Investment Promotion


1. The context for extractives sector investment

Over the past three decades, there has been a strong drive from the international community to increase the inflows of Foreign Direct Investment (FDI) into developing countries, with the intention of boosting sustainable economic growth. The extractives sector is one area that has attracted and continues to attract FDI, particularly in developing nations.

However, extractives companies are currently facing unprecedented global supply restructuring in the wake of the super cycle that ended in 2008. This signalled the current extended downturn characteristic of the cyclical nature of commodity pricing.

The current downturn has come with the associated effects of a very competitive market and an intense reduction in funding available for the industry, translating into a suspension of expansion projects and a big reduction in grass roots exploration funding. In the context of the extreme competition for funding that has resulted, it is likely that those countries that best manage the evolving investment risks associated with the current cycle will be best positioned to survive and thrive in the next cyclical upswing.

The impact of commodity price fluctuations on investment

Recent commodity price fluctuations have had a significant impact on the flow of Foreign Direct Investment worldwide. Since 2012 there has been an ongoing and persistent decline in the price index of minerals, ores, metals, natural gas and oil. As low prices limit expenditure, there has been a slowdown in international investment in the extractives sector.

 

Natural resource rich economies that are heavily dependent on the extractives sector, particularly in Africa and Asia, are already experiencing a negative impact on their economic growth due to low commodity prices. This situation is likely to remain unchanged. There are also other factors that escalate the uncertainties surrounding investment in the extractives sector, including, for the petroleum sector, the newly signed Paris Agreement on Climate Change and the steady growth of renewable energy consumption.

In this context, the promotion of petroleum and mining activities are more significant today than ever. There are numerous factors that can increase the rate of attractiveness for investment. The approach selected by any government will need to consider the structure of the sector, as well as specific factors relating to the constitution, economy, institutions and stakeholder groupings in that jurisdiction.

This topic material will not seek therefore to recommend one policy over the other, but to provide a map of good practices, available literature, tools, and options for key policy makers.