LIBERIA: Mittal accused of creating a state within a state in Liberia

A damning report on Mittal Steel's acquisition of an impoverished African country's iron ore reserves is published today, accusing the world's largest steelmaker of offering an inequitable "raw deal" that has created an unaccountable "state within a state".

The report by the campaigning group Global Witness says that Mittal's strategy in the west African state of Liberia is a "case study in which multinational corporations seek to maximise profit by using an international regulatory void to gain concessions and contracts which strongly favour the corporation over the host nation".

The contract, signed in August last year by the outgoing, unelected transitional government amid considerable public controversy, is expected to see Mittal invest $900m.

The company, now the biggest steelmaker in the world after the fraught acquisition of Arcelor, sees the deal as an important step towards securing its own reserves of raw materials.

But the report says: "It is hard to believe that in signing the agreement the national transitional government was acting in the best interests of the nation, and Mittal has taken full advantage of this.

"It is important to discover what vested interests were in play when the agreement was signed. As a responsible corporate citizen and an equitable partner it [Mittal] has a very long way to go."

Concern about the way the deal was secured has had two consequences. An investigation has been launched by anti-corruption police in the Netherlands where Mittal is based, and since the election of President Ellen Johnson-Sirleaf in January parts of the contract - along with all the major deals signed by the previous regime - are now being renegotiated.

Mittal says it is "unable to comment on matters relating to any enquiries by the Dutch authorities".

One of the peculiarities of the deal is the way in which the government's technical committee at first recommended a rival company - run by the younger brothers of Mittal's chairman Lakshmi - and then suddenly switched after intense lobbying of the US government by the company.

In response to Global Witness's inquiries and in lengthy exchanges with the Guardian, Mittal strenuously denied any impropriety and insisted that the company "secured its investment through an open and transparent tender process ... in the best economic interests of the country".

The report highlights areas of concern in which, it claims: "Liberia has ceded important sovereign and economic rights to a foreign multinational ... Mittal has control over all major decisions, company and capital structure, taxation, royalties, transfer pricing, rights to minerals and confidentiality. In an investment of this scale and of this strategic importance this cannot be an acceptable position".

The main areas of concern are:

Royalties and transfer pricing: Mittal has control over how much royalties are paid because the agreement does not set a price for the ore. Mittal would have a "strong incentive" to sell the ore to its affiliates at less than the market price - so-called transfer pricing practised routinely by mining companies. Mittal says that all pricing options remain open.

Taxation: These clauses "fall far short of recommended international best practice." Mittal has been given a five-year tax holiday with the option of an unspecified extension. "To obtain tax concessions at the direct expense of a chronically poor country raises serious moral and ethical questions," the report says. Mittal emphasised that most developing countries use such agreements to attract investment.

State assets: As part of the deal, Mittal takes over control of the railway from the ore deposits to the sea as well as the port of Buchanan. "This transfer will be at the expense of the people of Liberia," the report says. President Johnson-Sirleaf has already said that "these facilities are national assets which cannot be put under the control of anyone". Mittal emphasises its beneficial investment to rebuild the railway.

Erosion of sovereignty: The contract includes a stabilisation clause - often used to give protection to a company's investment - which Mittal says is necessary for a 25-year deal. But the report says the agreement goes too far, allowing Mittal to pick and choose with which new laws it will comply. Liberia's right to regulate in the area of human rights, international obligations and the environment could be undermined.

Transparency: The contract has "very stringent provisions" about non-disclosure, including basic revenue information, contrary to international best practice. The report says this is of particular concern "in vulnerable countries where corruption is endemic and governance is weak". Mittal says it is exploring ways of improving disclosure.

Corporate social responsibility: Mittal is providing $3m to local communities. But the report says: "Like many extractive industries operating in the developing world, Mittal's corporate social responsibility machine has done no more than pay lip service to local developmental needs by making a few cheap gestures towards, for example, health and education. In comparison to the scale of the project and the returns they expect, these gestures are meaningless. As a responsible citizen and an equitable partner it has a very long way to go."

In a statement last night Mittal said: "We are confident that our investment in Liberia will be of considerable benefit to the people of Liberia. Not only are we planning to invest $900m over 25 years but we are also committed to making extensive social investments to benefit the communities where the mines will operate." The company added that it was confident that the renegotiations would be concluded to the satisfaction of both sides.

• 104 Globalization
• 106 Money & Politics
• 116 Human Rights
• 183 Environment
• 187 Privatization
• 208 Regulation