COUNTRIES SEEK GREATER DEVELOPMENT GAINS FROM FOREIGN INVESTMENT IN EXTRACTIVE INDUSTRY

Higher commodity prices have led to increased foreign direct investment in extractive industries, and especially in low-income countries, transnational corporations (TNCs) dominate the extraction of natural resources, UNCTAD´s annual review of investment trends reports.

TNC involvement provides both opportunities and challenges for developing countries, the World Investment Report 2007 concludes. This year´s report is subtitled Transnational Corporations, Extractive Industries and Development(1). It says that maximizing development gains from such industries requires coherent and well-designed policies that reflect a commitment to the public good by all involved.

The universe of extractive-industry TNCs is diverse and new players are emerging

Rising demand, especially from Asia, for oil, gas, and metals has spurred an investment boom in mineral exploration and extraction. Those industries account largely for the recent increases in foreign direct investment (FDI) in many mineral-rich developing countries, notably in Africa. The boom has also triggered a series of cross-border mega mergers in these industries, resulting in higher market concentration.

The World Investment Report 2007 shows that the relative importance of TNCs varies between different extractive industries. In metal mining, 23 of the top 25 producers in 2005 were privately owned TNCs, whereas only 2 were majority State-owned. In oil and gas, the majority of the top 50 producers were majority State-owned. Most such production was controlled by State-owned companies from developing and transition economies. For example, in 2005, the production of Saudi Aramco (Saudi Arabia) was more than twice that of the largest privately owned oil and gas producer, ExxonMobil (United States).

The report also highlights the rise of new extractive-industry TNCs. While private companies remain the largest corporations in terms of foreign assets, a number of developing-country firms, especially in the oil and gas industry, are rapidly becoming global players. The combined overseas production of the seven most important State-owned companies -- CNOOC, CNPC, Sinopec (all China), Lukoil (Russia), ONGC (India), Petrobras (Brazil) and Petronas (Malaysia) -- exceeded 528 million barrels of oil equivalent in 2005, up from only 22 million 10 years earlier (figure 1). Their overseas expansion is partly driven by rising demand in Asia´s fast-growing economies.

TNCs dominate extractive activities, especially in low-income countries

In a number of low-income countries, investment in extractive industries makes up the bulk of inward FDI. Due to small domestic markets and weak production capabilities, these countries tend to have few other industries to which they can attract significant FDI. Consequently, revenues from mineral exploitation and exports often represent a very large share of their national incomes.

While the extent to which countries rely on TNCs for exploitation of their natural resources varies, low-income countries are generally the most dependent on foreign companies. In metal mining, foreign affiliates account for virtually all of the (non-artisanal) production in least developed countries (LDCs) such as Guinea, Mali, the United Republic of Tanzania, and Zambia, as well as in Argentina, Botswana, Gabon, Ghana, Mongolia, Namibia, and Papua New Guinea. In another 10 metal-producing countries, the shares of foreign affiliates account for between 50% and 86% of production (figure 2).

In oil and gas, foreign affiliates in 2005 accounted for 57% on average of the output of sub-Saharan Africa. For example, foreign companies accounted for more than half of production in Angola, Equatorial Guinea and Sudan (figure 3). Foreign affiliates account for significant production shares in other countries as well, including Argentina, Indonesia and the United Kingdom. In West Asia, however, where the largest and richest reserves of oil and gas are located, the corresponding share was a mere 3%. No production was attributed to foreign affiliates in Iraq, Kuwait, and Saudi Arabia.

TNC participation can have significant impacts on host economies

UNCTAD argues that the commodities boom should provide opportunities for development and poverty alleviation in mineral-exporting countries. But considerable efforts to address the economic, environmental, social, and political issues relating to mineral extraction are necessary for harnessing the earnings from extractive industries to boost development.

TNCs can influence the outcome. They may contribute capital, technology, and management skills -- and when domestic capabilities are lacking, such an approach is often the most viable option for exploiting natural resource wealth. The most important economic impact of foreign investment in a country´s extractive industry is increased income, including government revenue. At the same time, UNCTAD notes, TNC involvement can raise concerns about unequal bargaining power, ownership and control over non-renewable resources, rent-sharing, transfer pricing, and various environmental and social costs. For example, TNCs claim a significant share of the revenue generated and repatriate part of their profits.

Ultimately, the overall impact of revenue generated will be determined by the way it is shared between the foreign companies and the host country, and on how the government´s portion of the revenue is managed, distributed and used. Funds should be used to support development objectives and the needs of current and future generations.

The extraction of natural resources can have far-reaching environmental, social and political consequences. TNC participation may add to environmental degradation and social conflicts simply by making resource extraction possible in a country. On the other hand, TNCs may reduce adverse environmental consequences by using more advanced technologies and by applying and diffusing higher standards of environmental management than domestic companies employ. TNCs can also become embroiled in local conflicts and may find themselves acting against the interests of local communities. In some cases, their mere presence may strengthen the existing governmental order. Some TNCs take adverse social impacts into account and abide by higher standards than their competitors do in dealing with such issues.

To confront policy challenges, efforts by all stakeholders are needed

A concerted effort by all concerned is necessary to ensure that the vast mineral resources located in some of the world´s poorest countries become a force for development. "The objective is to ensure that investments are undertaken in the most efficient and environmentally friendly manner possible, and to ensure that they contribute to poverty alleviation and accelerated development. For that, institutional and regulatory frameworks must be promoted by accountable governments as well as responsible investors," United Nations Secretary-General Ban Ki-Moon recently remarked.

The report makes a number of recommendations:

The quality of governance, specific government policies and institutions of the host country are a determining factor for ensuring sustainable development gains from resource extraction, with or without TNC involvement. Governments need a clear vision and strategy to ensure that oil and other mineral resources are used in a transparent and equitable manner to contribute to sustainable development. They also need to strengthen their abilities and capacities for designing and implementing appropriate policies.
High mineral prices have led many governments to seek to increase their share of the profits generated by amending mining codes, fiscal regimes, and contracts. Recent regulatory changes in developed, developing, and transition economies suggest that previous regulations may have been overly generous to foreign investors. The report recommends that countries seek to develop frameworks that are robust over the different phases of the business cycle, for example by introducing progressive taxation systems for the revenues from extractive industries.
Home-country governments should promote responsible behaviour by TNCs investing in extractive industries abroad. This is equally important for State-owned TNCs.
The international community can help promote greater development gains from resource extraction through technical assistance, the development of relevant standards and guidelines, and the monitoring of their implementation. A number of initiatives, such as the Extractive Industry Transparency Initiative, the Voluntary Principles on Security and Human Rights, and the Global Reporting Initiative, can provide valuable input, but more countries and companies need to commit to and implement these standards.
The role of TNCs is to contribute to efficient production while, at a minimum, respecting host country laws. When mineral deposits are located in weakly governed or authoritarian States, foreign companies need to consider carefully the implications of investing there.

Tables and figures

Figure 1. Oil and gas production of selected TNCs outside their home country, 2006

(Millions of barrels of oil equivalent)