Getting more durable deals in extractives: knowledge is a power best shared

By Iain Steel, Research Associate, ODI & Founding Director, Econias

“It’s a high-risk country, there’s no infrastructure, and the resources are low quality.” I have heard these arguments countless times over the years from investors in extractives projects. And in every single negotiation I have advised governments on, across Africa and Asia-Pacific, investors have asked for tax incentives that they claim are necessary for financial viability. But how are governments to judge these claims when investors don’t share the underlying data?

Extractives projects are uncertain and risky. Nobody knows the true geology of the asset before it is developed, the precise amount of investment required, and the operating costs to extract and refine the resources. And the only thing we really know about commodity prices is that they’re volatile and unpredictable. Who would have thought in January 2020 that within four months the price of oil would be negative?

Unbalanced deals are a bad result for all parties

Investors often have better information than governments when negotiating extractives contracts. This is not a criticism of governments, but a function of the work that is usually undertaken by investors. Investors tend to explore for resources and commission studies to determine the technical and financial feasibility of projects. They are also likely to have deeper sectoral expertise and experience than governments, and know the value of their intellectual property.

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Call for Comments: Maximising development outcomes from natural resources through public-private collaboration

By Lahra Liberti, Senior Advisor and Head of the Policy Dialogue on Natural Resource-based Development at the OECD Development Centre

Governments and extractive firms are increasingly looking at how natural resources can generate benefits for their economies and societies as a whole. In Zambia, for every 10 direct mining jobs, approximately seven are created in first-tier mining suppliers. In turn, the incomes generated in mining and supplier industries stimulate non-mining industries. Accordingly, the total amount of employment created through mining in Zambia is almost five times as high as direct employment in the sector. Similarly, in Ghana’s gold sector, 2.8 jobs are created in first-tier mining suppliers for each job directly created in mining. These are just two among other positive examples.

However, generating positive economic spinoffs from extractives is not always easy. Past lessons show that over-reliance and dependence on resources can adversely affect an economy’s long-term competitiveness given increased exposure to external shocks, severe price volatility and little economic diversification. The conditions can be challenging too: The world’s known mineral, oil and gas reserves are often found in tough contexts beset by geographic remoteness, political risk, weak technological and skills capabilities and environmental pressures ranging from water scarcity to climate change to competition for access to limited resources. In addition, conflicts with local communities as well as investment disputes between governments and extractive companies complicate matters.

Recognizing both the opportunities and the challenges, new efforts are emerging for exploiting commodities and at the same time promoting structural transformation for sustainable and inclusive development. Why? Public scrutiny and awareness are on the rise as citizens increasingly demand greater participation in their economies. Consumer demand across many emerging markets is driving an unprecedented sustained demand for raw materials. There is a growing realization that weak infrastructure and poor governance are showstoppers. And even the organisational structures of leading commodity firms have evolved. In the past, mining, oil and gas companies were self-sufficient and vertically integrated: They made the majority of the intermediate goods and services they needed.  Today, they are much more often using external suppliers. The need to reduce cost pressure and increase flexibility has prompted multinationals to make their operations more flexible, outsource non-core activities and diversify their supply chains. Yet, shortages of skills across technical and managerial levels limit their progress. All these factors provide a substantial opportunity for a win-win alliance between leading commodity firms, local economies and national governments.

Indeed, lack of skills, insufficient technological and innovation capabilities, inadequate local infrastructure and weak local institutions require long-term coordination and collaboration to effectively create shared natural resource-value. This means, among other things, fully engaging all parties, clearly defining roles and responsibilities and tapping governments and industry to evaluate together the potential for local value creation. In short, public-private coordinated responses are vital to effectively overcome structural obstacles and develop targeted, local and mutually beneficial solutions.

That is why the OECD Development Centre is hosting a multi-stakeholder process to develop a systemic approach to resource-based development as part of its Policy Dialogue on Natural Resource-based Development. What has emerged is an advanced draft of the Operational Framework on Public-Private Collaboration for Shared Resource-based Value Creation. Liberia and Norway led the inclusive and transparent multi-stakeholder drafting of the Framework with the active involvement of Switzerland, South Africa, the African Union Commission, AngloAmerican, Antofagasta Minerals, the Chilean Mining Council, the Columbia Center on Sustainable Investment, Eni, Exxon Mobil, the International Council on Mining and Metals (ICMM), IPIECA (the global oil and gas industry association for environmental and social issues), Shell, Social Clarity and Total.

This Framework works to shape collaborative public-private solutions to maximise socio-economic benefits along the entire value chain of extractives. It intends to effectively enable deeper collaboration among governments, non-governmental organizations, development partners, the private sector, and communities to explain how extractives can contribute to the sustainable management and efficient use of natural resources. By doing this, it seeks to boost the competitiveness of local economies and generate opportunities for local development and greater well-being that outlive the life-cycle of extractives.

What do you think of the Framework? Comments and feedback are welcomed from September 15th to October 30th as part of a broad public consultation now underway. Comments received will inform further revisions of the operational Framework’s final text for possible endorsement this December. Be a part of the process and send comments directly to: DEV.NaturalResources@oecd.org

This article should not be reported as representing the official views of the OECD, the OECD Development Centre or of their member countries. The opinions expressed and arguments employed are those of the author.