Oil, gas and mining projects can provide a range of development benefits through the payment of taxes and royalties, the provision of employment and procurement from local suppliers. Increasingly, however, extractive companies are finding that these ‘conventional’ measures are insufficient to secure their ‘social licence to operate’. There is a growing recognition that companies need to play a more active role in supporting local communities. Yet companies face real challenges in this regard, including the risk of raising community expectations and demands to a point where the cost of contributing to community development becomes excessive, the risk of creating community dependency on the company for the provision of basic services, and the frequent lack of in-house community development leading to community projects that fail and/or to jealousies and disappointment between community members.
Given the expectations that mining, oil and gas companies will provide public goods, some criticism of the quality and sustainability of community programmes, the rising awareness of the long-term liabilities of creating community dependency, and the low rates of return and/or high transaction costs associated with social investment, corporations are beginning to investigate whether and how they can manage social issues more efficiently and effectively. One approach has been to look to develop partnerships with government and civil society, where the parties ‘pool’ their resources, competencies, capacity and expertise, thereby achieving outcomes that add value to what each party could achieve by acting alone. The partnership approach is innovative, requiring extractive companies to move away from their conventional ‘command and control’ approaches to community development and to enter into voluntary arrangements with non-traditional parties.
The partnership approach builds on the idea that each sector in society has core competencies and resources (see examples below) that, if appropriately arranged, are complementary to one another.
Examples of Core Competencies and Resources for Managing Social Issues
Government authorities (local, regional, national)
Strategic co-ordination through local development Plans
Budgets for public services
The potential to facilitate dialogue between stakeholders
Oil, gas and mining companies
Employment
Procurement/supply chain management
Infrastructure construction
Capital equipment
Logistics management skills
Access to best international practices
Capacity for advocacy (e.g. with government)
Civil society organisations
Local knowledge
Understanding of development needs
Ability to mobilise community participation
Independent monitoring
The potential for partnerships to contribute to development outcomes was analysed by the Natural Resources Cluster of Business Partners for Development, a three year applied research programme supported by the World Bank, the UK Department for International Development and a number of major mining, oil and gas corporations. The programme studied tri-sector partnerships in Colombia, Nigeria, India, Venezuela, Bolivia, Zambia, Azerbaijan, Indonesia and Tanzania, covering development issues such as health, education infrastructure provision, capacity building and, as illustrated in the case study below, local employment. The key lesson from the programme was that partnerships between extractive companies, government and civil society can, under the right conditions, yield better results for communities and for business than alternative approaches to community development. The community development benefits included the leverage of resources into community development, better quality and more sustainable projects and enhanced community ability to negotiate effectively with government and with the private sector. The business benefits included new and improved channels of communication with local communities, a more durable local ‘social license to operate’, and the closing of the gap between the expectations of regulators and investors and the social performance of operations on the ground. There was also evidence that partnerships enhanced public sector governance through ensuring greater government accountability and transparency, providing a forum where the different parties could meet, and enabling government to deliver on policy commitments in relation to health, education and poverty alleviation.
Case-Study: Creating Local Employment and Managing Retrenchment
Managing fluctuating levels of employment over the life of the project and removing the barriers to market entry for local businesses are two sides of the same coin. If local business can be stimulated, local communities stand the best chance of securing a lasting income. Working alone, the operating company is limited in its capacity to achieve this goal. This limitation is magnified during the transition from construction to operations, when downsizing and at closure – all project stages when the corporate focus is on minimising activities external to core business. At these times, a partnership approach to stimulating local business development can bring the strengths of the operating company alongside the complementary skills, resources and market opportunities provided by others in society.
Examples of partnership innovation in local business development include:
Encouraging local authorities to extend market access for the company’s suppliers to the construction and maintenance of public utilities, thereby broadening the base of the company’s sub-contractors and creating local business opportunities that last beyond the life of the project
Working with local NGOs and international donors with expertise in business management training, establishing micro-finance and linking local business to new market opportunities.
Establishing funds (e.g. in conjunction with international investors) to provide SMEs with equity financing and/or to underwrite local bank loans.
Developing strategic alliances with other multinational enterprises in a region to ensure a ‘level-playing field’ of access to opportunities for locally owned suppliers.
The partnership model of corporate responsibility is not without risk, and the reputations of the partners may be damaged if one partner fails to deliver on its commitments. Partnerships can also fail for reasons such as poor planning, insufficient attention to the resolution of historic disputes before endeavouring to commence the partnership process, the unwillingness of companies to share control of the process and inadequate time to develop an understanding of the underlying motivations of the parties to the partnership. However, these risks can be managed, and value added for all parties, if the processes of building trust and reaching agreement between the partners are properly managed, and if partners can be found who have complementary resources and are willing to share responsibilities.
In conclusion, partnerships are not a panacea to the challenges faced by oil, gas and mining companies when operating in developing countries. However, the Natural Resources Cluster has demonstrated that partnerships, under the right conditions, represent an important and viable alternative to traditional corporate approaches to community development.
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Corporate Citizenship Briefing, issue no: 75 – May, 2004
Rory Sullivan is Director, Investor Responsibility with Insight Investment. Michael Warner is a Research Fellow with the Overseas Development Institute (ODI).
Rory and Michael are the editors of the recently published Putting Partnerships to Work: Strategic Alliances for Development between Government, the Private Sector and Civil Society (Greenleaf Publishing, 2004).
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