How do extractive companies currently participate in expanding economic opportunities in developing countries? A report (pdf, 52 pages) published by the Harvard University's Kennedy School of Government provides an overview and critical assessment on this topic.
The report argues that expanding economic opportunity in the communities and countries where they operate is in extractive companies’ best interest. Indeed, extractive industries function most productively in stable economic and political environments with markets for both their inputs and products. Hence, expanding economic opportunity in host communities, countries and regions can provide continuity of supply and distribution outlets for goods and services enhance the social license to operate, and mitigate risk and potential conflict.
As major multinational energy and mining companies continue to expand their developing country footprints (over the next 20 years, approximately 90% of new hydrocarbon production will come from developing countries), they are finding challenges to long-term sustainability of their operations in local communities. Challenges – including public condemnation, activism and government intervention - sprout from the real and perceived “benefits gap” between the anticipated and actual rewards to the local communities impacted by extractive industries’ operations. In 2007, energy and mining companies made up six of the ten largest companies in the world, and five of the ten most profitable. However, the communities from which these companies extract commodities are among some of the poorest. It is evident that economic opportunity does not flow directly and evenly from multinational extractive companies to those closest to and most affected by their business activities.
The mismatch between revenues generated and local benefits is primarily due to issues of governance, transparency, and accountability in funding allocation, as well as weak administrative capacity in many governments. Three underlying conditions generally drive economic development in mineral-rich countries: reformed legal frameworks and mineral legislation; significantly improved macroeconomic management; and some improvements in governance. These are significant issues for both extractive companies and host governments. There is, therefore, an opportunity to build effective public-private partnerships beyond those that currently exist to insure a more transparent and democratic extractive business.
Such partnerships need to integrate the various ways through which extractive industries can contribute to the national economy - in addition to their contributions to national budgets. These include the procurement of goods and services, product distribution and sales, employment, and strategic social and community investment.
The Harvard report (pdf, 52 pages) selected a series of case studies to highlight these different avenues of promoting economic opportunity. The examples are taken from around the world and consist of initiatives by some of the industry’s leaders in hydrocarbons and mining.
The first example concerns BP in Trinidad and Tobago, a story that illustrates the challenge and benefit in local capacity development. BP has operated in Trinidad and Tobago since 1961 and bpTT, its local subsidiary, produces 70% of the country’s petroleum. At the turn of the century, bpTT sought to align its business strategy with the country’s goal of transitioning from a developing economy to a developed economy by 2020. As a major player in the Trinidad and Tobago’s upstream sector, bpTT committed itself to contribute to local capacity development to meet its upstream services needs with the long-term objective of building the country’s upstream services sector more broadly.
ExxonMobil’s National Content Strategy first applied in Sakhalin, Russia, is now being rolled-out on a worldwide basis. The National Content Strategy, supported at the highest levels of leadership in the company, aims to ensure that the company’s presence in a host nation helps develop human, social and economic capacity – content that benefits its people, communities and businesses over the long-term. The strategy is considered a key business enabler to ExxonMobil and is a visible strategy in places like Chad, Malaysia, Russia and others. ExxonMobil implements its national content strategy through direct investments, knowledge and skills transfers, local goods and services procurements, local job creation, and education and training for employees, contractors and suppliers.
Chevron has been operating in Angola for over 50 years. In 2002 the company launched the Angola Partnership Initiative (API) to build the local capacity required to sustain the country’s economic growth and improve the living standards of Angolans in the long run. The API is designed to contribute to long-term development through local employment and supplier linkages. Since its launch, Chevron has contributed $23.5 million and has leveraged additional resources from its key partners, USAID and UNDP, to reach total funding of over $55million.
Meanwhile, in the mining industry, Anglo American offers an example of inclusive business in South Africa. In 1989 the company launched the Anglo Zimele initiative. The initiative’s aims are to provide historically disadvantaged South Africans with access to mainstream business opportunities; create sustainable, commercially viable enterprises driven by people from marginalized sectors of society; and contribute to the sustainable development of mining communities. Anglo Zimele’s activities have focused on three primary areas: providing business development services aimed at strengthening the capacity of local businesses, creating procurement opportunities to facilitate the inclusion of these firms in Anglo American’s value chain, and finally, supporting local participation in South Africa’s mining industry through start-up funding. Anglo American also supports additional community development programs that generate livelihoods and provide micro-financing at the local level.
In Peru, Newmont, in collaboration with the IFC, is implementing an SME stimulating program in Minera Yanacocha. Minera Yanacocha is Latin America’s largest gold mine. Launched in 2002, the SME Linkages Program focuses on increasing the long-term sustainability of the region’s economy by both incorporating local businesses in Yanacocha’s value chain and expanding economic activity beyond the mining industry. The goal of the program is to build a diversified and sustainable economic base that takes full advantage of opportunities related to, but also extending beyond, Yanacocha’s mining operations.
As a final example, the Harvard paper offers the case of Rio Tinto in Canada’s Northwest Territories, which illustrates best practice in creating economic opportunity for targeted segments of the population. There were two significant drivers behind Rio Tinto’s efforts to expand economic opportunities in the Northwest Territories. First, the company was driven by its corporate commitment to sustainable development. Second, a significant development in the regulatory regime provided for meaningful participation of the indigenous communities in the regulatory bodies and processes governing resource development in the Northwest Territories. In collaboration with a host of local partners, including government authorities and representatives of indigenous groups, Rio Tinto made a commitment to the sustainable development of the Northwest Territories by providing significant training, employment and business opportunities to benefit local residents.
More information:
Promoting small and medium enterprises for sustainable development
SME Development: a vehicle to support entrepreneurship in the low-income segment
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