agreeable terms of purchase, thus forcing OPEC nations to competefor customers.66

The major drawback to market intervention mechanisms such ascartels is that they can cost a lot. Either the producer must agree to cutback production to sustain higher prices, thus losing part of the con-sumer market, or buffer stocks must be financed so that excess supplycan be purchased by a fund where prices are low, to be sold again whenincreased demand encourages higher prices (e.g., the European Com-munity agricultural price support program). Buffer stocks commonlyrun out of financial means before market goals are realized ( e. g., theInternational Tin Agreement). However, if the above conditions aremet, significant price gains can be made, sometimes even ratherquickly. The advantage of a buffer stock fund over other types of marketcontrol instruments is that not all producers must be members in orderfor the fund to be effective. Only financial sources must be great enoughto support a price through purchasing. The question then becomes one offinancial wherewithal.

In any case, it is difficult to enforce and finance price supportprograms, especially by an international organization that has never hadany real sanctions anyway. It would be difficult under these cir-cumstances, for example, to punish "cheaters" who do not cooperatewith agreements. It is possible to assume that "mankind" in general anddeveloping country minerals consumers in particular might have more togain by more unrestricted price determination by the market itself; if vastnew supplies are made available through ocean mining, new demandand new applications could conceivably be engendered through lowerprices. In any case, ocean mining consortia can be expected (voluntarilyor through ISA recommendation) to restrict production when, due toexcess production, marginal costs exceed marginal revenue. The finalquestions are thus the economic one of dealing with setbacks to LBPs,and the political one of determining desirable patterns of long-termminerals consumption if minerals scarcity for future generations provesto be a likely reality.

Typical consumer tools for guaranteeing minerals supplies are

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stockpiling, long-term supply agreements, and aid reduction to non-compliant supplier states. But these economic tools are hardly availableto Third World consumers. One way that developing countries canincrease available minerals supply for import needs is to reduce politicaluncertainty and facilitate the path of ocean mining consortia that in turn,it could be argued, can provide minerals at the lowest costs; empiricalresearch justifies both sides of this argument.67 By supporting the UNocean mining consortia and through revenue sharing, the Third Worldwould realize the greatest economic gains, especially in the short run ifthe deep-sea contribution to the world's supply proves to be substantial.The remaining question is thus a political one concerning control of theocean legal regime. One conceivable goal of an ISA resource policywould be to avoid a monopoly position of any one country (through adominant position in mining consortia) by anti-trust measures thatassure entry to second-generational late-comers who would be disadvan-taged by a relative lack of experience in ocean mining. Free access notonly for the first-comers but also for the last served would be guaranteedby a resort to the quota proposals of Japan and the European Commu-nity, or by similar measures.68 For reasons explored above, total controland/or ownership of ocean mining by an ISA would not be in thegeneral or economic interests of mankind because of higher prices andthe costs of of running a system of production controls. However, a UNumbrella agency that licensed ocean mining firms would allow mineralsto be recovered at the lowest price, leaving greater economic rents forthe "benefit of mankind."

The assertion that a common interest exists in the ' 'increased availa-bility of raw materials"69 should be qualified. Is the UNCLOS majoritymost concerned with the cheapest supply of minerals and the greatestsource of profits, or an increase in UN control through the formation ofan international organizational business authority? The two goals arecontradictory, for an extensive UN involvement in ocean mining couldconceivably create costs greater than the net income of mining activity,especially in the first years.70 It is dubious, too, whether oceanmining—one of the most technologically complex and high-riskindustries—is a good place for the international public sector to make itsdebut in business management. Perhaps a more appropriate area inwhich to begin, for example, would be fishing for krill in Antarcticwaters, an international industry with which at least all coastal states are

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familiar. UN experience in UNDP investment consulting and WorldBank investment finance would be applicable to the basic structuring ofa UN business role.

6. The Problem of the Land-Based Producers

The number of land-based producers (LBPs) that would be threatened byocean mining competition is surprisingly few (that is, assuming that thenumber of countries applying forLBP status would not reach inordinateproportions once attractive compensatory terms have been established).According to Steinberg et al., Cuba, the Dominican Republic, In-donesia, and New Caledonia would lose a significant share of foreignexchange earnings from nickel exports, Gabon from manganese ex-ports, and especially Zaire from cobalt exports; the copper market is notexpected to undergo significant change. Although it is extremely dif-ficult to accurately predict future ocean mining production levels, Stein-berg estimates that "total claims in 1985 from countries sufferingsubstantial damage as a result of nodule mining could be of the generalorder of $245 million a year,>>71 compared to a net annual revenue fromocean mining in 1985 ranging anywhere from $193 million.72 If these"guesstimates" are valid, compensating land-based production wouldplace a heavy burden on ocean mining production. It can be surmisedthat the economic threat of overcompetition to the LBPs can only beeffectively met by real long-term internal adjustment—through theredistribution of domestic resources and through new investment in theeconomies of Third World LBPs.

A surprisingly overlooked fact, however, is that ocean mining firmsare often already involved in land-based production. For example, thenickel industry (basically nodule mining is a nickel operation) is anoligopoly dominated by the International Nickel Company (INCO) ofCanada, and the nickel price is largely set by that firm.73 INCO is also amember of the INCO ocean mining consortium. There seems to be noeconomic incentive for INCO to underprice its land-based operationswith supposedly cheaper "ocean nickel," unless new applications fornickel were developed. (The real incentive may be for increased bar-gaining power with host country governments.) In addition, S. Brownstates that if it is assumed that INCO will not respond to new entrants bylowered prices, and that only a few mining operations will be established

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in view of the high cost of ocean mining, then the price of nickelprobably will not fall.74 Thus, much of the adjustment process can occurthrough in-house measures.

In the case that prices should fall significantly, however, provisionscould be made (by the ISA) stipulating that ocean mining firms shouldor must seek new investment opportunities in threatened LBPs, inconjunction with UNDP preinvestment studies. Furthermore, it is con-ceivable that ocean mining consortia would agree to purchase agree-ments for LBP minerals during a five-year adjustment period with pricesbased on those of the last year before ocean mining began. In addition,consortia could agree to the hiring of displaced labor from threatenedland-based mining concerns, thus acting in accord with the transfer-of-technology concept. Furthermore, ocean consortia could agree to inves-tigate, in conjunction with the UNDP, the feasibility of constructingprocessing facilities in LBP and other Third World states, whereverfeasible. The ocean mining consortia would perform these functionswhen affiliated firms are already located in threatened LBPs.

IV. The ISA-NIEO Relationship

1. Common Goals and First Steps

An ISA resource policy would be directly conjoined to internationalorder building in the trade sector by the Draft Treaty provision that anISA can enter directly—almost as if it were a sovereign state—intointernational commodity arrangements in the interests of all oceanminers. Related to the Integrated Program for Commodities proposed atUNCTADIV in Nairobi in 1976, only copper, and perhaps manganese,would apply for Common Fund status .7S The basic common goals ofinternational trade organization are price stabilization and marketpromotion of Third World commodities. Price stabilization, it is hoped,ensures Third World countries of steady foreign exchange earnings—inspite of price swings for agricultural products due to changes in supply(weather, pestilence) and for minerals due more to changes in demand(business cycles). Western governments are ensured of more steadycommodities supplies and cushioning from price swings that "involvethem in substantial economic losses through a ratchet effect on pricesand employment."76 Market promotion increases Third World com-

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modify exports and increases the availability and applications of com-modities to industrial economies.

A first attempt at trade internationalization was the InternationalTrade Organization (ITO) proposed after World War II as a sisterorganization to the finance-oriented World Bank. The ITO was neverrealized, bulthe basic concept of trade liberalization through the facili-tation of market access was later incorporated in a more limited way inthe General Agreement on Tariffs and Trade (GATT).

In a world of newly emerging nations, determined to match political withsome degree of economic independence, the "new deal" of the 1940sbecame the "old unworkable order" of the 1960s. A system designed, in themain, to serve the purposes of the rich, industrialized countries was seen tobe inappropriate for the needs of the poor, developing countries of thepost-colonial era.77

The need for a ' 'newer deal'' culminated in the 1964 UN Conference onTrade and Development (UNCTAD I) resolution to make another try atinternational order building, this time with a stronger regard for theThird World.™ In 1974, the year of "international crisis conferences"that followed the 1973 oil crisis, the UN Sixth Special Session on RawMaterials and Development produced a "Declaration on the Establish-ment of a New International Economic Order" and a "Program ofAction. "79 The latter called for structural changes in five key areas: (1)primary commodities trade; (2) transfer of technology; (3) internationalmonetary reform; (4) "collective self-reliance" of Third World coun-tries from the "center"; arid (5) more trade between the developingcountries and socialist countries.80

2. A Common Fund and a UN Resource Policy

At UNCTAD IV in Nairobi in 1976, the first of these problems wasaddressed: broad proposals for a Common Fund and an IntegratedProgram for Commodities (IPC) were initiated.81 The functioning of aFund as a "thermostatic" stabilizing device is thus: when a commodityprice sinks below a minimum low, the Fund buys the commodity untilenough supply has been siphoned off the market to effect an acceptableand higher equilibrium price; when the commodity price exceeds a

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designated high, the Fund sells from its stock, and the market priceaccordingly falls. The "Common" aspect of the Fund is that 10-18commodities with different price cycles would be pooled together in oneFund so that financing would be broadened and facilitated. The Fundwould also be able to borrow in capital markets, and would be supportedby contributions not only by producers but also by consumers, unlikeproducers' cartels. In addition:

"The Common Fund shall not only finance buffer stocks for storableraw materials but shall also bring into play different measures fornon-storable commodities (reprocessing, research, marketing, or qual-ity control). For industrial countries this is rather uncanny, whilethrough the First Window buffer-stock prices will be dictated andthrough the Second Window production. "S2 Evidenced in these SecondWindow provisions, the basic link between the Common Fund and anISA resource policy is that "If . . . stocking schemes are not adopted. . . the burden of adjustment of commodity markets falls on otherinstruments, such as, for example, export regulations and productioncontrols."83

Viewed in another way, it is not yet certain whether ISA productioncontrols—for copper and manganese, at least—complement or dupli-cate buffer-stocking schemes of the Common Fund. In the latter case,market control would be paid for twice. Not surprisingly, a basic pointof contention between the 77 majority and the industrially-favored is thenature and extent of the production control factors of a Second Windowor of a resource policy.

The Common Fund concept is aimed at price instability due tosurpluses and shortages, while a resource policy for seabed nodules isaimed at surpluses only; but both are aimed at price control, i.e.,establishing a "real price " for the product concerned. The ' 'real price "is an adjusted market price at which commodities have stronger purchas-ing power (or terms of trade) vis-a-vis manufactures, i.e., a price atwhich commodities producers would get more for their money.84 Whenthe "real price" is determined by government discretionary policy, itundoubtedly will be higher than the market price because: (1) there is atendency in price-fixing toward higher levels (consider normal cartelbehavior), and (2) government participation in market decisions re-quires a bureaucracy that takes note of direct or indirect costs. Instru-

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ments for price stability—even some sort of voluntary scheme of inven-tory control at the firm recovery or processing level—must be paid for.Administrative costs can be expected to be reflected to some degree inminerals market prices. Who pays for the "stability surcharge"? Ac-cording to the Common Fund concept, both consumer and producershare the cost burden of price control. But with regard to ocean mining,supply is basically "cartelized" by the ISA itself according to the DraftTreaty prescript, and buyers are dispersed and nonorganized; further-more, the land-based nickel market is already an oligopolistic one withprices set by one firm. Whether there is a Common Fund or an Interna-tional Seabed Authority, or both, for ocean minerals, the consumer isgoing to have to pay the price—a burden that can be fully expected tohurt developing country consumers the most.

But the Common Fund is to be in large part self-financing, a pro-Fundspokesman might reply. However, it should be considered that if bufferstocking is a viable business then enterprises for economic reasonswould have already entered the field. In essence, the private com-modities markets (e.g., the London Metal Exchange and the New YorkCommodities Exchange) have to some degree assumed this role. To ourknowledge, the relation between the private commodities markets andthe Common Fund or the resource policy of the ISA has been littleexplored, although functions performed are comparable and analogous.For example, in the commodities market, a buyer agrees to purchase acommodity in the future at a price which he believes is lower than whatthe price at the time of future purchase will actually be. The seller, on theother hand, assumes that the agreed-upon price is actually higher thanthe final market price will be. The speculated price is that at which afuture market transaction will actually occur. To spread risk, the buyeror seller might hedge transactions with purchase or sell offers above andbelow the original agreed-upon price. Hedging is thus analogous tosetting a price margin in a Common Fund arrangement. But the mainpoint here is thatthehigh degree of risk associated with price guessing inthe private commodities market is a very well known fact; and if it is sodifficult for professional speculators to guess future prices, there is littlereason nor historical evidence to suggest that determining the marketequilibrium price will be easier for a Common Fund manager. Thedifficulty in determining prices is that changes in market trends upon

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which fabricated prices are based constitute either short-term deviancesor forerunners of longer-term trends.Sorting out the misfits from themainliners has historically proven to be a very treacherous path.85

3. Similarities between UNCLOS and UNCTAD

There are many striking similarities between the UNCLOS andUNCTAD negotiations. Firstly, both have resorted to the conference

format for institution-building rather than resorting to available UNlegal commissions. Secondly, both future citadels of the new worldeconomic order are confronted with a similar goat: increasing theavailability of commodities while preventing market instabilities, in-cluding long-term scarcities (although the latter point is rarely discus-sed). Thirdly, ISA production controls and Common Fund price stabili-zation schemes would lessen the opportunities provided by lower costminerals, such as new applications and growth impetus, by maintainingprices above some rationally determined price floor. However, unlessnickel and cobalt are included in the UNCTAD list of primary com-modities eligible for Fund status, and further assuming that oceanmanganese will not be recovered, the only ocean mineral that wouldqualify for Common Fund buffer-stocking is copper.

The copper market was previously organized by the InternationalCouncil of Copper Exporting Countries (CIPEC) which tried during therecent recession to restrict the exports of member countries by 15percent to help sustain the world price of copper. But producing coun-tries alone were not able to sustain and stabilize the world price ofcopper.86 The Common Fund scheme plans to overcome the financialweakness of CIPEC by: (1) including consumers in financing arrange-ments, (2) borrowing at favorable terms in private and intergovernmen-tal capital markets, and (3) pooling financial resources from all com-modities so that funds can be used to bail out commodities with falteringprices,87 assuming that all primary commodity prices will not fallbeyond price floors at the same time. Of course, if an ISA resourcepolicy is functioning effectively, prices for copper would not falter, atleast not due to overcompetition from ocean mining.

Fourthly, a greater political implication of both the ISA and theCommon Fund concept is that income will be transferred from the

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industrial consumer to the Third World producer—the price of stability,if there is a real transfer of income and control, will be borne in large partby the consuming West. Another odd fact about both the Common Fundand the ISA resource policy is that if either one indirectly assists ThirdWorld producers, it will by necessity also help multinational mineralscorporations located in the Third World. Western business with ThirdWorld interests would stand to gain when the Third World gains. Theprice of stability under these circumstances would be once again borneby the Western consumer, and, in a world without preferential prices, bythe Third World consumer, too, who is likely to feel the burden evenmore.

At both conferences, impasses have occurred concerning the desirednature and extent of international administration in the business andtrade sectors. The Group of 77, according to the North, has consistentlypursued an "all or nothing" approach to bargaining in these "poorman's clubs"—bestirred by confidence in the majority vote and byideological and real economic incitements to bring down, or to modifyin any case, the existing international economic order.88 The North,according to the South, propels a colonial past into the future byinflexibly continuing to protect and promulgate its own interests, oftenin the very name of "development." The question is also one of timeperception. By gaining concessions to greater demands now, the 77 standto gain more in a shorter time period. The question is thus one of not onlyhow but also when ' 'payoffs'' or benefits from new trade and contractualrelationships will be realized. The North seems more willing to makeconcessions more gradually on a longer-term basis—perhaps to avoidcritical disruptions in its own business and trade cycles and to allow timefor adjustment mechanisms to take effect. At UNCTAD and at UN-CLOS, the Group of 77 has been striking out for more concessions fromthe West and less compromise with the West now—rather than dem-onstrating a willingness to follow a transitory road to a new globalequilibrium in trade and jurisprudence. By asking for everything now,however, the developing world to date has gained almost nothing, atleast judging on the substantive basis of their original demands. Bysticking to a sagging status quo, the North has delayed the unearthing ofreal solutions, further antagonized the South, and forfeited, perhaps, thepossibility of creating and protecting a true common heritage of man-kind.

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V. Summary

The cloud of myths that once enshrouded the ocean mining debate hasdissipated as progress toward reaching a final consensus continues.Despite the altemative-path approach adopted here, it is possible—indeed desirable—that the serious and prolonged endeavors of confer-ence negotiators will pay off in generally acceptable solutions. What-ever the outcome of UNCLOS seabed discussions, however, we main-tain that the issues elaborated here can not be overlooked and should beconsidered during the conclusion of any final ocean mining agreement.The issues may be summarized as follows:

1. A firm legal basis for UN commercial involvement and for thecompetence of a UN organization to hold title to resources remainsto be accomplished.

2. The UN seabed negotiations concern an industry that does notexist, as if this time the clothes do not have an emperor. Com-plementary to the development of this industry would perhaps be aregulatory precedent that incrementally assumes power as theindustry grows and the negotiating climate becomes more matureand amenable to consensus.

3. Whether the authority is a producer or not, it will be called upon toperform regulatory duties (granting permits and licenses, allocat-ing sites, setting standards, monitoring the environment, andperhaps supporting the development and assuring access to a newocean communications system). It should be institutionally en-sured that the regulatory preformance of the authority will not becurtailed by the natural proclivity of an authority-producer topromote its own interests.

4. An important institutional consideration is whether thelegislative/executive/judicial triad is appropriate to a high-riskindustry hurdling technological frontiers. Assemblies, for exam-ple, are hardly the powerful modes necessary for the propercontrol and conduct of business—perhaps demonstrated by UN-CLOS's 12-year longevity and by "overrepresented" Westerndemocratic systems in which policy making sometimes takes aback seat to interest formation.89 Similarly, care is necessary toensure that the Enterprise, the productive branch of the ISA, doesnot duplicate in a costly way existing authority competence.

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5. If the authority is a partial or total owner of ocean mining opera-tions, important is the consideration of: 1) the adoption of astandard "one-sea" contractual format; 2) the feasibility of anauthority sponsored or initiated securities distribution as related to3) a system for the allocation of benefits from ocean mining; 4) thedetermination of whether the prevailing seabed interest of the 77 isaccess to sites, technology or profits, for the achieving of thesegoals may require different if not contrasting means; and 5)whether ocean mining is the best place to launch the first UNBusiness, Inc.

6. Before & resource policy is adopted, several of the pros and cons ofproduction controls, price supports,and stocking schemes requirefurther strict attention. Additional elements would be mineralssupply guarantees, and guaranteed access for mining late-comers.

7. There are several ways of approaching the LBP problem, one ofwhich is the case for "internal adjustment assistance" in LBPeconomies.

8. In the ISA-NIEO duet, it is important to determine whether effortsand programs are complementary or tautological. Related is theissue of who is carrying the burden for market rationalization andwhether the developing country consumer would not be the mosthard hit by discretionary price increases.

Finally, the definition and implementation of a generally acceptabletime plan for change based on a precept of "mutually comfortablegrowth" will greatly assist the realization of global reforms (rather thanpalliatives and placebos) in an awkwardly changing world order.

Notes

1. H. Möller, Problems of a New International Economic Order, Berlin,1977, p. 12.

2. In 1973 the oil embargo caused India, Argentina, and other less de-veloped countries (LDCs) to realize that they needed their own offshore oil.Perhaps the common heritage concept did not die at that time like some LOSdelegates privately purport, but it certainly lost breadth in its base of support.Major energy and minerals exporting LDCs are perceptibly more interested intying up with ocean mining consortia for joint-ventures with the Enterprise andgaining automony by contributing themselves to finance (or through loans and

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international institutional financing) rather than through (in this instance) thirdparty equity investment or contributions. In any case, this "77 elite" hasinterests that can no longer be equated with the ''common heritage'' interests ofsmaller, poorer, and often landlocked 77 "brothers."

3. W. Graf Vitzthum, "Die Bemühungen um ein Régime desTiefseebodens—Das Schicksal einer Idee," ZaöRVR 38 (1978), p. 745.

4. Regarding a successive host state involvement, "Host states also shoulddevelop their own enterprises—first by equity participation with an investingTNC (Transnational Corporation), then as partners in the use, and finally, bythe generation of technology and marketing." Th. W. Wälde, "TransnationalInvestment in the Natural Resources Industries," Law and Policy in Interna-tional Business II/2, 1979, p. 772.

5. See U.S. Public Law 96-283 of June 28, 1980, "Deep Seabed HardMineral Resource Act." Also Entwurf des Deutschen Bundestages, "Entwurfeines Gesetzes zur vorläufigen Regelung des Tiefseebergbaus," 1978, BT-Drs. 8/2363.

6. The choice of a regulatory package is a political one; only one or tworegulatory instruments may be incorporated.

7. From the vast literature on taxation in the mining sector may be cited: J.K. Sebenius, J. D. Nyhart, J. J. McLeod, "Revenue Sharing from Deep OceanMining (Draft)," Study for Dept. of Ocean Engineering at the Sloan School ofManagement, Massachusetts Institute of Technology, March 1979; M.Fritzsche and A. Stockmayer, "Mining Agreements in Developing Coun-tries—Issues of Finance and Taxation," Natural Resources Forum 2/1978;M. Fritzsche, Fiskalregime von Bergbauvorhaben (The Fiscal Regime ofInternational Mining Ventures), Frankfurt, 1979; D. N. Smith and L. T. Wells,Negotiating Third World Minerals Agreements, Cambridge, Mass., 1975; E.B. Steinberg, J. A. Yager, G. M. Brannon, New Means of Financing Interna-tional Needs, Washington, D.C.: Brookings Institution 1977.

8. See A. Stockmayer, E. Schanze et al., "Mining Agreements in Develop-ing Countries," Journal of World Trade Law, 1978.

9. See D. Smith and L. T. Wells, supra note 7, and R. F. Mikesell, NewPatterns of World Mineral Development, British-North American ResearchAssociation, London, 1979.

10. "UN: Information Note on Joint Ventures, "C.1/Working Paper no. 5,8 April 1975, p. 3, in R. Platzöder, Third United Nations Conference on theLaw of the Sea. Documents 1975, Ebenhausen, 1975.

11. Ibid.12. Ibid., p. 5.13. However, the International Telecommunications Satellite Corporation

(INTELSAT), which does not form part of the UN family of organizations,

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provides interesting historical patterns with regard to a global commercialenterprise for transmitting international television and telephone traffic. J. F.Galloway, The Politics and Technology of Satellite Communications,Lexington Books, 1972. Joint ventures with regional (especially banking)organizations could also be considered relevant here.

14. UNCLOS III, Draft Treaty, A/Conf. 62AWP. 10/Rev. 3, 1980. Annexin (21).

15. Ibid., Art. 178.16. Ibid., Annex IV (13) 1.17. The World Bank Group: Policies and Operations, September 1976, pp.

10-17, 78-96.18. Ibid., p. 88.19. Draft Treaty, Annex IV (13) 2.20. Ibid., Annex IV. (13) 3.21. Ibid., Art. 153 (1).22. Ibid., Annex III (4) and (4) (b).23. Ibid., Annex III (12) 4.24. Ibid., Art. 137(2).25. UN Conference on Trade and Development, UNCTAD IV. Text of

Resolutions, Recommendations and Other Decisions Adopted by the Confer-ence, Nairobi 5-31 May 1976; "UNCTAD IV and Beyond," BackgroundPapers 1-4 (1976-1978); H. O'Neill, A Common Interest in a Common Fund,New York: United Nations, 1977.

26. An excellent and recent coverage of this area: United Nations IndustrialDevelopment Organization, ThirdGeneral Conference of UNIDO, New Delhi,21 Jan.-8 Feb., 1980, Industry 2000—New Perspectives, ID/CONF. 4/3*.DOC.ID/237, esp. Ch. 6.

27. See D. Smith and L. T. Wells, supra note 7; Th. W. Wälde, "Lifting theVeil from Transnational Mineral Contracts," Natural Resources ForumI/1977; C. F. Bergsten, Th. Horst, Th. H. Moran, American Multinationalsand American Interests, Washington, D.C.: Brookings Institution, 1978; U.N.Information Note on Joint Ventures A/CONF. 62/C.1/L.19, "Costs of theAuthority and Contractual Means of Financing its Activities," 18 May 1977;R. Mikesell (Ed.), Foreign Investment in the Petroleum and Mineral Indus-tries, Baltimore, 1971; M. Radetzki and S. Zorn, Financing Mining Projects inDeveloping Countries, London: Mining Journal Books, 1979.

28. H. Cattan, "The Evolution of Oil Concessions in the Middle East andNorth Africa," 1967, p. xii; cited in U.N. Information Note, supra note 27 onp. 22.

29. See D. Smith and L. T. Wells, supra note 7, Chapters 1 and 2.30. Ibid. Cf. E. Penrose.T. Walde et al., United Nations Center on Transna-

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tional Corporations, Round Table on Negotiations with Transnational Corpora-tions, Mount Kisco, New York, Papers, UNCTC/RTN/6.

31. C. F. Bergsten et al., supra note 27, at pages 159 and 348.32. Draft Treaty, Annex IV (12) 3(a). See also Annex III (9) 2.33. C. F. Bergsten et al., supra note 27, at pages 133 and 144.34. Ibid.35. M. Tietzel, Internationale Rohstoffpolitik. Bonn, 1977, p. 15. Compare

R. Prebisch, "The Economic Development of Latin America and Its PrincipalProblems," Economic Bulletin for Latin America VII/1962, pp. 1-52.

36. See F. J. Goodnow, Politics and Administration, 1900; L. Jaffe, "TheEffective Limits of the Administrative Process, "Harvard Law Review, 67/7,1954; S. Huntington, "The Marasmus of the ICC: The Commission, theRailroads, the Public Interest," 61 Yale L. J., 1952. This concept can becompared to that of "Wirtschaftsaufsicht" in Germany.

37. D. Smith and L. T. Wells, supra note 7 at p. 44.38. Ibid.39. See U.S. Forest Service, Disposal of Minerals on Lands under the

Jurisdiction of the Forest Service, Oct. 1967; U.S. Forest Service, TimberManagement Planning. Sale and Disposal of Timber, Regulation 36 CFR 223,US Fed. Reg. 42/106, 2 June, 1977; M. Clawson, "Economic Trade-Off inMultiple-Use Management of Forest Lands," American Journal of Agricul-tural Economics 56 (1974), pp. 919-926; M. Clawson, "The NationalForests", Science 191 (1976), pp. 762-767.

40. Ibid.41. "Higher costs to the transnational corporation generally will result in

lower profits for the host state to tax." T. Wälde, supra note 4, at p. 771.42. J. K. Sebenius, Net Proceeds Sharing from Seabed Mining (Draft.

Study to provide background material for LOS Delegates concerning proposedtax regimes), Grad. School of Bus. Admin., Harvard Univ., July 1979, p. 1.

43. See J. Sebenius et al., supra note 7; J. Sebenius, supra note 42.44. One need only think of the external financing required at the famous

Bougainville copper project in Papua New Guinea after a sliding scale taxationscheme creamed off much of initial "excess" profits that could have providedin-house financial resources when the international copper market becamedepressed after 1974. See M. Radetzki and S. Zorn, supra note 27, esp. pp.64-65.

45. In essence, a joint venture formula.46. A tentative model for binding negative and positive risk was developed

in A. Post, "The Ocean Resources Agency. A Hypothetical Model for anInternational Deepsea Mining Regulatory Authority,'' Munich Social ScienceReview 1, 1978.

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47. A historical consideration of alternatives is UNCLOS in, First Commit-tee, "Alternative Means of Financing the Enterprise", A/CONF.62/C. 1/L. 17,3 September 1976. Compare the more recent view of a fund approach (specifi-cally regarding the Inter-American Development Bank) for risk insurance in R.F. Mikesell, Statement before the Subcommittee on International EconomicPolicy and Terms of Trade, H. R. Comm. on For. Affairs, Sept. 11, 1979. AlsoJ. F. Shaw, "Investment in the Copper Industry,"Natural Resources ForumII/2, 1978.

48. This concept is adapted from A. Pardo who further equates exclusivejurisdiction inter alia with feudalist concepts (Spain) and to present perceivedneeds of the extractive industries (petroleum, fishing for most countries, etc.);res communis equates more closely, on the other hand, with the merchantinterests of Holland, Great Britain, and more recently the United States. A.Pardo, "Comments," Letter to author, 29 June 1979.

49. R. S. Katz, "Financial Arrangements for Seabed Mining Companies:An NIEO Case Study," Journal of World Trade Law 13/3 1979, p. 212.

50. UN Information Note, supra note 27; and C. F. Bergsten et al., supranote 27, at p. 160.

51. S. Brown, N. W. Cornell, L. L. Fabian, E. Brown Weiss, Regimes forthe Ocean, Outer Space, and Weather, Washington, D.C.: Brookings Institu-tion, 1977; and E. Steinberg et al., supra note 7.

52. Ibid.53. A. Post, supra note 46.54. Wirtschaftsvereinigung Bergbau: Stellungnahme zum Fragenkatalog

fur die öffentliche Anhörung des Auswärtigen Ausschusses und des Ausschus-ses fur Wirtschaft des Deutschen Bundestages über das Thema "Probleme der3. VN-Seerechtskonferenz unter besonderer Berücksichtigung der Fragen desMeeresbodenbergbaus," Bonn, 7 Dec. 1977, p. 20.

55. See L. Jaffe, supra note 36, at p. 327.56. Ibid.57. C. F. Bergsten et al., supra note 27, at p. 352.58. Ibid., p. 270.59. R. Mikesell, supra note 27, at pp. 3-6; G. K. Helleiner, International

Trade and Economic Development, Harmondsworth, 1972, p. 40, cited in H.Corbet, Raw Materials. Beyond the Rhetoric of Commodity Power, London:Trade Research Policy Center, 1975, p. 17.

60. M. Tietzel, supra note 35 at p. 53.61. See H. Corbet, supra note 59; M. Tietzel, supra note 35; J. E. Tilton,

The Future of Nonfuel Minerals, Washington, D.C.: Brookings Institution,1977.

62. M. Tietzel, supra note 35, at p. 38.

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63. C. F. Bergsten, supra note 27, at p. 140.64. E. B. Steinberg et al., supra note 7, at p. 149.65. H. Corbet, supra note 59, at p. 11.66. Abstracted from discussion of the author with offshore oil engineer,

Total, Inc. France, 1978.67. R. Mikesell, supra note 9.68. See UN CP Working Paper No. 2, 18 March 1975, First Committee

Working Group, "Country Proposals Regarding Conditions of ExplorationPresented at UNCLOS III/3, Geneva 1975."

69. UN Third Conference on the Law of the Sea, "Report by Mr. PaulBamela Engo, Chairman of the First Committee, on the Work of the Committeeat the Fifth Session of the Conference," A/CONF.62/L.16, 16 Sept. 1976, p.8.

70. See UN Information Note, supra note 27, and E. Steinberg et al., supranote 7, Ch. 5.

71. E. Steinberg et al., supra note 7, at p. 164.72. Ibid., Ch. 5. A cost analysis by the MIT Sea Grant Program, which

played a pivotal role in LOS negotiations concerning the terms for an oceanmining tax regime, more optimistically estimates that revenue after operatingexpenses will reach $258 million. See J. D. Nyhart et al.,A Cost Model of DeepOcean Mining and Associated Regulatory Issues. MIT Sea Grant Program,Rpt. No. MITSG 78-4, March 1978. This report has been recently updated andcriticized by W. Schneider, Battelle Institute, Frankfurt.

73. S. Brown et al., supra note 51, at p. 81.74. Ibid.75. UNCTAD, supra note 25; C. Warin, "Ein neuer Ansatz zum Rohstoff-

handel," Forum der Vereinten Nationen, Oct. 1978; K. Seitz, "Die Ver-handlungen über einen gemeinsamen Rohstoff-Fonds," Spiegel der Presse—Entwicklungspolitik 7, 1 March 1978, pp. 2/6-209.

76. D. Housego, "Broker on the Common Fund," Financial Times, 13April 1978.

77. H. O'Neill, supra note 25, at p. 2.78. See supra note 25.79. Ibid.80. H. O'Neill, supra note 25, at pp. 5-6.81. See supra note 25.82. "Gerangel um das 'Zweite Fenster'," Neue Zürcher Zeitung, 23 March

1978.83. "UNCTAD IV—And Beyond. A Common Fund. Questions and

Answers." Background Paper No. 2. Oct. 1977, p. 3.84. H. O'Neill, supra note 25, at p. 38.

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United Nations Involvement in Ocean Mining 313.

85. Based on Hornblower's Commodity Technical Analysis Reports,Hornblower, Weeks, Noyes, Inc.; E. M. Brook et al., "Commodity-PriceStabilization and the Developing Countries: The Problem of Choice," WorldBank Staff Working Paper No. 262, July 1977.

86. J. C. Tilton, supra note 61, at p. 81.87. UNCTAD, supra note 25.88. H. O'Neill, supra note 25, at p. 5.89. P. C. Mayer-Tasch, "Die Bürgerinitiativbewegung—eine neue APO"?

Working Paper prepared at Geschwister Scholl Institut, University of Munich;"Single-Issues Politics." Newsweek, 6 Nov. 1978, pp. 48-56.

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United Nations involvement in ocean mining

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Transcript of United Nations involvement in ocean mining