sharing in governance of extractive industries
For the last few years the main story around the extractive industries (EI) has been widespread and often deep price declines. For almost as long, industry observers and practitioners have been trying to figure out what these changed market conditions mean. As part of its efforts on this front, the World Bank decided to look at the private sector and its impact on EI governance.
In early consideration of the impacts of commodity price adjustments on governance, the World Bank reached out to a number of companies operating internationally with help from Columbia Center on Sustainable Investment, Business for Social Responsibility, the International Council on Mining and Metals and the World Economic Forum. We undertook a small-scale anonymous survey of 18 firms last summer to provide a preliminary snapshot of whether and how lower prices are impacting EI company attitudes and behavior in ways that are relevant to the governance of extractives industries (GEI). The major highlights of the survey – some anticipated and others somewhat less expected – are briefly summarized below. Although we cannot generalize broadly from such a small sample, we hope the information we have gathered serves as a conversation-starter, suggesting possible trends for further investigation and catalyzing discussions about their potential implications.
As a starting point, there is great variation in how EI companies understand and promote good governance of extractives. When asked about their company’s roles and strategies for promoting good GEI, responses ranged from very broad (e.g., membership in industry associations and compliance with national laws) to very specific (e.g., running project-specific local multi-stakeholder dialogue platforms); from pragmatic (e.g., doing whatever adds value or maximizes profit in a given setting) to farsighted (e.g., promoting stakeholder engagement to improve growth and sustainable development for local communities and the host country as a way of ultimately creating a more stable business environment). While demonstrating significant diversity of commitments, responses also underscored that there is great inconsistency across companies in how they view their possible and appropriate role(s) in promoting better EI governance.
Private sector support for GEI may be facing cuts, both internal and external, across many EI companies. Internally, in response to declining prices, most companies in the sample reported cuts to governance/CSR staff and budgets. Of the 18 companies, six reported “major cuts” (all from mining), eight “moderate cuts”, three “no change” (all from oil or gas), and one “major increases.” In most cases, CSR/governance cuts generally are not deeper compared to other company units. Externally, while just under half of respondents reported no change in participation in and financial commitments to multi-stakeholder initiatives (MSIs), eight companies reported that participation would be reduced (while two reported increases) and a majority (eleven companies) indicated reductions in financial commitments to MSIs. If these developments hold more widely, most EI companies will generally have fewer resources available to support good governance than they did in previous years and according to some respondents, will face pressure to demonstrate the value of good governance and to choose efficient strategies that maximize impact. Similarly, MSIs focused on GEI may face lower levels of both participation and financial support from a significant part of the private sector.
Lower prices are significantly affecting company strategies and decision-making for projects in non-OECD countries. Almost across the board in our sample, lower prices are affecting company investment strategies in non-OECD countries, with only two companies indicating no change. Project delays, suspensions and abandonment were widely reported, as were revisions of project terms (in both directions). Multiple comments indicated a growing intolerance for projects in high-risk settings during such periods of lower profits. Lower prices are also leading a subgroup (five companies in the sample) to place greater emphasis on technical risk relative to non-technical risk in investment decisions (even while most respondents felt investors/lenders are showing increasing concern for non-technical risk). Such changes in company strategies and decision-making in response to lower prices could greatly impact non-OECD host countries and in some cases de-emphasize the importance of GEI relative to technical concerns.
Public sector governance still matters to companies, although some aspects more than others. Almost all respondents reported that public sector governance challenges significantly impact the risks and reputation of company operations. When asked what host governments could do to attract or retain EI investments under current lower price conditions, responses reflected an emphasis on traditional company concerns that tend to exist regardless of price levels including: certainty of title and ease of permitting; contract security and favorable contract terms; political stability; commitment to rule of law and property rights protections; strong, clear and consistent legal and fiscal frameworks, regulatory regimes and bodies; clarity of processes across the value chain; ease of business without government interference; terms of infrastructure costs and use; and no onerous local content or ownership requirements. A few respondents noted that incentives were particularly valuable in a time of low prices.
Increasing community demands and decreasing company supply of resources for CSR/governance could be a recipe for more conflict.In terms of the effects of lower prices on company-community relations, a handful of recurring themes emerged. Many respondents anticipated increasing demand for measures to improve company-community relations as lower prices reduce prospects for tax revenues, jobs, and business for local suppliers, thereby reducing perceived benefits of EI projects. Some were concerned that these rising demands could face reduced company supply-side resources for managing such issues (as noted above), resulting in reactive rather than proactive company approaches to community relations and greater potential for company-community conflict. The need for expectation management and realignment, particularly with regard to disappointed communities and local governments, was also widely cited as an important consequence of lower prices on company-community relations.
(Faint) glimmers of hope: lower prices might hold some upsides for GEI. Some corporate respondents hoped that delays and suspensions would afford more time to improve assessments of non-technical risk and to create multi-stakeholder shared interests in EI projects. Others thought increased pressures to maximize company profits and government revenues could result in demand for private and public sector reforms to stamp out corruption, mismanagement and other potential sources of losses associated with non-technical risks. Yet others hoped that experiencing the pains of current price volatility would persuade governments to plan better for future volatility and diversify their economies beyond extractives. However, many were concerned that the pressures of a low price environment on companies and governments alike would likely reduce the scope for action to realize such potential opportunities.
The posts that follow in this blog series will take up some of the threads from the survey and explore them further. As the World Bank and others delve deeper into these issues and better understand how and why lower prices impact companies in different ways (including those that experience no change), this information can be used by a wide range of actors to more strategically advancing good GEI under current market conditions.
NOTE: We invite those companies that have not yet responded to the anonymous survey to do so here, allowing us to expand and update our findings over the coming months.
 Fourteen of the companies were in mining (12 exclusively), five in oil/gas (three exclusively in oil/gas), and one exclusively in oil. Operations were most frequent in Africa and Latin America & Caribbean (with 15 respondents reporting operations in each), followed by North America (11), East Asia & Pacific and Europe (10 each), Europe (includes Russia, 9), Middle East & North Africa (8), South Asia (7) and Caucasus and Central Asia (4). In terms of ownership, 10 companies were privately owned, 6 publicly, one an SOE, and one a PLC. Over half of the respondents were from “major” or “blue chip” companies, while another 7 were some variant of “junior” or “mid-sized”. The companies were predominantly involved in exploration and production (usually both), with the exception of 2 consulting companies.
 Two companies reported increasing emphasis on non-technical risk.
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