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|Natural resource trade and investment|
|Wednesday, 26 May 2010 06:57|
Is it worth the bother? International trade and investment in the extractive industries have had a “chequered history”, as UNCTAD argues in its excellent 2007 World Investment Report. In fact, most countries which are resource rich have become poor, especially those in Africa and Latin America. Against that, resource poor countries like Japan, Korea and Singapore have become rich thanks to investing in education and hard work.
In the past, an important aspect of Western colonialism was investment in natural resources. This investment then declined in importance with decolonization and the creation of the Organisation of the Petroleum Exporting Countries. However, over the past decade or so, with rising demand from China and other major emerging economies, there has been strong growth in trade and investment in natural resources.
International trade and investment in natural resource industries takes place due to the uneven geographical distribution of reserves, production and consumption. Some developing countries are major producers and exporters of natural resources like metals, oil and gas. And many developed countries and fast-growing emerging economies, like China, are the major consumers and importers.
Most resource rich developing countries lack the capacity to transform their natural resources into commercial goods, even though technologies used in most metal mining operations and oil and gas extraction are well known today. Multinational enterprises (MNEs) can provide them with the necessary capital, knowledge and access to markets, as well as undertaking technologically challenging projects like deep offshore drilling, and production of liquefied natural gas and the development of unconventional energy sources.
Some of the world’s largest MNEs from developed countries are in the natural resource extractive industries, although some new ones are appearing from developing countries themselves. They can provide their home countries with secure supplies of natural resources.
Major natural resource investment destinations include the following:
. Among developed countries -- Australia, Canada and Norway. The present BP fiasco in the Gulf of Mexico reminds us that even the US receives investment in the natural resource area.
. In Africa, there are Botswana, Nigeria and South Africa.
. In Latin America, we have Bolivia, Chile, Ecuador and Venezuela.
. And in the former communist countries, Kazakhstan is a major destination.
MNEs account for virtually all mineral production in countries like Guinea, Mali, Tanzania, Zambia, Argentina, Botswana, Gabon, Mongolia, Namibia and Papua New Guinea. By contrast, in Iran, Poland and Russia, the share of MNEs is negligible.
In the oil and gas sector, MNEs generally account for a much lower share of production. But they do account for more than half of production in Angola, Argentina, Equatorial Guinea, Indonesia, Sudan and the UK. Against that, no production is attributable to MNEs in Kuwait, Mexico and Saudi Arabia.
The top three MNEs in the metal sector are BHP Billiton (Australia), Rio Tinto (UK) and CVRD (Brazil). Three state-owned companies are ranked highly too – Codelco (Chile), Alrosa (Russia) and KGHM Polska Miedz (Poland). The metal mining sector is very concentrated, with the top ten companies controlling one-third of global production.
In the oil and gas sector, private companies are the biggest foreign investors. But the world’s three largest oil and gas are not these MNEs. Rather, they are state-owned enterprises, namely, Saudi Aramco (Saudi Arabia), Gazprom (Russia) and the National Iranian Oil Company (Iran), companies with virtually no foreign investments themselves. Saudi Aramco’s production is more than double that of ExxonMobil (US), the world’s largest privately owned oil and gas producer.
More than half of the world’s top 50 oil and gas producers are majority state-owned and more than half are also in developing countries. These state-owned companies generally have a low international presence, except for the cases of Chinese oil companies like CNOOC, CNPC and Sinopec, Russia’s Lukoil, India’s ONGC, Brazil’s Petrobas and Malaysia’s Petronas. Foreign investments account for some 70 per cent of the production of the top three privately owned oil majors, ExxonMobil, BP and Shell.
What drives the foreign investment in natural resources by MNEs? UNCTAD identifies a few different motives like the search for natural resources, markets, efficiency and strategic assets.
So is foreign investment in natural resources beneficial or not to the host country? In short, there are some positive examples, like Australia, Canada and Norway. And there are bad examples like many African countries and to a lesser extent Latin America. MNEs can play a very positive role by complementing domestic investment, and boosting production by contributing capital, technology and management skills. But reliance on MNEs can raise concerns associated with unequal bargaining strengths, ownership and control over non-renewable resources, rent-sharing, transfer pricing practices and various environmental and social costs.
What are the factors that drive the possible economic benefits of natural resource investment? It all boils down to three factors.
First, whether a country can add value. The scope to add value through backward and forward linkages may be limited in developing countries as they lack the qualified suppliers and workers.
Second, how much of the value of production is captured locally in the form of employment and wages, and government revenues in the form of taxes, royalties or dividends. Natural resource production offers limited employment opportunities, and usually requires high-skilled staff. So the major benefit for developing countries from natural resource development is the government revenue. But MNEs usually claim a significant share of the revenue generated and repatriate a certain proportion of the profits, thereby affecting the sharing of the value created.
So the relative shares depend on bargaining strengths between the MNE and the host government. As reported by the Economist magazine, the Australian government is currently proposing to implement a "Resource Super-Profits Tax" based on the argument that mining companies are reaping huge profits from selling Australia's very soil to China, but are not paying the Australian people their due in taxes.
There can also be indirect benefits such as knowledge and technology transfer to developing countries, although that depends on the extent of educated and skilled resources, and the general absorptive capacity. Foreign investments can involve infrastructure investments like electricity and water supplies, and roads, railways and ports, which may also benefit local populations.
Third, how the local resource revenues are managed, distributed and used by the government, and to what extent they support the development objectives and needs of both current and future generations. Too often such revenues end up in the pocket of corrupt leaders who then put the money in Swiss bank accounts, meaning that the local population gets nothing. Nigeria is a classic example. Following the oil price hikes in the 1970s, it even went on a borrowing spree, landing the country with lots of unpayable debt!
There are also considerable environmental, social and political impacts from natural resource exploitation. Extractive industries always have environmental costs because of the extraction process and also because of accidents and bad practices that often occur. Just look at BP’s problems in the Gulf of Mexico right now. And these are nothing compared with the oil spills in developing countries like Nigeria, as documented by Greenpeace and Amnesty International.
But MNEs may also make a positive contribution by using advanced technologies, and by applying and diffusing high standards of environmental management. The net impact depends largely on the host country’s environmental regulations and its institutional capacity to implement them.
Social concerns come from health and safety issues associated with resource extraction. Once again, problems basically arise from weak governance frameworks. China is a very interesting case where local coal mining operations kill vast numbers of local minors. If it were a MNE doing this mining, it is very likely that there would be much greater respect for health and safety issues.
Issues can arise from the relationship between the MNEs and the local communities, including from the influx of workers. Political problems can also arise from disputes over revenue sharing, corruption and even armed conflict or war among different groups seeking to benefit from the resource revenues. The operations of MNEs can strengthen the political status quo (the case of Total in Burma is arguably an example), and companies need to give careful consideration to whether they should operate in such areas.
The bottom line is that for a country to benefit from its natural resource endowment, it needs good systems of government to manage all these issues. But regrettably, too many natural resources exist in countries with weak systems of governance. And the abuse and misuse of natural resource revenues further adversely affects governance.
There are a number of international initiatives aimed at improving governance in resource extraction like the Extractive Industries Transparency Initiative, the Kimberely Process Certification Scheme, the Voluntary Principles on Security and Human Rights, and the Global reporting Initiative. However, the number of MNE which have signed up to these initiatives is still small.
We should be thankful that many NGOs are working hard to ensure that natural resource development is conducted on a sustainable basis, and that local populations can benefit from these activities. But even here, we must be vigilant. It has recently come to light in the Economist magazine that BP itself has been providing massive payments to some NGOs leading members of these NGOs to question how independent and serious they have been.
Although foreign investment in natural resources is not always crowned with success, resource protectionism can also create many problems.
Resource nationalism -- meaning restrictions or prohibitions on the exploitation of natural resources by foreigners -- is widespread to varying degrees in many parts of the world. The most striking examples are Mexico and Saudi Arabia which prohibit foreign enterprises from exploiting their oil and gas.
The reason why resource nationalism is practiced is to ensure that revenues from resources are retained within the country, and also sometimes because of perceived historical grievances. Resource nationalism can wax and wane with rises and falls in energy prices. Governments may believe that MNEs are getting to big a share of resource revenues, so they seek to regain control over such resources.
As oil prices increased from 2005 to 2008, countries ranging from Kazakhstan to Russia to Venezuela sought to reduce the share of key projects managed by foreign oil companies. Even the Canadian province of Alberta tried to change its royalty regime.
Resource nationalism may sometimes be politically popular, and may raise government revenues in the short run. But it also acts a major disincentive to resource exploration, development and production by MNEs, with potentially adverse consequences nationally and globally.
World Investment Report 2007: Transnational Corporations, Extractive Industries and Development
Is Resource Nationalism Back?, Nouriel Roubini, 10 September 2009, Forbes.com
Digging in a minefield, The Economist, 3 June, 2010
The oil spills we don't hear about, Anene Ejikeme, Trinity University, San Antonio, Texas
Business and NGOs: Reaching for a longer spoon