10. Industry view and case studies
This section has so far focused on policy decisions made by the government. Other decisions, such as building local support, involve companies directly. Extraction companies also have a clear and important role within their corporate social responsibility goals. Firms should follow best practice and avoid minimising effort within local law. Building local support improves reputation, continuity, and avoids delays. Avoiding costly legal litigation is in firms’ own interest. Moreover, aiding governments in capacity building improves policy stability and a stable investment environment. Finally, extraction companies’ experience in one country can help them support governments in other countries.
A prerequisite for the credible involvement of extraction companies is transparency, information disclosure, and accountability towards the local population and government. This may be facilitated by disclosing more details on the extraction contracts and involving stakeholders in their design. Care should be taken when entering partnerships with companies owned or controlled by government officials or their kin unless this is fully and publicly disclosed. Capacity building within governments is a short run cost to the company, but has significant long-term pay off. Usually, the investment horizon for mining and oil and gas fields is very long which weights this trade-off balance towards investing in improving local governance. This means that companies should follow the highest standards and they should not negotiate exemptions from local laws and (environmental) regulations. This includes labour laws, and being directly involved in the evaluation and mitigation of local impacts.
Many case studies are available from the International Council on Mining & Metals. In addition, the Natural Resource Governance Institute and the Oxford Centre for the Analysis of Resource-Rich Economies offer the following detailed case studies (alphabetically listed by country):
Key findings: The national government discloses a large amount of disaggregated information on oil, gas and mineral revenues and fiscal transfers. This allows local governments to verify they are receiving what they are entitled to.
Key findings: More than half of Cameroon’s oil revenues are not properly accounted for. The paper argues that poor governance is the culprit. The decision to “save” Cameroon’s oil revenues abroad proves to have been sub-optimal given the lack of a transparent and accountable framework to manage them and the poor governance record of the country.
Key findings: the involvement of the private sector is crucial for extracting natural resources but requires the construction of adequate institutions that enhance this.
Key findings: The majority of resource revenue streams assigned to the central government are pooled into the national budget and redistributed together with other fiscal revenues. However, the central government share of royalties and compensation fees share need to be spent in their region of origin and are largely spent on state geological exploration.
Key findings: The hydrocarbon sector served as an engine of strong economic growth by boosting domestic demand and propelling growth in construction and financial sector. Prudent macroeconomic policies had been pursued by the government with more than two-thirds of oil revenues saved in the Oil Fund. Nevertheless, the government lacked policies aimed at discouraging excessive risk taking behaviour of the private sector, which greatly jeopardized the sustainability of growth.
Key findings: Regional Development Funds were introduced in 2014 to finance the development of local infrastructure and the social-economic programmes.
Key findings: Malaysia’s resource revenue sharing system is mature, as its main elements were put in place in the 1970s. However, the system lacks transparency. Payments to subnational governments are dependent on often secret intergovernmental agreements.
Key findings: In recent years, some efforts have been made toward increasing fiscal decentralisation. A key initiative in the decentralisation process was the Local Development Fund, introduced in 2013 and funded partly from mineral royalties.
Key findings: The federal government of Nigeria makes monthly revenue transfers to all state and local governments. Oil-producing regions continue to demand more revenue from the centre, although transparency and accountability of these revenues, especially at the subnational level, are largely absent.
F.M. Aragón and J-P. Rud, Natural Resources and Local Communities: Evidence from a Peruvian Gold Mine (American Economic Journal: Economic Policy, 2013)
Key findings: a change in policy by the mine to procure more inputs from the local economy significantly increased real incomes for households that live near the mine.
Key findings: Despite a revenue sharing system, the contribution of natural resource wealth to subnational governments’ budgets is usually slight, even in many jurisdictions with significant natural resource wealth.
Key findings: although the state and people of Zambia received only a tiny share of copper revenues, high levels of investment in the copper sector, combined with recent reforms to the mining taxation regime and in the conduct of macroeconomic policy have left Zambia better-placed to benefit from future growth in the copper sector.