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Extracting gains from mining

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Much money to mine.
Much money to mine.

After decades of resource extraction, the transformation of dormant mineral deposits into sustainable development gains remains a demanding undertaking in many countries.

G. Srinivasan

In the light of the recent happenings in mineral-rich States of Orissa, Bihar, Jharkhand and Chhattisgarh , the transformation of mineral deposits into sustainable development gains would be a daunting task if the interests of all the stakeholders are not adequately addressed.

In the face of local resistance to mining, multinational companies such as South Korea’s Posco would find the going tough if they lack a clear strategy on how to obtain, manage and use the revenue generated from mineral extraction and dovetail it into an overall development strategy.

Even as India is new to the game of entertaining foreign companies to invest in extraction industries for domestic purposes and exports, the experience so far has been agonising enough to put paid to the interests evinced by prospective investors or transnational companies. The authorities need to address the myriad problems such engagement with foreign companies bring in its trail.

Role of transnationals

In its latest World Investment Report, 2007, the UN Conference on Trade and Development (Unctad), highlights the role of transnational corporations (TNCs) in extractive industries and documents their presence in many of the world’s poorest economies.

The UN Secretary-General, Mr Ban Ki-moon, in the preface to the 290-page well-researched report, states thus: “TNCs can bring in the finance and management skills these economies need to transform their products into products that can be used locally or exported. The rise of new transnational corporations from the South, not East Asia, has given mineral-rich countries a wider spectrum of potential sources of investment.”

Unctad states that TNCs could improve the overall performance of the extractive industries by contributing capital, technology and management skills and, hence, boost output, exports and government revenues. They could also complement domestic investment and expose local companies to competition.

Moreover, responsible TNCs might be better placed to address adverse environmental and social impacts of their activities. But it is not all unmixed blessings as there could be shortcomings to their presence in developing countries that are related, for instance, to their ownership and control over production and revenues, transfer pricing, limited local procurement and linkages and various environmental and social effects of their activities, as well as to the unequal bargaining power of host-country governments vis-À-vis the TNCs.

Justifying its focus on extractive industries, the Unctad report states that as a consequence of rising mineral prices, the share of extractive industries in global FDI has recently risen, though it is still much lower than those of services and manufacturing.

Global mineral markets are characterised by an uneven geographical distribution of reserves, production and consumption. These imbalances foster concerns among importing countries over the security of supply, and among exporting countries over market access. TNCs could be important for both host and home countries in this context.

The current price boom reflects in part a surge in demand for oil, gas and various metallic minerals, especially from rapidly growing economies, notably China. Though by mid-2007 the prices of commodities such as aluminium, copper, gold and oil remained close to their pinnacle levels in nominal terms, their future trends are fraught with uncertainty.

But experts concur that the costs of exploiting new mineral deposits are likely to soar, which might keep prices at relatively high levels in the coming years. For instance, global private investment in non-ferrous metal exploration rose from $2 billion in 2002 to an estimated $7 billion in 2006 and drilling for oil and gas doubled over the same span pushing the rig utilisation rate up to about 92 per cent.

Unctad said in terms of production, TNCs from developed countries no longer rank among the largest companies in the world. In 2005, the world’s three largest oil and gas producers were all state-owned enterprises based in developing or transition economies — Saudi Aramco (Saudi Arabia), Gazprom (Russian Federation) and the National Iranian Oil Company.

Different motives

Natural-resource-seeking motives dominate FDI and other forms of TNC involvement in upstream (exploration and extraction) activities, while market-seeking motives figure mainly among the drivers of overseas downstream activities.

For instance, state-owned Saudi and Kuwaiti oil companies have partnered with Chinese firm Sinopec in two separate refining and petro-chemical ventures in China.

Efficiency-seeking motives apply mainly to investments in the processing or early metal manufacturing stage, where TNCs seek to exploit differences in costs of production between countries. Strategic asset-seeking motives could be linked to the rise of cross-border mergers and acquisitions (M&As).

Unctad rightly emphasises that the chances of benefiting from TNC participation in the extractive industries increase if host governments have a long-term plan concerning natural resource extraction and an effective mechanism for ensuring that the benefits accruing are fairly shared by the various stakeholders.

Governments also need to invest some of the revenues earned from mineral extraction in building the economic and social infrastructure needed for sustainable development.

“The challenge is to take advantage of what TNCs can offer as a catalyst for industrial and economic growth while minimising the costs”, Unctad points out, suggesting that host governments balance social and environment concerns against economic considerations when designing institutions and policies.

Regional initiative

The Unctad Secretary-General, Mr Supachai Panitchpakdi, has appealed to the global community to help promote greater development gains from resource extraction and has suggested initiatives at the regional level.

It is worth exploring the scope for regional geological surveys and for establishing regional mining schools in Africa.

“A win-win situation can result if various minerals are produced efficiently and if host countries with the support of various other stakeholders can make the revenues generated work more effectively for sustainable development and poverty alleviation,” Mr Panitchpakdi said.

This holds absolute relevance to countries such as India, which is opening up its mineral sector for private and foreign participation, in its quest to ensure inclusive economic growth encompassing the marginalised sections of society.

(This article was published in the Business Line print edition dated October 17, 2007)
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