CSR, Sustainability, Ethics & Governance

Series Editors: Samuel O. Idowu · René Schmidpeter

Eduardo G. Pereira
Rochelle Spencer
Jonathon W. Moses Editors

Sovereign
Wealth Funds,
Local Content
Policies and CSR
Developments in the Extractives Sector
CSR, Sustainability, Ethics & Governance

Series Editors
Samuel O. Idowu, London Metropolitan University, London, UK
René Schmidpeter, Cologne Business School, Cologne, Germany
In recent years the discussion concerning the relation between business and society
has made immense strides. This has in turn led to a broad academic and
practical discussion on innovative management concepts, such as Corporate Social
Responsibility, Corporate Governance and Sustainability Management. This series
offers a comprehensive overview of the latest theoretical and empirical research and
provides sound concepts for sustainable business strategies. In order to do so, it
combines the insights of leading researchers and thinkers in the fields of management
theory and the social sciences—and from all over the world, thus contributing to
the interdisciplinary and intercultural discussion on the role of business in society.
The underlying intention of this series is to help solve the world’s most challenging
problems by developing new management concepts that create value for business
and society alike. In order to support those managers, researchers and students who
are pursuing sustainable business approaches for our common future, the series offers
them access to cutting-edge management approaches.
CSR, Sustainability, Ethics & Governance is accepted by the Norwegian Register
for Scientific Journals, Series and Publishers, maintained and operated by the
Norwegian Social Science Data Services (NSD).

More information about this series at http://www.springer.com/series/11565

Eduardo G. Pereira Rochelle Spencer
• •

Jonathon W. Moses
Editors

Sovereign Wealth Funds,

Local Content Policies
and CSR
Developments in the Extractives Sector

123
Editors
Eduardo G. Pereira Rochelle Spencer
Siberian Federal University College of Arts, Business, Law
Krasnoyarsk, Russia and Social Sciences
Murdoch University
The University of West Indies
Murdoch, WA, Australia
St. Augustine Campus
St. Augustine, Trinidad and Tobago
University of São Paulo
São Paulo, Brazil

Jonathon W. Moses
Department of Sociology and Political
Science
Norwegian University of Science
and Technology
Trondheim, Norway

ISSN 2196-7075 ISSN 2196-7083 (electronic)

CSR, Sustainability, Ethics & Governance
ISBN 978-3-030-56091-1 ISBN 978-3-030-56092-8 (eBook)
https://doi.org/10.1007/978-3-030-56092-8
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of
illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and
transmission or information storage and retrieval, electronic adaptation, computer software, or by similar
or dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are exempt from
the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this
book are believed to be true and accurate at the date of publication. Neither the publisher nor the
authors or the editors give a warranty, expressed or implied, with respect to the material contained
herein or for any errors or omissions that may have been made. The publisher remains neutral with regard
to jurisdictional claims in published maps and institutional affiliations.

This Springer imprint is published by the registered company Springer Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Foreword

The Stuff of the Stars

Who Owns Natural Resources?

Many of the creation stories of the world’s great (and smaller) religions tell us
that we did not create the natural resources that we often claim to own. Instead, we
were also created as part of the natural world and given custodianship rather than
ownership of natural resources.
Astrophysicists also tell us that within twenty minutes of the birth of our
Universe, 90% of all of the lithium was created in an event called the Big Bang
Nucleosynthesis (BBN). All of the elements heavier than lithium were subsequently
created in stars that began to form 180 million years later. Iron and related elements
(chromium, manganese, copper and nickel), the so-called iron peak, are the ejecta
of supernovas where oxygen and silicon fused to create these elements (and still
do). Gold comes from the collision of neutron stars. Tin and lead are from red giants
(like our sun will one day become) and on it goes. Carbon the foundation of life as
we know it is, with a tinge of cosmic irony, from dying stars. We are truly the stuff
of stars (as Carl Sagan famously said).
According to astrophysicists, all of the metals on our Earth arrived here on
interstellar and solar winds and coalesced into this cooling cauldron of molten metal
that we now call home. That all happened between 13.8 billion and 4.5 billion years
ago. Magmatic and tectonic forces then distributed those atoms in our planet to be
moved around, subducted, erupted and ultimately placed on our cooling crust. The
hydrocarbons that form the basis of fossil fuels began being laid down half a billion
years ago.
It is in these distant stories of creation and cosmological history that we, human
beings, find ourselves often arguing about who owns and who should have right of
access to harness what atoms. It is the hubris of the construct of our human societies
that lays claim to “ownership” of the stuff that is the stuff of stars—materials which
we were given custodianship of, to harness and to maintain for the benefit of all.

v
vi Foreword

While this book does not deal in astrophysics or theology or take a view measured
in billions of years, it does directly challenge the ideas of “ownership” of natural
resources. It casts an eye to more recent histories and suggests that in our current
configuration of societies and nation-states, we need to re-examine who “owns”
the natural resources and who has the right to exploit and prosper from them.
The theological origins of planet Earth and haphazard cosmological game of stellar
and planetary formation both suggest no basis for humans to claim ownership of
natural resources. The equally haphazard and often historically dubious incidences
that led to the drawing of maps that formed national boundaries as we know it today
also cast doubts on the “rights” of current residents in specific countries and com-
munities to claim ownership of materials found beneath their land.
Drs Spencer, Pereira and Moses have worked together virtually on this volume.
They have never met in person (in this COVID-19 constrained world) but have
nonetheless cooperated and collaborated closely to bring together 44 authors to
examine a dozen jurisdictions. This is a significant achievement in its own right.
Taken together this compendium explores three mechanisms to manage the own-
ership of atoms: sovereign wealth funds (SWFs), local content policies (LCP) and
corporate social responsibility (CSR). The strength of the volume is found in both
the depth and breadth of analysis coupled with the diversity of professional per-
spectives and how the chapters invite us to undertake a comparative policy
approach to the myriad of “solutions” described. The value of the book is found in
the ways that it provokes our own thinking (and hopefully doing) to seek inclusive
economic growth that brings enduring benefit to local communities. The very
communities who are the closest to the atoms and are often are the last to benefit
and often benefit the least.
It is an important contribution to an urgent issue and we commend it to you, the
reader.

David Doepel
STM Chair, Africa Research Group, Murdoch University
Perth, Australia
Prof. Kevin Chika Urama
FAAS, Senior Director, African Development
Institute, African Development Bank Group
Abidjan, Côte d’Ivoire
Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Jonathon W. Moses, Rochelle Spencer, and Eduardo G. Pereira

SWF
Public Wealth Management and Distribution in the Extractive
Industry in Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Chilenye Nwapi
Public Wealth Management and Distribution in Kenya’s
Extractives Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Kate Wanza Mavuti, Helen Hoka Osiolo, and Caroline Wanjiru Kariuki
Overview of Extractive Resources Management in
Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Rivana Mezaya, Yudo Anggoro, Wisnu Jaluakbar, and Wulan Asti Rahayu
The Social Fund: A Brazilian Sovereign Wealth Fund . . . . . . . . . . . . . . 99
Hirdan Katarina de Medeiros Costa and Isabela Morbach Machado e Silva
Public Wealth Management and Distribution in Iran . . . . . . . . . . . . . . 113
Zoha Abdolalizadeh
The Experiences of Managing the Heritage and Stabilisation Fund
in Trinidad and Tobago and the Sovereign Wealth Fund Guyana . . . . . 127
Alicia Elias-Roberts and Indira Rampaul-Cheddie
Russian Sovereign Wealth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Svetlana B. Globa
Alaska’s Petroleum Industry, Institutions and Sovereign
Wealth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Douglas B. Reynolds

vii
viii Contents

Non-renewable Natural Resource Wealth Management

and Distribution in Canada: National, British Columbia,
Northwest Territories, Quebec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Andrew Bauer and Sarah Daitch
Non-Renewable Resource Revenue Savings and Distribution
in Canada: Alberta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Shantel S. Jordison and Niloo Hojjati
Sovereign Wealth Funds and Impact Investing in Australia . . . . . . . . . 231
Rochelle Spencer, Eduardo G. Pereira, and Fadzai Matambanadzo
Norway’s Sovereign Wealth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Jonathon W. Moses

LCP
Local Content in the Extractive Resource Industry in Nigeria . . . . . . . . 265
Chilenye Nwapi
Complexities of Local Content in Kenya’s Extractive Sector:
An Appraisal of Policy, Legal and Institutional Frameworks
and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Sarah Nduku Muyonga
Local Content Policy in Indonesia Oil and Gas Industry . . . . . . . . . . . . 293
Eko A. Prasetio and Elisabeth D. Kumalasari
Local Content and Extractive Industry in Brazil . . . . . . . . . . . . . . . . . . 309
Israel Lacerda de Araújo and Hirdan Katarina Medeiro da Costa
Local Content Requirements in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Zoha Abdolalizadeh
The Development and Implementation of Local Content
in the Extractive Industries in Trinidad and Tobago and Guyana . . . . . 343
Alicia Elias-Roberts
Local Content Within Extractive Resources Industry
in the Russian Federation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
Olga S. Kirillova
Alaska’s Tug-of-War on Land Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 371
Douglas B. Reynolds
Local Content Policies in the Extractive Industry in Canada . . . . . . . . . 385
Chilenye Nwapi
Local Content Policies for Regional Economic Development
in Western Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
Simon White
Contents ix

Norwegian Local Content Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423

Jonathon W. Moses

CSR
Corporate Social Responsibility in the Oil and Gas Industry
in Nigeria: The Case for a Legalised Framework . . . . . . . . . . . . . . . . . . 439
Eghosa O. Ekhator and Ibukun Iyiola-Omisore
An Overview of Corporate Social Responsibility in Kenya’s
Extractives Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
Angela Khanali Mutsotso
Practice of Corporate Social Responsibility (CSR) in Extractives
Sector in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
Yudo Anggoro, Adita Pritasari, Rivana Mezaya, Dematria Pringgabayu,
and Dany Muhammad Athory Ramdlany
Corporate Social Responsibility: Brazilian Case . . . . . . . . . . . . . . . . . . . 499
Silvia Andrea Cupertino, Hirdan Katarina de Medeiros Costa,
and Marcia Regina Konrad
Corporate and Social Responsibility in Iran . . . . . . . . . . . . . . . . . . . . . . 511
Zoha Abdolalizadeh and Elham Beygi
The Approach to Corporate Social Responsibility in the Extractive
Industries in Trinidad and Tobago and Guyana . . . . . . . . . . . . . . . . . . 527
Alicia Elias-Roberts
Corporate and Environmental Responsibility Among Russian Oil
Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545
Nina Poussenkova and Indra Overland
Alaska’s Corporate Social Responsibility: The Economics
of the Corruption Case of VECO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567
Douglas B. Reynolds
Corporate Social Responsibility in the Mining Sector in Canada . . . . . . 579
Jocelyn Fraser and Andre Xavier
Corporate Social Responsibility in Australia . . . . . . . . . . . . . . . . . . . . . 601
Martin Brueckner
CSR in the Norwegian Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621
Siri Granum Carson and Heidi Rapp Nilsen
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635
Jonathon W. Moses, Eduardo G. Pereira, and Rochelle Spencer

Author Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659

List of Figures

Introduction
Fig. 1 Crude oil prices, 1861–2018. Source BP (2019) . . . . . . . . . . . . . 6
Fig. 2 Commodity price indices, monthly, 1960 to present.
Source World Bank (2019b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Overview of Extractive Resources Management in Indonesia

Fig. 1 Cost recovery scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Fig. 2 Changes in Fiscal Regime in Indonesia. Source SKK Migas. . . . 86
Fig. 3 Production sharing contract in Indonesia. Source SKK
Migas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Fig. 4 PSC versus gross split. Source Ministry of energy and mineral
resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

The Social Fund: A Brazilian Sovereign Wealth Fund . . . . . . . . . . . . . .

Graph 1 PSSF’s revenues. Source Inforoyalties (2019) . . . . . . . . . . . . . . . 107

Non-renewable Natural Resource Wealth Management

and Distribution in Canada: National, British Columbia,
Northwest Territories, Quebec
Fig. 1 Canada’s mineral production by province and territory.
Source Mining Association of Canada (2017) . . . . . . . . . . . . . . . 194
Fig. 2 B.C. Prosperity Fund deposits and balance. Source Annual
budget documents, British Columbia Ministry of Finance . . . . . . 195
Fig. 3 NWT’s current fund governance model. Source Daitch et al.
(2014); GWNT 2012c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Fig. 4 NWT Heritage Fund: good governance and gaps in regulation.
Source Daitch et al. (2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Fig. 5 Annual deposits and withdrawals from Quebec funds.
Source Quebec Ministry of Finance budget documents . . . . . . . . 201

xi
xii List of Figures

Fig. 6 Quebec fund cumulative balances, based on deposits

(not book value). Source Quebec Ministry of Finance
budget documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Fig. 7 Asset allocation for Generations Fund investments.
Source Government of Quebec (2018b) . . . . . . . . . . . . . . . . . . . 203

Non-Renewable Resource Revenue Savings and Distribution

in Canada: Alberta
Fig. 1 Province of Alberta, Canada. Source Natural Resources
Canada (2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Fig. 2 Alberta heritage savings trust fund, as a % of provincial GDP
(1981–2015). Source Dahlby (2017) . . . . . . . . . . . . . . . . . . . . . . 219
Fig. 3 Alberta government total expenditures, resource revenues
and non-resource revenues. Source Kneebone (2016) . . . . . . . . . 222
Fig. 4 Governance of the Alberta Heritage Fund . . . . . . . . . . . . . . . . . . 223
Fig. 5 Heritage Fund long-term target policy asset mix.
Source Government of Alberta; Alberta treasury board
and finance (2018, p. 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Fig. 6 Flows to and from the Heritage Fund. Source Government
of Alberta; Alberta treasury board and finance (2018) . . . . . . . . . 226

Norway’s Sovereign Wealth Fund

Fig. 1 Norwegian production figures, 1971–2018. Source NPD
(2019b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Fig. 2 GPFG, 1996–2017. Source NPD (2018) . . . . . . . . . . . . . . . . . . . 251

Local Content Policy in Indonesia Oil and Gas Industry

Fig. 1 Indonesia oil production and consumption. Source Oil and Gas
in Indonesia: PwC Report (2017) . . . . . . . . . . . . . . . . . . . . . . . . 295
Fig. 2 Government income versus cost recovery . . . . . . . . . . . . . . . . . . 296
Fig. 3 PSC cost recovery versus the PSC gross split . . . . . . . . . . . . . . . 297
Fig. 4 Gross split scheme and the local content as part of variable
split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
Fig. 5 Gross Split Achievement until 2019, resulting in USD 895.4
million and Exploration Fund worth USD 2.1 billion. Source
Indonesia Ministry of Energy and Mineral Resources . . . . . . . . . 298
Fig. 6 Impact of newly introduced gross split scheme. Source
Indonesia Ministry of Energy and Mineral Resources . . . . . . . . . 298
Fig. 7 Local content value for procurement of goods and services
in the upstream oil and gas business. Source Indonesia Special
Task Force for Oil and Gas Upstream Business Activities
(SKK Migas) Report, 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
List of Figures xiii

Norwegian Local Content Policy

Fig. 1 Norwegian petroleum supply industry. Sources Rystad Energy
(2018: 8, 19); SSB (2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424

Corporate Social Responsibility in the Mining Sector in Canada

Fig. 1 CSR continuum: moving from transactional engagement
through transitional engagement and arriving at transformative
CSR. Adapted from “Strategy and Society: The link
between competitive advantage and corporate social
responsibility”—Michael Porter & Mark Kramer, HBR,
Jan–Feb 2011 and Network for Business Sustainability
Engaging the Community: A Systematic Review Sept 2008 . . . . 588

Conclusion
Fig. 1 SWF strategies employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649
Fig. 2 CSR strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653
List of Tables

Introduction
Table 1 Sovereign wealth funds types and objectives . . . . . . . . . . . . . . . . 14
Table 2 Rank chapters by HDI (2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Public Wealth Management and Distribution in Kenya’s

Extractives Sector
Table 1 Profit petroleum sharing formula for every calendar quarter . . . . 62

Overview of Extractive Resources Management in Indonesia

Table 1 SWFs management in Pacific Countries. . . . . . . . . . . . . . . . . . . . 77
Table 2 Indonesia’s extractive resources . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Table 3 Generations of PSCs in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . 85
Table 4 Gross split scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Table 5 Production royalty rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Table 6 Revenue sharing fund mechanism . . . . . . . . . . . . . . . . . . . . . . . . 93
Table 7 Natural resources revenue sharing fund . . . . . . . . . . . . . . . . . . . . 94

The Social Fund: A Brazilian Sovereign Wealth Fund

Table 1 Brazilian rate of illiterates—aged 15 or older (in 2010) . . . . . . . . 105
Table 2 Distribution of royalties among the different beneficiaries
(% of total royalties) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Russian Sovereign Wealth Fund

Table 1 Allowed financial assets defined by the Budget Code
of the Russian Federation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Table 2 Regulatory currency structure of the National Welfare
Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

xv
xvi List of Tables

Table 3 Current terms to repayment of issues of debt instruments

of foreign states, debt instruments permitted for placement
of the National Wealth Fund for debt denominated in US dollars
and euros . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Table 4 Current terms to repayment of issues of debt instruments
of foreign states, debt instruments permitted for placement
of the National Wealth Fund for debt denominated
in pounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Non-renewable Natural Resource Wealth Management

and Distribution in Canada: National, British Columbia,
Northwest Territories, Quebec
Table 1 Simplified metallic mineral fiscal regime in Canadian
jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

Non-Renewable Resource Revenue Savings and Distribution

in Canada: Alberta
Table 1 Critical observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

Norway’s Sovereign Wealth Fund

Table 1 Largest SWFs by assets under management . . . . . . . . . . . . . . . . . 254

Local Content Policy in Indonesia Oil and Gas Industry

Table 1 Road map of local content of goods in upstream oil and gas
business activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
Table 2 Road map of local content of services in upstream oil and gas
business activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Local Content and Extractive Industry in Brazil

Table 1 Principles of Energy Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

Local Content Within Extractive Resources Industry in the Russian

Federation
Table 1 Main international joint projects implemented in the RF . . . . . . . 368

An Overview of Corporate Social Responsibility in Kenya’s

Extractives Sector
Table 1 Tiomin’s commitments and progress by 2011 when Base
Titanium acquired the project . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
Table 2 Stakeholder matrix of power and influence . . . . . . . . . . . . . . . . . 475
List of Tables xvii

Corporate and Environmental Responsibility Among Russian Oil

Companies
Table 1 Five Largest Oil Companies in Russia . . . . . . . . . . . . . . . ...... 551
Table 2 Dynamics of LUKOIL’s environmental expenditures,
2012–2018, bln rubles . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 554
Table 3 Surgutneftegas environmental indicators . . . . . . . . . . . . . ...... 556
Table 4 Rational utilisation of APG by companies in 2018 . . . . . ...... 558

Corporate Social Responsibility in the Mining Sector in Canada

Table 1 CSR approaches within the continuum. Example illustrating
how companies adopting different CSR approaches might
approach dealing with infrastructure issues . . . . . . . . . . . . . . . . . 590

Conclusion
Table 1 Energy Reliance across our 12 countries . . . . . . . . . . . . . . . . . . . 637
Table 2 SWFs described in this collection . . . . . . . . . . . . . . . . . . . . . . . . 640
Table 3 IFSWF members, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644
Table 4 Local content instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651
Introduction

Jonathon W. Moses, Rochelle Spencer, and Eduardo G. Pereira

Abstract The analogy that follows includes 35 chapters, 16 cases and 12 very
different countries. This chapter provides a brief overview of these cases and intro-
duces the concepts and literatures associated with three main tools for managing
a modern resource economy: sovereign wealth funds, local content policies and
corporate social responsibility.

Keywords Sovereign wealth funds · Local content policy · Corporate social

responsibility · Resource curse · Resource rents

“The revenue of the state is the state”. These words, from Burke’s (1790) Reflections
on the Revolution in France, sum up the anthology you hold in your hands. The
states in this volume are beholden to one type of extractive industry or another:
their main source of revenue comes from the exploitation of rare, valuable and non-
renewable resources. Many of these states find themselves in the developing world,
with relatively weak political institutions, and they hope that their natural resource
wealth can help them to develop further.

J. W. Moses (B)
Department of Sociology and Political Science, Norwegian University of Science and
Technology, Trondheim, Norway
e-mail: [email protected]
R. Spencer
Centre for Responsible Citizenship and Sustainability, Murdoch University—Perth, Perth, WA,
Australia
e-mail: [email protected]
E. G. Pereira
Siberian Federal University, Krasnoyarsk, Russia
e-mail: [email protected]
The University of West Indies, St. Augustine Campus, St. Augustine, Trinidad and Tobago
University of São Paulo, São Paulo, Brazil

© The Editor(s) (if applicable) and The Author(s), under exclusive license 1
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_1
2 J. W. Moses et al.

By depending on a single source of revenue, states take on three types of vulner-

abilities. First, they become very sensitive to the needs of the provider (e.g. Interna-
tional Oil, Gas and Mining Companies, or IOGMCs) to secure a steady supply of
resource wealth, often at the expense of local community priorities and indigenous
land rights. This segues to the second vulnerability: states risk creating or exacer-
bating social tensions and corporate-community conflict over the social and environ-
mental impacts of extractives activity. Third, states become exposed to markets that
tend to be very volatile. This suite of vulnerabilities highlights that sustainability in
extractive resources has long been a contentious issue owing to the depletive char-
acter of the extractives industry and the associated social and environmental impacts
that result from extractive activities.
The dangers of these sorts of vulnerabilities can be illustrated with a simple
illustration. Imagine two kings and two kingdoms, of relatively equal size: one king
(King1 ) controls a kingdom that sits on an enormous mountain of gold. The other
king (King2 ) rules a kingdom that is barren of natural wealth. Your first thought, at
this point in the story, is probably: Wow, lucky King1 ! After all, ruling a kingdom
filled with gold is like winning the lottery: what can be better than swimming in
money? While this is a common first impression—it is far too often wrong. As we
shall soon discover, natural resource wealth is seldom a manna from heaven. The
kingdom’s very wealth and inflated prices make it difficult to export other goods and
services and (as a consequence) all of the kingdom’s energy is directed at securing
more gold. The revenue of the state is the state.
Because the golden king has access to enormous wealth, he is (more or less) free
to behave as he likes: he can afford a large army and he can use that wealth to extend
the borders of his kingdom, and/or to rule over his people with an iron fist. When
King1 threatens to invade the other kingdom, King2 must find a means of defence.
Without recourse to an independent source of financing (i.e. gold), King2 is forced to
tax the people of his kingdom to fund his defence. This puts King2 at the mercy of his
people: in exchange for their taxes, the people can demand something in return, such
as constraints on sovereign authority (think Magna Carta). Because King2 receives
his revenue from the people, the people are able to hold him accountable. Because
King1 pulls his revenue from the ground, his biggest constraint is the size of his gold
holdings. The revenue of the state is the state.
This fanciful example is used to depict, very briefly, the main challenges—both
economic and political—facing states that have found wealth in non-renewable
natural resources. The rest of this book shines further light on these challenges.
Natural resource wealth holds the promise of raising incomes and living stan-
dards—in both developed and developing contexts alike. Extractives industries
contribute to GDP, increase tax revenues, export earnings and employment, and
the wealth that these industries generate can contribute to sustainable development
by enriching local communities, including those in rural and remote regions (where
these industries are often located). This is the hope offered by the extractives sector.
Still, there is now a rising knowledge of environmental sustainability as a premise for
economic and social sustainability (Folke et al. 2016). The “planetary boundaries”
Introduction 3

framework (Rockström et al. 2009; Steffen et al. 2015) demonstrates that we are
already transgressing four of the nine identified planetary boundaries, hence moving
out of the safe operating space for humanity. At least three of these boundaries are of
high significance for the extractives industries; climate change, biological diversity
and land-system change. This book does not get into these overarching issues as
such, but some of these challenges are discussed in, e.g. the Chapter “CSR in the
Norwegian Context”.1
Notwithstanding and perhaps despite these celebrated spoils of the extractives
sector, many resource-dependent countries prove unable to fully benefit from their
natural resource wealth. Too often, poor communities living adjacent to extractives
operations are denied the benefits of economic progress owing to historical legacies
of colonialism and dispossession; poverty persists; jobs may be hard to come by; the
industry can become “enclavic”, providing limited backward and forward linkages
with other industries or enterprises; and the environment can be degraded, impacting
the livelihoods and cultures of subsistence farmers and indigenous communities
whose connection to land is trivialised in order to prioritise extractives industries. The
wealth pouring into the country can also breed corruption and raise inequalities. These
unwanted outcomes risk perpetuating adverse social, cultural and environmental
legacies and may create fertile grounds for violence and conflict. In fact, on average,
resource-dependent economies score lower on the human development index than
less endowed countries. Out of the 3.5 billion people living in resource-dependent
countries, approximately 887 million live below $1.25/day (UNDP 2014).
It does not have to be this way. Some countries have managed their extractives
industries successfully: they have diversified their economies, ensured backward and
forward linkages, tackled corruption and conflict and invested in human and physical
capital. The experiences of these states show that it is possible for natural bounty to
be managed in a way that facilitates good governance and maintains international
competitiveness. By surveying these experiences, we can better understand the threats
that resource wealth brings to political, cultural and economic sustainability, and the
tools that states have to minimise or avoid those threats.
This is exactly what we propose to do in the book that follows: we consider how
twelve very different states employ three of the most important tools for managing
a modern resource economy: sovereign wealth funds, local content policies and
corporate social responsibility. To better understand how these tools are wielded, this
introductory chapter provides a brief and general introduction to the challenges hinted
at above: the unique qualities of natural resource wealth; the sort of socio-economic
imbalances this wealth can generate, and the sundry ways that states manage those
challenges.

1 For further reading, we suggest Hickel (2019) and Nilsen (2019).

4 J. W. Moses et al.

1 Kingdoms of Gold

Each of the case studies in this anthology is struggling with the wealth generated from
the process of extracting raw materials from the earth (and subsequently selling them
to consumers). The extractives industries are those that remove metals, mineral and
aggregates from the Earth, for example, through the process of oil and gas extraction,
mining, dredging and quarrying.
These extractives industries have the potential to drive growth, development and
poverty reduction (Spencer 2018; Blowfield and Dolan 2014). Indeed, these indus-
tries already play a dominant role in the economic, social and political lives of
3.5 billion people living in 81 countries (World Bank 2019c). If managed well, the
revenues and experiences from these industries could reduce poverty, increase pros-
perity and even minimise inequality, while protecting the surrounding communities
and environment (World Bank 2019a). In practice, however, most of these states
(from the global North and global South) do a poor job in managing their resource
wealth, resulting in both resource dependency and weak governance.
To understand the difference between good and poor management practices,
we need to begin by recognising that there is something special about the extrac-
tives industry. This industry is not like the textile, agricultural or service industries.
Whether it rests on gold or gas (or anything in between), the extractives industries
rely upon non-renewable natural resources, often in high demand. This matters, on
at least three counts.
First, natural resources are owned by the people in common. Public ownership
in natural resources is secured by centuries of common law/experience, but also by
international agreements, such as the 1962 UN Resolution on Permanent Sovereignty
over Natural Resources and Article 1 of the International Convention on Civil and
Political Rights. Whether it is because of historical convention, national (constitu-
tional) and/or international law, it is almost everywhere recognised that subsurface
petroleum and minerals are owned by the people, and the responsibility for managing
these resources lies with their representatives, i.e. national governments.2 As we shall
see, in some exceptional situations in, e.g. in certain parts of Canada and several parts
of the USA, the private ownership of mineral rights is still allowed. But it is a mistake
to think that such North American practices are normal or commonplace in the world
at large.
Second, because these resources are non-renewable and limited by nature, and
because they are in high demand, they tend to be associated with a significant rent—
the so-called resource rent.3 A resource rent is an extraordinary value derived from

2 As is clearly evident in the chapters on Alaska (“Alaska’s Petroleum Industry, Institutions and
Sovereign Wealth Fund”, “Alaska’s Tug of War on Land Rights” and “Alaska’s Corporate Social
Responsibility: The Economics of the Corruption Case of VECO”), federal systems complicate this
simple picture, as the interests of state residents may not correspond with the interest of the national
citizenry.
3 This understanding of rent was initially introduced by Ricardo (1817), but subsequently developed

by George (1879).
Introduction 5

exploiting a natural resource (fixed in quantity)—after accounting for all costs and
the provision of normal returns (including profit). We hasten to underscore that the
rent is not created by risk-taking, skill or expertise, and has nothing to do with profit:
it is an unearned surplus that results from restricted access to a valuable commodity.
The rent is what is left over after all the input costs are covered, and a normal return
on investment is paid off.
The size of the resource rent is determined by many different factors, none of
which are associated with commercial prowess. For one, the rent is determined by
the productivity of the process of extracting/producing the resource, relative to the
least efficient producer in the market. In some contexts (think Kuwait), it is relatively
easy to get oil out of the ground—and the rent comes easily. In other countries (think
Norway), it is very expensive to get the oil out of the ground, and the corresponding
rent will be relatively smaller. In this instance, the difference in rent is determined
by geological luck: Kuwait is simply luckier than Norway, with regard to the ease of
accessing its oil reserves.
Daniel Yergin, in his award-winning book, The Prize, provides a very useful
example:
[I]n the late 1940s, oil was selling for around $2.50 a barrel. Some grizzled stripper-well
operator in Texas might only make a 10 cent profit on his oil. But in the Middle East it only
cost 25 cents a barrel to produce oil. Deducting 50 cents for other costs, such as transportation,
and allowing a ‘profit’ of 10 cents on the $2.50 barrel, that would still leave a very large
sum—$1.65 on every barrel of Middle Eastern oil. That sum would constitute rents. Multiply
it by whatever the rising production numbers, and the money added up very rapidly. (Yergin
2009: 414)

The size of the rent is also determined by the market price of the resource, which
is—in turn—determined by supply. Much of the value in natural resources comes
from the fact that they are rare and limited. That they are rare in nature is easy to
understand, but they are also limited because states limit commercial access to these
resources.
In the early years of the US petroleum industry, it was relatively costless for
new actors to enter the petroleum market, and the price of oil fluctuated wildly.
New discovery areas were immediately flooded with wildcat producers, and the
price of oil (and the poorly managed reserves) fell precipitously. This price volatility
became unbearable, even for liberal, free-market states in Southern USA, so state
authorities in Texas and Oklahoma, for example, began to limit access to the resource
with an eye at stabilising its price.4 Further access restrictions were introduced in
response to increased concerns about inefficient use of the resource and potentially
detrimental environmental effects. Whatever its initial motivation, we know that
access to non-renewable natural resources is limited by both nature and government.
In particular, and as we shall see below, states use a plethora of licensing arrange-
ments to restrict access in all the extractives industries. Restricting access in this
way allows political authorities to increase the size of the rent, by limiting access

4 See, e.g., Yergin (2009: Chaps. 12 and 13). These examples came to influence the subsequent
creation of OPEC. See Yergin (2009: 495), but also Rabe (1982).
6 J. W. Moses et al.

to potential competition. When governments limit access to natural resources (e.g.

through a system of contracts, licences or concessions), they increase the potential
rent—and hence, the resource becomes even more valuable. As the resource rent is
a function of the underlying resource (not the result of some clever manipulation on
the part of the contractor), and because the size of the rent is a function of restricted
access, the rent belongs to the owner of the resource and the creator of the rent (i.e.
nature and government—both of which belong to the people).
Third, the global price on natural commodities is notoriously volatile. As we have
just seen, this is one of the reasons that governments initially became involved in
restricting access to these resources. For example, in just two years, around 2014,
the price of a barrel of crude Brent oil halved, from about $117 in 2013 to about $56
in 2015. You can see that significant drop in Fig. 1, which illustrates the long-term
price volatility in the oil market, using overlapping price measures. Figure 2 shows
similar long-term price developments in three aggregate commodity indices: energy
(including crude oil, natural gas and coal), metals and minerals, and precious metals.
As the prices of these important natural resources rise and fall, so too do the fortunes
of countries that rely upon them.
When a country leans heavily on a single natural resource, the price of which
is volatile, it is exposed to a number of challenges. First of all, state revenues will
vary significantly, along with the price of the resource. This is a problem, in that the

140

120

100
US$/barrel

80

60

40

20

0
1861
1867
1873
1879
1885
1891
1897
1903
1909
1915
1921
1927
1933
1939
1945
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
2011
2017

Fig. 1 Crude oil prices, 1861–2018.

Source BP (2019).
Note In 2018 US dollars (deflated using the Consumer Price Index for the USA). Different measures
were use to cover the different periods: 1861–1944 uses the US average; 1945–1983 uses the price
of Arabian light posted at Ras Tanura; and in 1984–2018, we used the Brent dated data
Introduction 7

200

180

160

140

120
Index value

100

80

60

40

20

0
1960M01
1961M10
1963M07
1965M04
1967M01
1968M10
1970M07
1972M04
1974M01
1975M10
1977M07
1979M04
1981M01
1982M10
1984M07
1986M04
1988M01
1989M10
1991M07
1993M04
1995M01
1996M10
1998M07
2000M04
2002M01
2003M10
2005M07
2007M04
2009M01
2010M10
2012M07
2014M04
2016M01
2017M10
2019M07
Energy Metals & Minerals Precious Metals

Fig. 2 Commodity price indices, monthly, 1960 to present.

Source World Bank (2019b).
Note “Pink Sheet”. Monthly indices based on nominal US dollars, 2010 = 100. See source for
further clarification on the composition of the indices, e.g. the “energy” index is made up of coal
(4.7%), crude oil (84.6%) and natural gas (10.8%)

state’s spending needs are more constant (consider education or defence). In other
words, the state needs to find a way to smooth out the revenue flow, such that it
can continue to pay for necessary state activities, even when the resource price is
low. Second, when the market price of a natural resource is high, the industry will
draw to it the country’s productive factors (capital, labour), leaving fewer qualified
people and investment capital to satisfy the needs of other sectors. As a result, these
countries become more and more dependent on a single source of economic activity.
As long as the price of the single resource remains high, this might not appear to
be a problem. But when that price falls, as it inevitably does, it brings along with it
the jobs and revenues that are connected to the related industry—and with them the
fortunes of the state. Absent of economic alternatives (having been drained of labour
and capital), it becomes very difficult for any country to adjust to the new (low-price)
market conditions.
In short, the challenge of resource management is twofold.5 The first is a need to
secure the resource rent for its rightful owners. As the resources belong to the people,
and governments contribute to the rent by limiting access to the natural resource, it
is essential that private actors are not allowed to abscond with the rent (by this, we
mean corrupt government, but also IOGMCs). When all is said and done, states need

5 Inthis volume, we set aside the other, arguably more common, aspects of resource management
(e.g. how to maximise efficiency, protect the environment, etc.), in order to focus on the political
and economic effects.
8 J. W. Moses et al.

to provide terms of access to natural resources that can attract competent expertise;
allow for a reasonable return on invested labour and capital (while protecting workers
and the surrounding environment and communities), but still ensure that private actors
do not walk away with the underlying rent.
At the same time, a strong and resilient economy needs more than one leg to stand
upon, and relying on natural resources is particularly problematic, as the price trends
are so volatile. States need to manage the revenues generated from the resource
in ways that can protect alternative economic sectors and maintain international
competitiveness throughout that volatile price cycle.

2 Winning the Lottery

When a country uncovers its hidden wealth in natural resources, it is like winning the
lottery. All of a sudden, and as the result of dumb luck, a country finds itself sitting
on a valuable resource. Like the lottery winner, the state is initially bombarded with
consultants and advisers, anxious to help them spend their new-found wealth and/or
lend them additional money. Lottery winners tend to assume that their life starts
anew: they need not worry about future revenues streams, and they finally have the
money they need to fix the roof or educate the kids. In the absence of a plan, a
lottery winner might quit her job, buy her cousin a new home, and begin to spend
extravagantly…until all the money is gone. The same can easily happen with a state
that has discovered natural resource wealth: the promise of future wealth makes it
easy to secure loans, to throw money at problems (both new and old), and to distance
oneself from previous (less lucrative) forms of employment.
When a commercially viable natural resource is first discovered, it is understand-
able that most of the early attention is focused on the technical challenge of locating
the resource and getting it to market: countries spend a great deal of money acquiring
the expertise necessary to make this happen. After all, the extractives sectors tend to
be very capital and knowledge-intensive: the resources they chase do not float on the
surface waiting to be picked up. But this challenge is relatively easy to overcome:
the expertise is out there to secure, it is just a matter of attracting its attention and
finding the money to pay for it. While petroleum engineers are often loath to admit
it, the real challenge for the country happens only after this technical miracle has
been performed: what to do with all the money that results?
Two threats are particularly menacing: one mostly economic, the other mostly
political. The first has to do with maintaining international competitiveness and a
balanced economy. The second concerns the nature of so-called rentier states—
states that depend upon the rents from their natural resources. Both threats can play
havoc with good governance. After all, it is not without reason that Juan Pablo Pérez
Alfonzo—Venezuela’s former oil minister and the main driver behind the creation
of OPEC—referred to oil as the “Devil’s excrement” in a 1975 speech (Starr 2007).
The problem of excess money has many different names and can take many
different forms. Whether we refer to it as a resource (or oil) curse, or a paradox of
Introduction 9

plenty, the problem is one that has long haunted countries.6 The initial work on the
resource curse showed how those countries that relied on natural resource exports
tended to have lower per capita growth rates (see e.g. Sachs and Warner 1995).
Subsequent work extended the argument to more political effects (such as increased
corruption, inequality and internal conflict). The argument is on full display in a 2003
World Bank study of the extractive industries:
Data on real per capital gross domestic product (GDP) reveal that developing countries with
few natural resources grew two to three times faster than resource-rich countries over the
period 1960–2000. Of 45 countries that did not manage to sustain economic growth during
this time, all but six were heavily dependent on extractive industries, a majority of them also
experienced violent conflict and civil strife in the 1990s. (World Bank 2003: 12)

Over time, the nature of the relationship has changed, so the economic curse seems
less pronounced now than it was in the past (Ross 2012). Today, it would seem that
economic growth is neither faster nor slower in resource-rich states (relative to the
rest of the world). While this is an improvement on the past, it is hardly what we
should expect.7 Why does not this increased wealth transfer to greater economic
activity, more jobs, and higher standards of living?
The main problem is one of economic capacity: the domestic economy simply
cannot absorb the new capital in an efficient or effective manner, and this inability
to adjust bloats the surrounding economy, making it harder for it to compete on the
international stage. This particular part of the problem is what we refer to as Dutch
Disease: where the new wealth from natural resources floods the local economy,
creating inflation and a real appreciation of the national currency. As a result, the
price of local goods and services rises across the board (as the injection of new
money drives up food costs, housing costs, wages…). This, in turn, makes the goods
and services produced in the country more expensive, and hence less competitive,
internationally.
In addition, the wealth being generated in the natural resource sector will attract
skilled workers and dormant capital away from traditional centres of economic
activity. This sort of internal factor flow makes it difficult to sustain alternatives
to the natural resource sector: it pushes up wages and returns across the country—
crowding out investment and jobs elsewhere. As prices increase across the economy,

6 The «Paradox of Plenty» comes from a 1997 book title by Terry Lynn Karl. The “resource curse”
was first coined by Auty (1993) to describe how natural resource wealth was not generating the effect
on economic growth that economists expect. Subsequent econometric work by Sachs and Warner
(1995) and a 1999 article in World Politics by Michal Ross brought his work to even broader
audience. The notion of a “rentier state” was first introduce by Mahdavy (1970) with reference to
the political challenges associated with Middle Eastern states that rely heavily on resource rents;
whereas the term, “Dutch Disease” was first introduced in a 1977 Economist article referring to a
decline in the Dutch manufacturing sector after that country’s natural gas discoveries in the 1950s.
7 Expectations are a large part of the problem. The defining characteristic of developing countries is

a lack of investment capital (or excess labour, relative to the domestic capital supply). As resource
wealth introduces an abundance of capital to countries that were previously starved for investments
(but pregnant with labour), economists expect significant economic growth from the injection of
new capital.
10 J. W. Moses et al.

the traditional sectors can no longer maintain their price competitiveness with others
in the global economy.8
From these economic challenges, we see how easy (and dangerous) it is for a
country to become overly dependent upon the extractives sector. This economic
dependence brings with it political challenges as well—and these challenges can
be even more troubling for the general population. The problem is that the state is
less likely to concern itself with the needs of the people when its main paymaster
resides elsewhere. To put it bluntly: after the discovery of natural resource wealth,
the keys to the state’s treasury lie with the extractives industry—not with the people,
themselves.
Having direct access to a strong revenue stream from natural resource extrac-
tion/production, state officials can avoid the unenviable task of taxing their citizens.
Knowing which side of their bread is buttered, these officials are increasingly sympa-
thetic to the needs of the industry that fills their coffers, and increasingly callous to
the needs of their citizens. Resource wealth allows governments to ignore the needs
of their constituents: they can become more corrupt, and they are more susceptible
to political violence, even civil conflicts. With their treasuries full, governments can
pursue stick and carrot policies. On the one hand, officials can buy-off any political
opposition, by offering generous social policies or subsidising important fuel/food
costs. If that does not work, government officials can use their wealth to build up a
domestic security force to protect governors from the governed, and to further repress
the people. In the end, following Burke, the revenue of the state becomes the state.

3 Managing the Resource

Because natural resources are commonly owned by the people, their governments are
responsible for managing them in an efficient and just manner. The first task of the
government, in this regard, is to find, extract and get these resources to market. In so
doing, states need to present terms and conditions that are generous enough to attract
competent skills and contractors, but fair enough to ensure that the contractors do not
walk off with the resource rent. The “generosity” tends to be higher for the so-called
first comers as they take higher risks and expect higher rewards. As we will see in
the Chapters “The Experiences of Managing the Heritage and Stabilisation Fund in
Trinidad and Tobago and the Sovereign Wealth Fund Guyana”, “The Development
and Implementation of Local Content in the Extractive Industries in Trinidad and

8 Consider a country that has previously relied on agricultural exports, but then uncovers a mineral
Eldorado. All of a sudden, capital is flooding into the country, inflating prices across the board
(as we saw above). Wages and returns on investment grow higher in the mining sector, relative
to the agricultural sector, so that workers and capital are drawn from agriculture and into mining.
The agricultural export industry finds it increasingly difficult to attract new workers and investors,
and the industry must raise their prices (wages) accordingly. As a result, the price of the country’s
agricultural exports rises, relative to the global competition, making it more difficult to compete/sell.
Over time, the agricultural industry falls further into decline.
Introduction 11

Tobago and Guyana” and “The Approach to Corporate Social Responsibility in the
Extractive Industries in Trinidad and Tobago and Guyana”, this was the case in
Guyana over a decade ago as not many oil and gas companies were keen to venture
into those waters as no discovery was found nor any infrastructure in place. But it
is no longer the case as Guyana became one of the largest finds in recent years with
its first production started in 2020. Nevertheless, it is difficult to find a balance for
such “first comers” as an oil and gas contract should last for many years and host
countries should avoid expropriation or forced renegotiation.
The international community is increasingly aware of the scope of the challenge,
and several international organisations help countries manage their natural resource
wealth in a way that can maximise the national benefit from the sector, contribute
to economic growth and reduce poverty. While many of the programs offer out-of-
the-box state improvement courses [e.g. increase effective governance and trans-
parency, promote inclusive growth, protect both people and the environment (World
Bank 2019a)], new global standards are being developed—inter alia—to promote
the open and accountable management of oil, gas and mineral resources, the use of
improved stakeholder engagement, the safety of extractives operations. For example,
the Extractive Industries Transparency Initiative (EITI) was established to publish
information on the extractives industry value chain. This initiative allows us to follow
the money: how these revenues make their way through the government, and how
they benefit (or not) the public. Currently, the work of the EITI is supported by a
broad coalition of government, companies and civil society, and 52 countries have
agreed to implement the EITI Standard (EITI n.d.).
For our purposes, there are basically two different sorts of tools used to manage
natural resources: the licensing regime and the revenues regime. How these two
regimes are combined determines the size of what is often called the “government
take”, or the public’s share of the resource rent.
The first step a government must take is to decide how to get the resource to market,
i.e. to secure a commercial partner. Generally speaking, two paths avail themselves.
On the one hand, the state can keep the process in-house, using state-owned enter-
prises (SOEs), for example, a national oil, gas or mining company (NOGMC) to
extract and bring the resource to market. Alternatively, the government can hire
in private (often international) expertise, e.g. an International Oil, Gas or Mining
Company (IOGMC) to do the work. In either case, the government issues a permit
or licence, often allocated using some sort of bidding/procurement process, to the
chosen firm so that it can access and extract the natural resource.
Governments provide access to their natural resources by way of a system of
contracts, or licences, and the form of these contracts tends to vary over time and by
national contexts (see Moses and Letnes 2017: 86–91 for a discussion). Although
the scope of these licensing agreements can vary significantly, they all determine
how rents and costs will be distributed between the host government (and/or its
NOGMC), and any interested private companies (e.g. IOGMCs). In the early years of
the industry, following American experience, countries tended to rely on concession
or royalty-based contract forms; but in the late 1960s, following Indonesia’s example
(see the Chapter “Overview of Extractive Resources Management in Indonesia”),
12 J. W. Moses et al.

more and more countries came to employ production sharing agreements (PSAs)
or contracts (PSCs). More recently, varying forms of service contracts (SCs) have
grown in frequency. Each of these contract types offers varying levels of control, risk
and reward, and there is much overlap among them. The most relevant point is that
these licensing agreements are used to control access to a valuable non-renewable
resource: they are, in effect, licences to print money (i.e. access the resource rent).
The second tool is used to ensure that the underlying rent remains with the people.
In order to ensure that the licensed contractor does not abscond with the rent, the
state needs to appropriate that rent, and it must do so in a way that does not under-
mine the willingness (and profit) of private interests to do the job, and/or undermine
the country’s competitiveness in international markets. The form of appropriation
can either be political (e.g. ensuring local content), or economic (e.g. through fees,
royalties and taxes) in form. The latter is often referred to in terms of “government
take”.9
The size of the government take is only partly determined by the nature of
the contract. Just as important is the system of revenue collection used by the
state. After all, states might demand a share of equity in any venture, royalties,10
taxes/fees/bonuses, etc. (See Moses and Letnes 2017: 91–95 for a discussion). Some
of these taxes and fees are used to incentivize the industry to act in particular ways
(e.g. to reduce harmful emissions); others are used to secure the resource rent. In
practice, states use a plethora of tools to secure their share of the resource rent, and
the particular mix of tools can vary across countries and time.11
Finally, as the nature and size of the rent can change over time, it is impor-
tant for political authorities to adopt a system that is flexible enough to adjust
to the changing conditions and allows for updates in ways that can facilitate the
obsolescing bargaining mechanism (Vernon 1971). By spreading out the allocation
of licenses/contracts (over time), and by embracing shorter licensing/contractual

9 There is no agreed-upon means for measuring or comparing the level of “government take” across

countries. Indeed, most measures ignore the political take and focus on the economic value, often
measured as if it was some sort of “taking” from the international oil company! See, e.g., Johnston
(2007) for a description of the different means used to estimate government take and Johnston
(2008: 34) for a useful graphic depiction of variations in government take, across countries. For an
alternative metric, see API (2012).
10 A royalty is levy where the owner is entitled to a given percentage of the wealth being produced. In

other words, a royalty is a payment to an owner for the use of property (here natural resources)—it
is designed to compensate an owner for use of her/his asset.
11 For example, in Norway, the authorities today rely on six sources of income from the petroleum

sector: dividends from its majority ownership share in the national oil company (Equinor); state
direct ownership in sundry production licences (so-called SDFI); area fees; a NOx tax; a CO2 tax;
and taxes on petroleum companies. The latter consists of an ordinary company income tax of about
27% (which all companies pay) plus an additional 50% tax on petroleum firms, to secure the rent.
See Moses and Letnes (2017: 100–103).
Introduction 13

periods (but sufficiently long for investors to secure their rightful returns and estab-
lish efficient production routines), the political authorities can ensure that the resource
rent remains with the people.12

4 Three Popular Tools of Resource Management

With this general background in place, we can now turn to the focus of this anthology:
how states employ three of the most popular tools in resource management. Each of
these tools is aimed at different aspects of the aforementioned challenges, and each
has their own strengths and weaknesses. This section introduces these three popular
tools and the role they can play in the larger toolbox.

4.1 Sovereign Wealth Funds

Sovereign wealth funds are the new darlings of resource management. At the most
general level, a sovereign wealth fund (SWF) is simply a state-owned investment
fund. Traditionally, SWFs were built from central bank reserves, currency operations,
privatisation drives, etc., but we are concerned with states that build SWFs from the
revenues generated by their extractives industries.13
Although there are many variants (as we shall see!), there are basically two main
motivations for resource-rich states to start and employ a sovereign wealth fund: as a
tool to protect the economy from the price volatility that tends to characterise these
sectors; and as a means to save for the future or current needs. Table 1 provides an
overview of different types of SWFs, but where the savings/spending types of funds
are further sub-divided into three objectives (the bottom three rows).

4.1.1 Savings/Spending Funds

The bottom three rows of Table 1 reveal several of the different ways that SWFs
can be used as a savings/spending fund. A core concern of any government offi-
cial responsible for managing a non-renewable resource is clear: the resource will

12 Investors are often concerned by the lack of political and/or fiscal stability among the large number

of oil and gas provinces around the world. This is why it is fairly common for host governments to
sign bilateral investment treaties (BIT) and/or add stabilisation provisions in their relevant contracts
order to offer further assurances to investors that future governments will not change the key terms
of the said deal. However, it is outside the scope of this book to analyse these matters.
13 There are good introductions to the international variance in SWFs found in the Chapters

“Overview of Extractive Resources Management in Indonesia” and “Sovereign Wealth Funds and
Impact Investing in Australia”. See also the forthcoming edited volume by Okpanachi and Tremblay
(2020).
14 J. W. Moses et al.

Table 1 Sovereign wealth funds types and objectives

Classification of sovereign wealth funds Legal basis
Objectives Type Investor
Stabilisation Protect and stabilise Stabilisation Central bank or • Constitutive
the budget from funds monetary authority law
market volatility in • Fiscal law
revenue/exports • Constitution
and/or earn greater • Company law
returns than foreign • Other laws and
exchange reserves. regulations
Smooth revenues
and expenditures,
from fluctuations in
commodity prices
Capital Future liability Pension Intergenerational
preservation funds preserving reserve funds sovereign investor
the real value of
capital to meet
future, contingent
liabilities
Capital Increase savings for Future Liability sovereign
maximisation future generations. generation investor
Liability profiles funds
are
multi-generational,
usually have long
investment horizons
with higher target
returns. They
favour relatively
diversified and
low-risk portfolios
and illiquid assets
such as
infrastructure,
public equity and
private equity and
real estate
Manage a nation’s Reserve Liquidity
foreign reserves and investment sovereign investor
earn greater returns funds
than foreign
exchange reserves;
and assist monetary
authorities dissipate
unwanted liquidity
(continued)
Introduction 15

Table 1 (continued)
Classification of sovereign wealth funds Legal basis
Objectives Type Investor
Socio-economic Fund social and Strategic Strategic
development economic development development SWF
development, SWF
and/or sustainable
long-term capital
growth.
Characterised by
long-term
investments,
especially in
infrastructure and
private equity. They
invest in illiquid
and strategic assets
which can stimulate
economic
development
Source SWFInstitute.org https://www.swfinstitute.org; Bortolotti et al. (2015)

eventually be depleted. Hence, any oil (or gold, or diamonds) that we take out of
the ground today will not be available for future generations. This introduces three
problems, each of which can be addressed with a SWF.
First, we like to think of resources in the ground as money in the bank. The
problem is that untapped natural resources do not earn any interest. Once a state’s
natural resources are extracted and sold, then the wealth of the people is (in effect)
spent. In the process, the country is simply draining its resource pool (and wealth)
and leaving nothing in return. A SWF can take the revenues generated from the
sale of natural resources and invest them in the market, generating a return on that
investment. In the process, a state can turn its fixed pool of capital into a dynamic
stream of revenue.
Second, when a natural resource remains in the ground, its value is shared by
current and future generations. Once it is brought to market, however, its value
is captured by the current generation, at the expense of future generations. This
raises concerns about inter-generational equity. If we think of natural resources as
the people’s “family jewels”, then we need to think of ways to reimburse future
generations when selling the family jewels. A SWF can do this, by squirrelling away
the resource money, to be used by future generations—for example, as a means to
transition to a new economic footing, once the resource is depleted.
Third, the savings inherent to a SWF can either be used as an engine of investment
(if the money is invested at home in necessary projects), or as a bulwark against Dutch
Disease (when invested abroad). The rationale for using a SWF to affect domestic
investments is somewhat convoluted, as the money is probably better spent through
traditional government channels, where the spending process will be exposed to more
16 J. W. Moses et al.

political scrutiny.14 When the money is invested abroad, however, the government
can protect the local economy from the inflationary and currency appreciation affects
that we associate with Dutch Disease. This brings us to the second type of SWF: as
a buffer or stabilisation fund.

4.1.2 Buffer Funds

Sovereign wealth funds can also be used to stabilise or buffer the national economy
from the price volatility that characterises these markets. This can be done in two
ways. First, a country that relies on natural resource wealth is susceptible to the
swings in production (in some years, there will be major finds, in other years, there
will be nothing), as well as significant variation in the market price for their resource.
As we have already noted, this is challenging for states, whose expenditure needs
are much more stable: the state still needs to protect, educate and inspire its people,
even if there were no new discoveries that year, or the global price of their resources
is falling.
To compensate for the cyclical nature of resource revenues, a country can invest
the resource revenues and then allow the return on these investments to slowly (and
predictably) return to the state (or the people directly). This is consistent with one
form of a savings fund, as described in the previous section. But here, our focus
is on the means by which the money is repatriated to the domestic economy. By
investing its money in this way, the government can plan and prepare for how to use
the revenues in a way that does not overwhelm the domestic economy. This buffers
the state economy from the ups and downs of the extractives sector.
This type of buffer fund is also useful to immunise against Dutch Disease.
When this is the objective, the state can invest its revenues offshore (beyond the
home economy), in effect protecting the local economy from the sort of infla-
tionary/appreciatory effects that we associate with Dutch Disease. When all the
resource revenues are deposited in an offshore account, the returns on these invest-
ments can be transferred back to the state (or people) in a steady and predicable
rate.
The second way to buffer the national economy is to invest the money in a way
that can counter-balance, or at least water-down, the price volatility inherent to the
extractives sector. After all, as the SWF grows, the returns from the country’s invest-
ments can be ploughed back into the fund, allowing for new sources of revenue (not
related to the original natural resource wealth). If the money was invested in IT, for
example, then the returns on IT investments are unlikely to corelate with the price of
oil (for example). Hence, returns on investments may increase even as the price on
the natural resource is falling. A SWF allows the state to develop a more diversified

14 When governments are suspected of being corrupt or inefficient, it is often tempting (if not always

accurate) to think of a SWF as an alternative budget, one that can be created with better means of
control and oversight. But SWFs that are poorly integrated with the budget can easily lead to a loss
of overall fiscal control and problems of coordinating expenditures. In practice, corrupt officials
have not found it difficult to bypass controls and drain the SWFs for their own private gain.
Introduction 17

portfolio and with it a more diversified source of revenue—which can be used in a

counter-cyclical fashion.
For this to happen, it is important to isolate the money in the SWF, so it is not
just the result of a government budget surplus. Most states take in their resource
funds, decide how to spend them, and then send whatever remains to a SWF. This
approach tends to facilitate wasteful spending, as it is tempting to use more of this
money than may be prudent. Worse, this approach can be destabilising as well. As
the price of the resource will vary substantially from year to year, letting it flood into
the government’s budget introduces a great deal of uncertainty and volatility in an
important source of government financing. To counter this, the government can set
up a system such that the resource money goes directly to an offshore SWF, and the
government budget is only granted an annual share of the expected return from that
fund (see, e.g., the Chapter “Norway’s Sovereign Wealth Fund”, on Norway).
While more and more states are employing SWFs, it is doubtful whether they
are appropriate in many contexts. Developing countries suffer from an acute lack of
investment capital, and resource wealth can be used to fill the void. The challenges
for these countries are to bring that money into the country in a way that does
not overwhelm the economic capacity of the existing economy—so the capital can
be utilised efficiently. It would be a shame if this needed capital is hidden away
in a foreign account (susceptible to future theft/corruption), if it could be spent at
home to develop domestic economic capacity (without increasing inflation and an
appreciation of the currency).
In any case, it is quite challenging for any country to save funds for future genera-
tions whenever there are high demands to deal with critical issues on present genera-
tions experiencing poverty and a lack of basic needs. However, such decisions might
be much easier in a developed economy like Norway or Canada in comparison with
Nigeria or Guyana. Nevertheless, most governments tend to face challenges when
implementing SWFs for various reasons:
1. transparency on the amount of money they collect into the funds,
2. maintain a constant flow of income inside the fund so it can continue to increase,
3. avoid large and/or constant withdrawals from the fund, or
4. wisely manage such funds.

4.2 Local Content Policies

A second tool used by state officials to manage their revenue wealth is the use of
local content policies (LCPs). LCPs are used by states to secure a larger part of the
resource rent: they are a means to help spread the wealth of the resources to a wider
swatch of the local economy, as they spread out the allocation of jobs and government
revenues. States introduce LCPs in an effort to create jobs, promote local enterprises,
support local communities, and to secure new types of skills and technologies.
18 J. W. Moses et al.

LCPs tend to be aimed at different goals, depending upon the state’s particular
needs, capabilities and contexts. Some states will wish to maximise local employ-
ment creation, others will want to expand domestic ownership and entrepreneurial
activity or encourage inward direct investment, and still others might want to focus on
building up a domestic supply industry, providing local skills, transfer of technology
and technical competence.
None of this is easy. Even defining local content can be a significant challenge:
“local” can be operationalised at various levels of aggregation (regional, national,
community) and content might refer to workers, firms (their location, ownership, tax
registration status), share of economic activity, or even the type of knowledge.
In addition, the capacity of states to use LCPs has been severely restricted by
changes in international trade and investment rules. For example, membership in
the WTO brings constraints in the form of several agreements that limit the state’s
capacity to employ LCPs, including the agreements concerning Trade-Related Invest-
ment Measures (TRIMS), the General Agreement on Trade in Services (GATS), the
Agreement on Government Procurement (GPA) and the Agreements on Subsidies
and Countervailing Measures (ASCM).15 International funding agreements and bilat-
eral investment treaties often include restraints on the use of local procurement tools
and require lenders to abide by the Model Law on Procurement of Goods, Construc-
tion and Services (see Ssennoga 2006: 222); and international contracts and trade
agreements are making it increasingly difficult to use national regulations as a means
to prioritise local producers by introducing ISDS (investor state dispute settlement)
clauses that allow investors/corporations to sue if a government’s actions result in
reduced profits.
Still, states have a need and desire to encourage local production, and their ability
to control access to natural resources provides them with the leverage to do so.
This leverage can be applied by prioritising their NOGMCs, by enacting national
legislation, and even by employing specified contract terms.
In many states, NOGMCs are the strongest drivers of local content policies. It
is for this reason that states tend to prioritise them when allocating their licences.
After all, NOGMCs are more likely to hire local employees, train local workers
and choose local contactors as their suppliers. Other states enact laws that formally
require contractors to employ local goods, services and/or workers. For example,
consider Article 27.1 of Angola’s Law No. 10 on Petroleum Activities (2004):
Licensees, the National Concessionarie (i.e., Sonangol) and its associates, and any other
entities which cooperate with them in carrying out petroleum operations shall:

(a) acquire materials, equipment, machinery and consumer goods of national production,
of the same or approximately the same quality and which are available for sale and
delivery in due time, at prices which are not more than 10 percent higher than the
imported items including transportation and insurance costs and custom charge due;
(b) contract local services providers, to the extent to which the services they provide are
similar to those available on the international market and their prices, when subject to

15 SeeMoses and Letnes (2017: 139–143) for a longer discussion about the nature of international
constraints on LCPs.
Introduction 19

the same tax charges, are no more than 10 percent higher than the prices charged by
foreign contactors for similar services. (Sonangol 2004)

As with SWFs, LCPs are not a panacea. They often result in less efficient and/or
more expensive options than what can be provided by IOGMCs. Policymakers need
to employ careful cost–benefit analyses to ensure that the political benefits from
local content enhancement outweigh the potential loss in the form of securing a
less efficient provider. LCPs can also fail, especially when poorly designed. After
all, there is no point in forcing Licensees/Contractors to use local suppliers if there
are no local suppliers able to provide the needed goods and services; this will only
exacerbate the Dutch Disease. It is essential that policymakers establish targets that
are within the reach and/or capabilities of local providers and the needs of IOGMCs,
or have a plan for expanding those local capabilities.
Thus, there are a number of challenges for LCPs and practices. The first issue
that any country should consider before implementing LCPs is to conduct a fair
assessment of the current reality of its capabilities and then set reasonable targets
to be achieved with a doable progression. When governments fail to conduct such
assessments or to provide strategies to reach such goals, negative results ensue either
with exorbitant increases in supply costs/prices and/or lack of compliance, resulting
in potential fines, which might scare away investors. In this case, it is relevant to
note that LCPs tend to focus on a compliance versus penalties approach rather than
positive incentives to encourage higher performance. Another key element for any
LCPs is to boost the capabilities of the competent authorities so they can monitor
and provide oversight instead of relying on the industry to do so without a proper
compliance system in place. In addition, it is paramount to invest in education and
transfer of technology, so the local industries are able to secure the added value
rather than exporting the low value commodity and/or relying on foreign technology.
Furthermore, diversifying the economy and creating SWF might help to avoid the
so-called resource curse. Finally, local content policies should have a beginning and
an end as at some point the “locals” should be able to compete on the same level
nationally and internationally.

4.3 Corporate Social Responsibility

Corporate social responsibility (CSR) is different from the other two tools in that
this tool is not typically part of an explicit government policy.16 Indeed, CSR is
better understood as a response to ineffective government policy. For that reason,
it may be more controversial than the other two instruments, as it has the potential
to undermine government competencies and transfer even more power to powerful
multinational actors (at the expense of the state). This instrument can also allow weak

16 Although in some countries it is, e.g. India.

20 J. W. Moses et al.

governments to continue to be so when the corporate sector addresses development

and infrastructure needs within the country via their CSR activities.
There is remarkably little consensus about what constitutes CSR.17 Indeed,
economists have long argued about whether companies should be engaged in CSR
at all, as it threatens to undermine shareholder value. Friedman (1970), for example,
argued that the main social responsibility of business is to increase its profits.
However, in the current climate of the United Nations’ Agenda 2030 and its asso-
ciated sustainable development goals, there is a greater emphasis and expectation
placed on the private sector globally to enact responsible business for progressing a
more sustainable and equitable pathway forward (Spencer 2018).
From an analytical perspective, it is difficult to measure the effect or effectiveness
of CSR, or even to put a finger on what it is, exactly. The former is complicated by
the fact that corporations are seldom willing to share the sort of data required to test
and control for the effect of their corporate engagement; the latter is evident in the
many faces of CSR. As Frynas (2009: 5) notes, CSR can take many different faces:
• business ethics and morality;
• corporate accountability;
• corporate citizenship;
• corporate giving and philanthropy;
• corporate greening and green marketing;
• environmental responsibility;
• human rights;
• responsible buying and supply chain management; and
• socially responsible investment.
In the most thorough study of CSR in an extractive sector (oil), Frynas (2009:
105) finds that the most socially responsible actors tend to be national oil companies,
which invest heavily in social programs as part of their governments’ broader social
policy objectives. But NOGMCs are often derided in the broader literature for being
less “efficient” than private companies, who often enjoy the luxury of ignoring the
social and environmental consequences of their actions. In this light, CSR can be a
double-edged sword: when employed by government-owned enterprises, it is seen
to be inefficient; when done by multinational corporations (IOGMCs), CSR is seen
as progressive.
CSR seems to be driven by two different developments. The first is a perceived
need to right past wrong doings. In effect, CSR is the industry’s response to blood on
its hands. IOGMCs work in politically sensitive situations and under trying political
conditions. In order to secure contracts under corrupt regimes, they are often forced to
become corrupt themselves. In short, these companies face severe ethical challenges,
and CSR is a strategy for dealing with those ethical challenges: it offers a means to
insure against growing reputational costs, and to secure greater influence over the
regulations that govern their industry (by encouraging voluntary, rather than manda-
tory or regulatory responses). “For the companies claiming to have a broader social

17 For an influential introduction to the subject matter, see Carroll (1979, 1991).
Introduction 21

responsibility, e.g. a ‘force for good’ (BP), and ‘building a better world’ (Shell), the
paradox of plenty directly affects their legitimacy as corporate citizens” (Skjærseth
et al. 2004: 18).
The second driver behind CSR has been the demise of the state: that is, the state’s
decreased capacity to supply the benefits and protections of traditional citizenship
(see, e.g., Matten and Crane 2005). The reasons for this demise are many and include
globalisation and the rise of market fundamentalism (read market liberalisation and
deregulation). Whatever the reason, states now enjoy less scope to provide and defend
social, political and civil rights (compared to, say the 1970s). This has created a
vacuum, into which firms (and CSR) have flowed, often unwillingly.
The result has created a paradox, where “government failure to deliver effective
governance in the form of environmental protection and economic and social devel-
opment often results in both government and local communities seeking to shift the
burden of delivering such benefits to oil and gas companies” (Wagner and Armstrong
2010: 144). In this new context, firms are embracing CSR as a cheap way to secure a
social licence to operate or a reputational insurance (Minor and Morgan 2011; Spense
2011), avoid the spotlight effect (Spar 1999) of poor publicity, and/or increase the
likelihood of securing future licences (and their rent!).
In short, there is a growing fear that CSR can undermine the effort for greater
revenue transparency and effective governance. In this regard, it is part of a larger
movement to move away from government regulation and capacity. It is for this
reason that the former US Secretary of Labour, Reich (2008) has argued that CSR
can do significant damage as it removes the incentives for government to enact laws
and to undertake actions that maximise social welfare. More recently, at the end of
2019, Reich declared “corporate social responsibility is the second-biggest con of
2019 (Donald Trump remains in first place)” (Reich 2019).
In the end, there are clearly a number of challenges involving CSR from its
definition to its need to manage expectations. However, it is clear that extractive
resource companies tend to deal with resources, which most likely belong to the
public and often are located in poor and remote areas. These investors should find a
way to extract such valuable resources with broader support (i.e. not only from the
host government but also with the support of local and wider public communities as
well as from their shareholders and financiers). This is why their CSR policies and
practices might assist them to secure a so-called social licence to operate; otherwise,
they might find serious challenges to conduct their business. Nevertheless, a serious
concern that extractive resource companies could face is the lack of governmental
presence within their business operations. A number of countries do not have a fair
distribution of resources nor wealth among its regions and population. This is why
an area might be rich in resources with poor economic development at the same time
as such rent might be moved to the capital and/or abroad. In these cases, extractive
resource companies might be expected to intervene as if they were the state and
build schools, roads, hospitals, etc. even though this is outside their expertise. Some
companies might prefer to pay the relevant funds to the government so they can build
it. But in other cases, the money might not be allocated as it should be. Resource
companies might add information on CSR investments but it is less clear what the real
22 J. W. Moses et al.

benefits and impact that such “investments” might add to communities and society
as a whole. In any case, the main challenge with such a complex topic is not even
who put them in place but rather who will staff and maintain them.

5 Overview

In the book that follows, we compare a wide variety of cases and how they employ and
react to these three tools: SWFs, LCPs and CSR. These cases vary significantly, in that
they are written by authors with very different professional backgrounds (lawyers,
engineers, political scientists, anthropologists, economists, activists…), and they
come from very different national contexts and industries (sometimes minerals and
metals, sometimes, petroleum, sometimes both and some external). Even the political
contexts vary in terms of both level of aggregation (some of the cases are states within
larger federal systems), and level of development.
Given this wealth of examples, we have decided to divide them into three different
groups, and let the chapters speak for themselves. The first grouping compares how
the sundry cases employ (or do not employ) a sovereign wealth fund. The second
grouping looks at how the same group of cases employs local content policies. The
third and final grouping looks at the use of corporate social responsibility in each of
these twelve states.
Within each grouping, we list the cases in order of their relative wealth. This, we
hope, will facilitate comparisons. This is no easy task, as the cases sometimes include
more than one nation state, or are based on sub-national actors (such as provinces
or states). But if we consider how each nation state is ranked in the recent World
Human Development Index, as is done in Table 2, we can then list the cases in terms
of their national ranking. In those cases, e.g. Alaska, where the case is a member
state to a larger federal union, it is presented in the order of its federal ranking (i.e.
the USA).
In this way, the reader will be free to choose how to organise his/her reading.
Some readers may only be interested in SWFs and will elect to read that section
to grasp the breadth of experiences we report. Other readers may be interested in
a particular country, say Indonesia, and wish to choose the thematic chapters from
each section for that country (reading the Indonesian chapter on SWF (“Overview
of Extractive Resources Management in Indonesia”); the Indonesian Chapter on
LCP (“Local Content Policy in Indonesia Oil and Gas Industry”) and the Indonesian
Chapter on CSR (“Practice of Corporate Social Responsibility (CSR) in Extractives
Sector in Indonesia”).
The main body of the text is organised to display the variety of ways that different
states employ these three tools, and our concluding chapter will return to the lessons
generated by this variance. However you decide to read the book that follows, we
are sure you will find a whole new layer of wealth.
Introduction 23

Table 2 Rank chapters by HDI (2019)

Country Rank Human Life Expected Mean years Gross
Development expectancy at years of of schooling national
Index (HDI) birth (years) schooling (years) SDG income
(value) SDG3 (years) SDG 4.6 (GNI) per
4.3 capita
(PPP $)
SDG 8.5
Nigeria 158 0.534 54.3 9.7 6.5 5086
Kenya 147 0.579 66.3 11.1 6.6 3052
Guyana 123 0.670 69.8 11.5 8.5 7615
Indonesia 111 0.707 71.5 12.9 8.0 11,256
Brazil 79 0.761 75.7 15.4 7.8 14,068
Iran 65 0.797 76.5 14.7 10.0 18,166
Trinidad and 63 0.799 73.4 13.0 11.0 28,497
Tobago
Russian 49 0.824 72.4 15.5 12.0 23,036
Federation
US 15 0.920 78.9 16.3 13.4 56,140
Canada 13 0.922 82.3 16.1 13.3 43,602
Australia 6 0.938 83.3 22.1 12.7 44,097
Norway 1 0.954 82.3 18.1 12.6 68,059
Source UNDP (2019)

References

API [American Petroleum Institute]. (2012). Composite index: Global rating and ranking fiscal
systems for oil and natural gas upstream investment. Press release. American Petroleum Institute.
Accessed January 5, 2020. https://www.api.org/~/media/files/news/2012/12-march/composite-
index-onepager.pdf.
Auty, R. M. (1993). Sustaining development in mineral economies: The resource curse thesis.
London: Routledge.
Blowfield, M., & Dolan, C. (2014). Business as a development agent: Evidence of possibility and
improbability. Third World Quarterly, 35(1), 22–42.
Bortolotti, B., Fotak, V., & Megginson, W. L. (2015). The rise of sovereign wealth funds: Definition,
organization, and governance. In S. Caselli, G. Corbetta, & V. Vecchi (Eds.), Public private
partnerships for infrastructure and business development. New York: Palgrave Macmillan.
BP. (2019). BP Statistical Review of World Energy 2019. Online at https://www.bp.com/en/global/
corporate/energy-economics/statistical-review-of-world-energy.html. Accessed January 5, 2020.
Burke, E. (1790). Reflections on the revolution in France. Online at https://constitution.org/eb/rev_
fran.htm. Accessed December 28, 2019.
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management
of organizational stakeholders. Business Horizons (July–August), 39–48.
Carroll, A. B. (1979). A three-dimensional conceptual model of corporate social performance.
Academy of Management Review, 4(4), 497–505.
24 J. W. Moses et al.

EITI [Extractive Industry Transparency Initiative]. (n.d.). Who we are. Online at https://eiti.org/
who-we-are. Accessed January 5, 2020.
Folke, C., Biggs, R., Norström, A. V., Reyers, B., & Rockström, J. (2016). Social-ecological
resilience and biosphere-based sustainability science. Ecology and Society, 21(3), 41. https://
doi.org/10.5751/ES-08748-210341.
Friedman, M. (1970, September 13). A Friedman Doctrine—The social responsibility of business
is to increase its profits. New York Times Magazine.
Frynas, J. G. (2009). Beyond corporate social responsibility: Oil multinationals and social
challenges. New York: Cambridge University Press.
George, H. (1992 [1879]). Progress and poverty. New York: Robert Schalkenbach Foundation.
Hickel, J. (2019). The contradiction of the sustainable development goals: Growth versus ecology
on a finite planet. Sustainable Development, 1–12.
Johnston, D. (2008). Changing fiscal landscape. Journal of World Energy Law and Business, 1(1),
31–54.
Johnston, D. (2007). How to evaluate the fiscal terms of oil contracts. In M. Humphreys, J. D.
Sachs, & J. E. Stiglitz (Eds.), Escaping the resources curse (pp. 53–88). New York: Columbia
University Press.
Karl, T. L. (1997). The paradox of plenty: Oil booms and petro-states. Los Angeles: University of
California Press.
Mahdavy, H. (1970). The patterns and problems of economic development in Rentier States: The
case of Iran. In M. A. Cook (Ed.), Studies in economic history of the Middle East from the rise
of Islam to the Present Day (pp. 428–467). London: Oxford University Press.
Matten, D., & Crane, A. (2005). Corporate citizenship: Toward an extended theoretical conceptu-
alization. The Academy of Management Review, 30(1), 166–179.
Minor, D., & Morgan, J. (2011). CSR as reputation insurance: Primum non nocere. California
Management Review, 53(3), 40–59.
Moses, J. W., & Letnes, B. (2017). Managing resource abundance and wealth. The Norwegian
experience. New York: Oxford University Press.
Nilsen, H. R. (2019). The hierarchy of resource use for a sustainable circular economy. International
Journal of Social Economics, 47(1).
Okpanachi, E., & Tremblay, R. (Eds.). (2020). The political economy of natural resource funds.
Springer: Forthcoming.
Rabe, S. G. (1982). The road to OPEC. United States relations with Venezuela, 1919–1976. Austin:
University of Texas Press.
Reich, R. B. (2008). The case against corporate social responsibility. Goldman School Working
Paper Series, No. GSPP08-003. August 1.
Reich, R. (2019). The biggest business con of 2019: Fleecing workers while bosses get rich. The
Guardian. https://www.theguardian.com/commentisfree/2019/dec/29/boeing-amazon-business-
ethics-robert-reich. Accessed December 29, 2019.
Ricardo, D. (1817). The works and correspondence of David Ricardo, Vol. 1: Principles of political
economy and taxation. Online Library of Liberty.
Rockström, J., Steffen, W., Noone, K., Persson, Å, Chapin, F. S., III., Lambin, E., et al. (2009).
Planetary boundaries: Exploring the safe operating space for humanity. Ecology and Society,
14(2), 32.
Ross, M. L. (2012). The oil curse. How petroleum wealth shapes the development of nations.
Princeton: Princeton University Press.
Ross, M. L. (1999). The political economy of the resource curse. World Politics, 51(2), 297–322.
Sachs, J. D., & Warner, A. M. (1995). Natural resource abundance and economic growth. NBER
Working Paper 5398.
Skjærseth, J. B., Tangen, K., Swanson, P., Christiansen, A. C., Moe, A., & Lunde, L. (2004). Limits
to corporate social responsibility: A comparative study of four major oil companies. Lysaker,
Norway: Fridtjof Nansen Institute.
Introduction 25

Sonangol, E. P. (2004). Republic of Angola LAW No. 10/04 of 12 November 2004. Petroleum
Activities Law. Translation provided by Miranda, Correia, Amenoeira and Associates. Accessed
December 11, 2016. https://www.eisourcebook.org/cms/files/attachments/other/Angola%20Petr
loleum%20Activities%20Law,%202004.pdf.
Spar, D. (1999). Foreign investment and human rights. Challenge, 42(1), 59–85.
Spense, D. R. (2011). Corporate social responsibility in the oil and gas industry: The importance
of reputational risk. Chicago-Kent Law Review, 86(1), 59–85.
Spencer, R. (2018). Corporate social responsibility as sustainable development: A critical anthro-
pology of development perspective. In M. Brueckner, R. Spencer, & M. Paull (Eds.), Disciplining
the undisciplined: Perspectives on responsible citizenship, corporate social responsibility and
sustainability (pp. 73–88). UK: Springer.
Ssennoga, F. (2006). Examining discriminatory procurement practices in developing countries.
Journal of Public Procurement, 6(3), 281–349.
Starr, A. (2007). Caracas: Living large on oil. The American Scholar. March 1. Online at https://
theamericanscholar.org/letter-from-caracas/#.Xg-rgfx7mUk. Accessed January 3, 2020.
Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M., et al. (2015).
Planetary boundaries: Guiding human development on a changing planet. Science, 347, 6223.
https://doi.org/10.1126/science.1259855.
The Economist. (1977, November 26). The Dutch disease.
UNDP. (2014). Development and extractive industries. Issue Brief. January. Online at https://www.
undp.org/content/dam/undp/library/Poverty%20Reduction/Extractive%20Industries/Issue-
Brief-Extractive-Industries.pdf. Accessed March 10, 2020.
UNDP. (2019). 2019 Human Development Index Ranking. Online at https://hdr.undp.org/en/con
tent/2019-human-development-index-ranking. Accessed December 30, 2019.
Vernon, R. (1971). Sovereignty at Bay: The multinational spread of US Enterprises. New York:
Basic Books.
Wagner, J., & Armstrong, K. (2010). Managing environmental and social risks in international oil
and gas projects: Perspectives on compliance. Journal of World Energy Law and Business, 3(2),
140–165.
World Bank. (2003). Striking a better balance—The World Bank Group and extractive industries:
The final report of the extractive industries review. Open Knowledge Depository. Last modified
December. Accessed May 4, 2015. https://openknowledge.worldbank.org/handle/10986/17705.
World Bank. (2019a). Extractive industries. October 11 version. Online https://www.worldbank.
org/en/topic/extractiveindustries/overview.
World Bank. (2019b). Monthly indices based on nominal US dollars, 2010 = 100, 1960 to
present. World Bank Commodity Price Data (The Pink sheet). Updated 3 December 2019.
Online at https://pubdocs.worldbank.org/en/561011486076393416/CMO-Historical-Data-Mon
thly.xlsx. Accessed January 1, 2020.
World Bank. (2019c). Extractives industries: Overview. Updated 11 October 2019. Online at https://
www.worldbank.org/en/topic/extractiveindustries/overview.
Yergin, D. (2009). The prize: The epic quest for oil, money and power. New York: Free Press.
SWF
Public Wealth Management
and Distribution in the Extractive
Industry in Nigeria

Chilenye Nwapi

Abstract Few issues surrounding public wealth management in Nigeria enjoy broad
geo-political agreement and support. The most vexed question is that of which level
of government ought to have control over extractive resources. Behind the resource
control debates is the question of the appropriate resource revenue sharing formula
the country ought to adopt. Under current arrangements, states receive 13% of the
revenues generated from natural resources located within their territory, leaving the
federal government with control of 87% of the country’s resource wealth. Agitations
by oil-producing states for state resource ownership and control have been raging
for decades but have not resulted in any change in resource ownership and control.
Although the federal legislature has the constitutional authority to change the current
sharing formula to give states more share than they currently have, it has not yet
exercised that authority. In order to ensure that extractive companies pay adequate
revenue to the state, the government imposes an assortment of fiscal instruments,
including: royalties, petroleum profits tax, capital gains tax and value-added tax.
In order to ensure that revenues generated from the resources benefit both present
and future generations, the country operates a sovereign wealth fund. The operation
of this fund has been riddled in managerial controversy, even its constitutionality
has boggled the minds of Nigerian legal pundits. This chapter analyses these issues,
proffering views on how they may be better understood and approached.

Keywords Excess Crude Account · Resource wealth · Sovereign wealth fund ·

Derivation

C. Nwapi (B)
Canadian Institute of Resources Law, Calgary, Canada
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 29
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_2
30 C. Nwapi

1 Introduction

Extractive resource revenue management is perhaps the sorest spot in Nigeria’s body
politic since the 1960 independence. Conflict after conflict over the negative environ-
mental and health impacts of extractive resource projects, over the underdevelopment
and marginalisation of the subnational region (the Niger Delta region) where the
resources are located, over the distribution of the wealth from the resources between
this region and the rest of the country, and over the lack of accountability of public
officers responsible for managing revenues from the resources have been the defining
characteristics of the political economy of resource extractivism in Nigeria (Nwapi
2010). The explanation for this should not, however, be laid open to one-sided gener-
alisations promulgated in the resource curse literature regarding the link between
natural resources and conflict and underdevelopment, for there is strong evidence
that its roots lie more deeply in structural distortions that for several decades have
cut off the extractive economy (particularly the oil economy) from other sectors of the
national economy (see Obi 2018). This is not to say, however, that the resource curse
theory has no explanatory value for understanding the Nigerian resource tragedy. It
is rather to highlight what a number of Nigerian scholars have suggested that the
Nigerian situation is much more mixed and complex than the resource curse theory
wants us to believe (see, e.g., Obi 2018). There is, for instance, what Finkel (2017:
178) calls the “chauvinistic” attitude and “bunker mentality” of many public agency
personnel as a factor militating against the effective functioning of regulatory insti-
tutions around the world. These two pathologies manifest quite strongly in Nigeria
in the form of ethnicism and distributive politics, whereby public officers (elected or
appointed) view their main mission as that of grabbing their own personal and ethnic
share of the common wealth instead of helping to create and sustain it (see Ikpeze
et al. 2004).
This chapter discusses Nigeria’s experience with the management of its extrac-
tive resource wealth. It addresses questions surrounding resource ownership, the
fiscal regime for generating resource revenue, the distribution of resource revenue
among the different levels of government and the establishment and management
of natural resource funds. The chapter highlights the complexity of resource wealth
management in Nigeria and provides thoughts on contemporary debates around the
subject.
Following this introduction, Sect. 2 presents an overview of the development of
the extractive industry in Nigeria. Section 3 analyses the constitutional framework
for extractive resource wealth management in Nigeria. Section 4 discusses the fiscal
regime for extractive resource revenue generation in the country, while Sect. 5 anal-
yses the country’s efforts to establish a sovereign wealth fund (SWF). Section 6
concludes the discussion.
Public Wealth Management and Distribution in the Extractive … 31

2 The Development of the Extractive Industry in Nigeria

Nigeria is rich in oil, gas and solid mineral (i.e., mining) resources. While oil and
gas resources are located in commercial quantities in the Niger Delta region, solid
minerals are spread all over the country. Some of the key solid minerals are coal,
tin, gold, lead/zinc, iron ore, limestone and gemstone. Although the history of solid
mineral development in Nigeria dates decades further back than oil and gas devel-
opment (Maduaka 2014),1 the latter has dominated the country’s extractive industry
since the mid-1970s. Increasing oil discovery led to increased production, which in
turn combined with rising oil prices to render Nigeria almost completely dependent
on oil, as federal budgets were funded almost exclusively from oil revenue (Nwapi
2010; Frynas 2001). This was at the expense of the solid mineral sector which, until
then was, together with agriculture, the mainstay of Nigeria’s economy (Aigbediion
and Iyayi 2007). Today, oil and gas resources account for about 80% of government
revenue and more than 90% of foreign exchange earnings (Agbaeze et al. 2015).
Nigeria holds the enviable honour of Africa’s largest oil producer after Libya and the
tenth largest in the world, with approximately 37 billion barrels of proven oil reserves
(Central Intelligence Agency 2017). It is Africa’s largest natural gas producer and
the ninth largest in the world, with about 187 trillion cubic feet of proven natural gas
reserves (Central Intelligence Agency 2017).
In contrast, Nigeria’s solid mineral industry is vastly underdeveloped. Until 1995,
the mineral sector had no standalone ministry, but was married with power to form
the Ministry of Mines and Power. Even then, the mines arm of the marriage was
treated like the “junior partner” (Eyre 2007: 28). This was in spite of the fact that in
other African countries, such as Botswana, Ghana, South Africa and Zambia, solid
mineral development was generating massive revenues and was the mainstay of their
economies, similar to oil in Nigeria (Eyre 2007). This is not to say, however, that
the government was not interested in developing the sector. Rather, the revenues
coming from oil and gas were so humongous that the government lost focus on other
economic sectors. With dwindling oil revenue, however, due mainly to decreasing
demand for oil and oil price volatility, the government has been compelled to see the
need to diversify the economy, and the solid mineral sector has been identified as a
priority sector because of its potential to bring significant economic benefits to the
country.
Like most countries, Nigeria’s extractive sector development is private sector-
driven although this is historically more so with solid minerals than with oil. While all
extractive resources belong to the state, the government’s policy thrust is to create an
enabling environment for the sector to thrive. The government grants oil concessions
or licences to third parties to exploit oil within defined acreages while reserving
for itself the right to participate directly in oil and gas development. The two main
participation arrangements used by the government are joint-venture agreements

1 Oil was officially discovered in commercial quantities in 1956 while commercial mining of tin ore

began as far back as 1904, and coal was discovered in commercial quantities in 1909. By 1919, the
Nigerian Geological Survey was already established.
32 C. Nwapi

and production-sharing contracts. The national oil company—the Nigerian National

Petroleum Corporation (NNPC)—serves as the government’s representative in all
participation arrangements. While the NNPC is supposed to focus on the commercial
interests of the government, it has often engaged in policy-making and regulation
although much more so previously than now (Ministry of Petroleum Resources 2017).
Authority to grant oil licences is vested in the Minister of Petroleum Resources, while
technical issues of policy, regulatory control, fiscal control and licencing and the day-
to-day monitoring of oil and gas operations are the responsibilities of the Department
of Petroleum Resources (DPR)—a technical unit of the Ministry. The Petroleum Act,
1969, does not specify how licences are to be awarded, leaving the Minister with the
discretion to decide. Discretionary allocation was the official licencing policy of the
government until around 2000 when the government adopted competitive bidding
with the intention of promoting transparency. However, since the Petroleum Act is
silent on the method of awarding licences, discretionary allocation remains a legally
valid method of licencing. Where bids are to be conducted, they are conducted by
the DPR based on its established guidelines.
In the case of solid minerals, however, the role of the government is limited to
that of regulator and administrator because there are no government participation
arrangements in the industry. The government awards mineral titles based on a “first
come, first served” principle. Under section 9 of the Mines and Minerals Act, 2007,
however, the Minister of Solid Minerals and Steel Development may make regu-
lations requiring that specified exploration licences and mining leases be awarded
based on competitive bidding. All other mineral titles, such as a reconnaissance
permit, a small-scale mining lease and a quarry lease, are awarded solely on the
first-to-apply principle; authority to make an award is vested in the Minister. Where
competitive bidding is to be conducted, the Mining Cadastre Office is charged with
its administration and conducts the bid based on guidelines established under the
Mines and Minerals Regulations 2011 (Regulation 24).
Nigeria has faced significant challenges in developing its extractive sector. The
challenges range from lack of revenue accountability, environmental degradation,
community–industry conflicts and weak institutions. The oil and gas sector is still
regulated primarily by the 1969 Petroleum Act, the oldest existing petroleum statute
of any major oil-producing country in the world. A Petroleum Industry Bill (PIB)
was introduced in 2008 to carve a new regulatory path for the sector but was stalled
by politics and industry lobbying. Several versions of the bill were produced without
success in the legislature. In 2016, the government adopted a new policy strategy that
not only decoupled the gas policy from the oil policy, but that also split the PIB into
five smaller bills: the Petroleum Industry Governance Bill (PIGB), the Petroleum
Industry Fiscal Framework Bill, the Petroleum Industry Downstream Administra-
tion Bill, the Petroleum Industry Revenue Management Framework Bill and the
Petroleum Industry Host Communities Bill. The PIGB was passed by the federal
legislature in mid-2018. However, the President declined to sign the bill due to
concerns over certain sections of the bill that seemed to cut his decision-making
power over petroleum development. Although under section 58(4) of the Nigerian
Constitution, the two chambers of the federal legislature can vote to pass the bill into
Public Wealth Management and Distribution in the Extractive … 33

law if the President fails to sign it after a period of 30 days have passed since it was
submitted to him, neither chamber has yet called for a vote.
Major developments in the solid mineral sector include the passage of a new
mining statute in 2007 (the Nigerian Minerals and Mining Act), which established a
Mining Cadastre Office (an independent agency responsible for the management and
administration of mineral titles), the adoption of a new mining policy in 2008 (the
Nigerian Minerals and Metal Policy 2008) and the adoption of a policy roadmap for
the sector in 2015 (Ministry of Solid Minerals and Steel Development 2016). In 2016,
the government committed 30 billion naira (approximately $82 million) to boost the
development of the sector, with priority for minerals considered of strategic impor-
tance to the economy (coal, bitumen, iron ore, barites, gold and lead/zinc) (Fayomi
2018). In the third quarter of 2018, mining’s contribution to overall Gross Domestic
Product (GDP) was 10.55% (National Bureau of Statistics 2018a; b). Although this
was lower than its contribution in four previous quarters, it represented a significant
increase from 2016 levels since the 1980s (Ministry of Mines and Steel Development
2016). It represents a visible sign that the steps undertaken so far to boost the sector
are bearing positive results.

3 The Constitutional Framework for the Management

of Extractive Resource Wealth

Nigeria is a federation made up of three tiers of government, namely: the federal, state
and local governments, with a federal capital territory (FCT). The FCT is freestanding
in the sense that, although under the ultimate control of the federal government, akin
to a state, it has a distinct political system composed of the executive, the legislature
and the judiciary. In fact, given the distinct status of the FCT, it can be said that the
country operates a four-tier rather than a three-tier system.2 However, it continues to
be regarded as a three-tier mainly because the FCT is almost akin to a state and that
is how it will be regarded in this chapter.
There is a widespread belief among Nigerians that Nigeria’s federal structure
is brutally flawed by an over-concentration of political and economic power in the
centre (see Kalu 2008). This power imbalance is treated as the original sin in Nigeria’s
political historiography and has given rise to a chant of “restructuring” as the most
important step towards the country’s survival as a nation (see Abutudu 2010). That is
to say, unless the federation is restructured to reduce the concentration of power in the
federal government, all efforts to address the country’s myriad of socio-economic
and political problems must prove vain. While the exact nature of restructuring
needed remains unsettled in the national debate, the most controversial issue is control
over natural resources. Under the current constitutional arrangement [section 44(3)],
ownership of natural resources is vested in the federal government; there is no state

2 The 1999 Constitution recognises the distinct standing of the federal capital territory in the
distribution of resource revenue.
34 C. Nwapi

or individual ownership. The federal government owns the resources, subject to the
requirement that it shall manage them for the benefit of the entire country.
Management power over the resources flows from ownership, and this is fully
established by the constitutional allocation of legislative power. There are two prin-
cipal heads of legislative power under the 1999 Constitution: the Exclusive Legisla-
tive List (ELL) and the Concurrent Legislative List (CLL). The ELL contains items
exclusively allocated to the federal government. The CLL deals with matters on
which both federal and state governments are granted power to legislate. In the case
of a conflict between federal law and state law enacted pursuant to the CLL, the
doctrine of paramountcy applies to give supremacy to federal law. Items that cannot
be directed into either the ELL or the CLL recede automatically into what, by consti-
tutional convention, has become known as the Residual List (Ingelson and Nwapi
2014).
By virtue of section 251(1)(n) of the 1999 Constitution, power to regulate “mines
and minerals (including oil fields, oil mining, geological surveys and natural gas)”
and matters incidental to these items belong to the ELL and therefore are under
exclusive federal jurisdiction. The federal government’s power is all-inclusive. It
covers not only the establishment of the policy, legal, fiscal and institutional regimes
for the exploration and exploitation of the resources but also the establishment of the
regime for managing their externalities. However, there are state laws and even local
council bylaws that impose certain fees or levies on companies (including extractive
companies) operating within their territories. But those fees or levies are treated
under federal fiscal laws as nothing other than part of extractive companies’ cost
of doing business, like any other expense an extractive company makes, deductible
for the purposes of calculating an extractive company’s taxable profits. However,
since most of the activities related to extractive resource development take place in
local areas under the jurisdiction of states, states have taken an interest in at least
protecting their environment by enacting laws and establishing institutions to deal
with environmental matters within their territories. These state laws and institutions,
however, only complement the powers of the federal government to manage the
negative fallout of extractive resource development and do not supplant or compete
with them, since the exclusive power of the federal government to regulate extractive
resource development is settled law. Thus, even state environmental laws are very
limited in their scope of application.
While the federal government has all-inclusive power to regulate extractive
resource development, the regime for the distribution of revenue generated from
the resources among the three tiers of government is dealt with substantially by the
constitution. Section 162(1) of the constitution provides for the establishment of
a “Federation Account” into which shall be deposited all revenue accruing to the
government of the federation, except revenues from personal income taxes of mili-
tary and police personnel, personnel of the ministry of foreign affairs and residents
of the FCT. Revenue deposited in the Federation Account is to be allocated to the
three tiers of government based on a distribution formula established by an act of the
federal legislature. In establishing the distribution formula, however, the federal legis-
lature must be guided by the following revenue allocation principles: “population,
Public Wealth Management and Distribution in the Extractive … 35

equality of States, internal revenue generation, land mass, terrain as well as popu-
lation density”.3 Revenue accruing to local government councils in the Federation
Account is to be allocated to the relevant state for the benefit of its local govern-
ments, and each state must deposit the revenue in a “State Joint Local Government
Account”. Thus, local governments do not receive their allocations directly from the
Federation Account, and the exact amount they receive is determined by an act of
the federal legislature.4
Regarding revenues from natural resources, the Constitution stipulates that “the
principle of derivation shall be constantly reflected in any approved formula as being
not less than thirteen per cent of the revenue accruing to the Federation Account
directly from any natural resources”.5 Thus, the distribution formula for natural
resource revenue is based on the principle of derivation. The derivation principle
stipulates that a state’s share of natural resource revenue depends on how much of
the resources in question is derived from the territory of that state (Akinola and
Adesopo 2011; Suberu 2010). Its underlying philosophy is that resource extraction
generates externalities that disproportionately affect residents of the states where the
resources are located; therefore, providing those states a percentage of the revenues
generated from those resources would serve to compensate the residents for the
negative impacts. Under current arrangements, states receive 13% of the revenues
generated from resources located within their territory. This means that the federal
government controls 87% of Nigeria’s resource wealth. However, the 13% estab-
lished by the Constitution is the minimum that states can be allocated. The federal
legislature has authority to increase it, but it has not yet exercised it.
The issue of how much of the revenue from extractive resources that the resource-
bearing states should receive is one of the most controversial issues in Nigeria.
Historically, resource wealth distribution has been governed, at different points in
time, mainly by two principles: the derivation principle (already explained) and
the needs principle. The needs principle allows distribution to be made based on
the responsibilities of each tier of government and the financial expenditures and
obligations of the various governments (Adango 2015). Needs is accordingly an
equalising principle that is based on the rationale that all citizens should have equal
claim to the national wealth regardless of the region of the country in which they
reside (Adango 2015). Whether derivation or needs, the actual distribution formula
has historically gone through a “back-and-forth process” (Appiagyei-Atua 2005). It
went from 100% in 1953 (pre-independence period) to 50% in 1960, 45% in 1970,
40% in 1975, 0% in 1979 in favour of a Special Account for mineral producing areas,
2% in 1982, 1.5 in 1984, 3 in 1992 and 13% since 1999 to date (Akinola and Adesopo
2011). The thinking of oil-producing states is that the changing revenue distribution
formula has its roots in the fact that oil is found mainly in areas inhabited by the
minorities who are disadvantaged in the political power play among the major ethnic
groups and who (at least until relatively recently) were unable to pose a real threat to

3 1999 Constitution, section 162(2).

4 1999 Constitution, section 162(5)–(8).
5 1999 Constitution, section 162(5)–(8).
36 C. Nwapi

national unity (Oguine 1999). There is much force in this thought, for during the early
post-independence period when national revenue came mainly from commodities
(such as cocoa, groundnuts and palm oil) produced in areas inhabited by the major
ethnic groups, not only was derivation the generally accepted principle for allocation
of national revenue, the percentage of revenue distributed to the commodity-bearing
states was as high as 45% (Omorogbe 2002; Oguine 1999). The debate is a continuing
one and is at the heart of the intensified quest for restructuring.

4 The Fiscal Regime in Nigeria’s Extractive Industry

The fiscal regime for petroleum consists of several fiscal instruments that can be
basically divided into: taxes, resource rents and royalties, state participation and
incentives. The regime for solid minerals is distinct from that of petroleum although
some of the fiscal instruments applicable to petroleum are equally applicable to
solid minerals. The major difference is that there is no state participation in the solid
mineral sector. Also, some taxes that are applicable to petroleum do not apply to solid
minerals, the most important example being petroleum profit tax (PPT). Mainly for
want of space and the fact that petroleum fiscal regime has generated a lot of debate
in Nigeria, the following discussion focuses on petroleum. It would suffice, however,
to note that solid mineral companies in Nigeria are subject to the following taxes:
companies income tax (CIT), personal income tax (for individuals, cooperatives and
partnerships engaged in mining business), royalties, withholding tax, capital gains
tax (CGT), value-added tax (VAT) and annual surface rent. In the discussion of the
petroleum fiscal regime, it is beyond the scope of this chapter to evaluate the strengths
and weaknesses of the various fiscal instruments. After all, it is not the theoretical
impact of each of the instruments, viewed in isolation, that matters, but the net impact
of all of them, as that is what determines a company’s decision to invest in a country
as well as the government’s revenue (Wilde 2016).

4.1 Taxes

Petroleum companies operating in Nigeria are subject to several taxes, including

petroleum profit tax (PPT), company income tax (CIT), capital gains tax (CGT) and
value-added tax (VAT). PPT is the principal tax and is established under the Petroleum
Profit Tax Act, 2004 (PPTA). Section 2 of the Act defines petroleum operations as:
the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or
on behalf of a company for its own account by any drilling, mining, extracting or other like
operations or process, not including refining at a refinery, in the course of a business carried
by the company engaged in such operations, and all operations incidental there to and sale
of or any disposal of chargeable oil by or on behalf of the company.
Public Wealth Management and Distribution in the Extractive … 37

PPT payments are made either in cash or in-kind, depending on the operating
contract between the company and the government. The applicable tax rate is 85%
(subject to certain incentives) or 65.75% during the first five years of their operations
to enable them to recover their capital expenditure.
However, associated gas producers are subject to the CIT under the Company
Income Tax Act, 2004, rather than to the PPT and are assessed at the rate of 30%
of taxable profits. Thus, a company must segregate its associated gas profits from
its other profits in order to determine tax payable under the CIT. On the other hand,
CGT is payable, under the Capital Gains Tax Act, 2004, on capital gains that accrue
to a company when the company disposes its chargeable assets (regardless of the
location of the assets) and is payable at the rate of 10%. Under the Value-Added
Tax Act, 2004, VAT is charged at a flat rate of 5% on supplies of taxable goods and
services.

4.2 Resource Rents and Royalties

Every corporation involved in the production of oil and gas is statutorily obliged to
pay royalty. Royalty payment is governed principally by the Petroleum Act, 1969 and
the Petroleum (Drilling and Production) Regulations, 1996. Chargeable oil for the
purposes of determining royalty is calculated by ascertaining the quantity of crude
oil produced on a field by field basis and reducing that quantity by deducting the
quantities used for production operations, the quantities used for re-injection and the
quantities lost through evaporation. Royalty is thus paid on net crude oil production.
The royalty rate depends on whether the oil is produced onshore or offshore. For
onshore areas, it is 20% while the rate for offshore depended, until a 2019 amendment
of the Deep Offshore and Inland Basin Production Sharing Contract Act, on the water
depth. Depths up to 100 m water depth was 18.5%; up to 200 m water depth 16.5%,
from 201 to 500 m water depth 12.5%; from 501 to 800 m water depth 8%; from
801 to 1000 m water depth 4%; and beyond 1000 m water depth 0% (Lawal 2013).
Under the 2019 amendment, however, introduced a mix of production and crude
price-based royalty system. It specifies a baseline royalty of 10% for crude oil and
condensates produced in the deep offshore (greater than 200 m water depth) and 7.5%
for the Frontier and Inland Basin. In addition, a royalty based on the price of crude
oil, condensate and natural gas at the relevant time will apply when the crude price
exceeds 20/barrelinagraduatedmanner: 0 0 and 20/barrel; 2.5 20 up to 60/barrel; 4
60 and up to 100/barrel; 8 150/barrel; and 10% when it is above $150/barrel.

4.3 State Participation

State participation is regarded as part of the fiscal regime because one of its main
purposes is to enable the country to generate maximum revenue from petroleum
38 C. Nwapi

resources. The Nigerian government participates directly in oil and gas develop-
ment through its national oil company, the Nigerian National Petroleum Corpora-
tion (NNPC). The two major participation arrangements are joint-ventures (JV) and
production-sharing contracts (PSC). Under a JV, the NNPC and the oil company
contribute to fund the oil operations according to the proportion of their equity hold-
ings in the JV. Companies in JV with the NNPC are assessed to tax at the rate of
65.75% of chargeable profits during the first five years of operation of the JV and
thereafter at the rate of 85% (KPMG 2014). Due to NNPC’s inability to fund its own
share of JV operations, the JV option is no longer popular. The preferred arrange-
ment is the PSC, under which the NNPC is the sole concessionaire, and engages
a company to conduct the petroleum exploration at its own financing risks. If it is
successful, the company will recover its costs when commercial production begins
but will lose everything if the exploration is not successful. The company is assessed
to tax at the rate of 50% of chargeable profits (KPMG 2014).

4.4 Incentives

As a response to declining levels of exploration and production in the 1980s, which

reduced petroleum revenue, the Nigerian government entered into a Memorandum
of Understanding (MOU) with their joint-venture partners under which it provided
several incentives to the partners in exchange for certain work commitments (Ayoade
2010). It appears, however, that the MOU schemes were cancelled around 2000, the
incentives system has taken on a life of its own under the PPTA and is composed of
deductions, investment tax allowance/tax credit and tax holidays.
Section 10 of the PPTA provides for allowable deductions before taxes are charged.
Such allowable deductions include: rent incurred by a petroleum company in respect
of land or buildings occupied under an oil-prospecting licence or an oil-mining
lease for disturbance of surface tights or the like; royalties, non-productive rents;
expenses incurred for repair of premises, plant, machinery, or fixtures used for
carrying on petroleum operations; etc. (Idubo 2015). In 1996, the Nigerian Supreme
Court expanded the scope of allowable deductions by interpreting the meaning of
“petroleum operations” under the PPTA.6 Shell had claimed for deductions for
“foreign exchange losses, Central Bank commissions and educational scholarship
expenses”. This claim was rejected by the Federal Board of Inland Revenue. The
Court held that this claim should be allowed because the expenses “were ‘incidental
to petroleum operations’ and were ‘wholly, exclusively, and necessarily’ incurred
for this purpose”. It is not necessary that the expense be directly related to petroleum
operations; it suffices that the petroleum company has a “statutory or contractual
obligation to incur [the] expense” (Ayoade 2014: 189). In June 2018, however, the
Federal High Court held that payments for gas flaring activities were not deductible
because they were penalties and not expenses (Anderson Tax 2018).

6 Shell v Federal Board of Inland Revenue, (1996) NWLR (Pt 466) 285.
Public Wealth Management and Distribution in the Extractive … 39

Capital Allowance relates to expenses on equipment, pipelines and storage facil-

ities, buildings and drilling costs. The applicable rate of Capital Allowance is 20%
of the cost of the qualifying asset for the first four years and 19% for the fifth year
(Wahab and Diji 2017). Capital Allowance deduction is restricted: for an accounting
period, a company’s tax cannot be less than 15% of the tax which it would have
paid had no Capital Allowance been granted it (Wahab and Diji 2017). A petroleum
investment tax allowance relates to new investments in assets and is available where
a petroleum producing company executes a PSC with the NNPC. Section 22 of the
PPTA allows companies that incur capital expenditure for petroleum operations a tax
allowance of 5% for onshore operations and 10% for operations in territorial waters
and the continental shelf.
Tax holidays are given to companies with “pioneer status” for the first year of
their production operations. The company must have incurred capital expenditure of
not less than 5 million Naira (Ghebremusse 2014).

4.5 Indirect Taxes

Indirect taxes are taxes levied on corporations that are not tied to the corporations’
income or profits, but typically to fund specific government programmes. An example
of indirect tax aimed at funding a specific government programme is provided under
the Tertiary Education Trust Fund Act, 2011. The Act mandates all companies regis-
tered in Nigeria to pay annually 2% of their assessable profits into the Tertiary
Education Trust Fund [section 1(2)], which shall be used “for the rehabilitation,
restoration and consolidation of tertiary education in Nigeria” [section 3(1)]. The tax
is assessed and collected by the Federal Inland Revenue Services, and the fund is
managed by a Board of Trustees. Also, companies are required to contribute 3% of
their total annual budget to the Niger Delta Development Commission to help fund
development in the Niger Delta region of the country.7

4.6 The New Petroleum Fiscal Policy

In 2016, the Ministry of Petroleum Resources released a draft of National Petroleum

Fiscal Policy whose main objective was to separate the fiscal requirements for oil
from those for gas (Ministry of Petroleum Resources 2016). The new policy is based
on six key principles: (1) right pricing (pricing should be fixed by market forces), (2)
sustainability, (3) non-consolidation/non-recovery of gas costs from oil income (gas
project costs should not cross-subsidise oil projects), (4) distinct fiscal treatments
for oil and gas, (5) upstream incentives for gas-for-development investments and (6)
midstream incentives (incentives to attract midstream investments).

7 Niger Delta Development Commission (Establishment) Act, 2000, section 14(2)(b).

40 C. Nwapi

The new policy proposes a National Hydrocarbons Tax in place of the current
PPT. Although it retains the current Companies Income Tax, the policy places more
emphasis on royalties than on tax and proposes to replace the current royalty system,
which is based on water depth, with a new system that is based on price and volume
of production. The implication is that even if a company operates in an area with
more than 1000 m water depth, it will still pay royalty, whereas under the current
system no royalty is payable. The afore-mentioned 2019 amendement to the Deep
Offshore and Inland Basin Production Sharing Contract Act was an implementation
of this policy.
The policy also proposes the elimination of several deductions and reliefs currently
in place, such as petroleum investment allowance, investment tax allowance, invest-
ment tax credit, gas flare deductibility and caps recoverable costs incurred both
locally and abroad. Overall, the prime objective of the policy is to increase govern-
ment revenue from oil and gas resources. The policy is expected to be implemented
through the Petroleum Industry Fiscal Framework Bill.

5 Managing the Resource Wealth for Present and Future

Generations

Until 2011, resource wealth management in Nigeria was based on political arrange-
ments between the federal government and the federating units. Historically, the first
proposal was made during the military era in the mid-1980s for the establishment
of a stabilisation fund. The idea was for the government to save additional money
when oil price exceeded US$16 per barrel and to draw from the savings when oil
price fell below that price (World Bank 2003). The proposal was implemented in
1989. However, the government lacked the fiscal restraint to manage the fund, as
it made withdrawals from the fund even in times of oil price boom in violation of
the spirit of the fund (World Bank 2003). The fund could thus not be sustained,
but the government renewed its efforts in 2004 by establishing another stabilisation
fund, called the Excess Crude Account (ECA), to help the country meet its budget
deficits and contribute to local infrastructure development. This political arrange-
ment which, like its predecessor, had no constitutional or legal parentage allowed
the federal government, the custodian of the Federation Account, to draw upfront
into the account national oil revenue excess of the budgetary benchmark price, so
that only revenue within the benchmark would be shared between the three tiers of
government based on the existing formula (Ugwuibe 2012).
From the very beginning, the ECA was riddled in controversy due mainly to its
lack of legal backing. It came under severe attack from a number of governors who
felt that the federal government was illegally withholding revenues constitutionally
meant to be shared by the three tiers of government (Ezeani 2012). A fusillade of
lawsuits challenged its legality (Ekokoi 2015). Observers raised concerns about its
Public Wealth Management and Distribution in the Extractive … 41

management: there was no systematic way to track the operations of the account—
how money came in and how money went out—due to absence of “rules of practice
governing deposits, withdrawals and investments” (Natural Resource Governance
Institute 2017). In the 2017 Resource Governance Index, the ECA was ranked as the
most poorly managed sovereign wealth fund (SWF) in the world (Natural Resource
Governance Institute 2017).8 But its greatest obstacle was lack of political will to
save in times of bumper harvest (Nigerian Extractive Industries Transparency Initia-
tive 2017). Increased public pressure led to the enactment of the Nigeria Sovereign
Investment Authority (NSIA) Act, 2011, apparently to fix the ECA. At the time of its
enactment, Nigeria was one of only three OPEC countries without a legally backed
SWF (Eguzozie 2011).9
The NSIA Act not only purports to address the questions surrounding the legality
of the ECA. It also purports to provide rules for the establishment of a structured,
central storehouse of resource revenues and rules for the collection, allocation,
management and disbursement of the funds, based on long-term national develop-
ment goals and strategies, with potential positive implications for transparency and
accountability. This is mainly what distinguishes it from the ECA, apart from its statu-
tory backing and wider scope. Also, in the inaugural edition of the African Sovereign
Wealth Fund Index released in June 2018, which ranked African sovereign wealth
funds based on four indicators: governance and disclosure, size, domestic investment
mandate and source of funding, Nigeria was ranked first (Nanfuri 2018).
Below is a discussion of the main features of resource revenue management under
the NSIA Act. As will be seen, although the Act is a significant step forward on the
part of Nigeria to design a mechanism to manage its resource wealth, its capacity
to achieve inclusivity in resource wealth management has been called into ques-
tion (Olawuyi and Onifade 2017). In addition, the Act has ended up in the same
constitutional hot water from which the ECA could not recover.

5.1 Main Features of the NSIA Act

The NSIA Act establishes a savings account. Its policy backdrop consists of building
a savings base for the benefit of future generations of Nigerians, boosting the devel-
opment of infrastructure in critical sectors, and in insulating Nigeria’s economy from
oil-price volatility-induced external shocks (Ugwuibe 2012). What is saved, however,
is not a percentage of oil revenue, but the difference between budgeted earning and
actual earning, which means that when actual earning is equal to or below budgeted
earning, nothing would be saved. However, the Act provides other sources of funding

8 The index assessed how 81 resource-rich countries governed their extractive resources (oil, gas
and minerals).
9 The others were Ecuador and Iraq. Most observers believe that Nigeria joined the league of coun-

tries with SWFs only with the enactment of the NSIA Act. This belief, however, ignores the fact that
the ECA was in itself a type of SWF, and despite its legal problems and management deficiencies
it continued to exist de facto as such.
42 C. Nwapi

for the SWF outside resource revenue. Section 30 of the Act provides for “Residual
Funds” from the Federation Account above the “Budgetary Smoothing Amount” to
be transferred to NSIA. Since the Federation Account does not hold only resource
revenue, resource revenue is not the only source of funding for the SWF. However,
as resource revenue is the major source of funding for the Federation Account, it is
the major source of funding for the SWF. Discussed below are the main features of
the SWF established under the NSIA Act.

5.2 The Funds

The Act establishes three SWFs: the Future Generations Fund (FGF), the Nigeria
Infrastructure Fund (NIF) and the Stabilisation Fund (SF). The FGF is a diversified
investment portfolio for the benefit of the future generations of Nigerians. The NIF
is a portfolio dedicated to the development of “critical infrastructure” to facilitate
the attraction of foreign investment and to promote “economic diversification and
growth”. The SF is an investment portfolio intended to provide supplemental stabil-
isation funding for the country in times of need, that is, when other funds set aside
for fiscal stabilisation have been exhausted or are insufficient for that purpose (NSIA
Act, s 4(1)). Thus, the SF provides the country a buffer against external shocks.
Ownership of the funds is vested jointly in the federal government, the state
governments, the FCT and the local and area councils [NSIA Act, s 32(1)]. They
hold the funds on behalf of the Nigerian people. None can transfer or assign or
otherwise dispose of or encumber any of its interests in the funds [NSIA Act, s 32(2)
and (3)]. As one commentator has wryly argued, this latter provision is intended
to prevent state governors from encumbering their interests in the funds by using
them as collateral to secure foreign debts (Ezeani 2012). Foreign debt acquisition
has become customary among Nigerian state governors (Debt Management Office
2018; National Bureau of Statistics 2018a, b).

5.3 Administration of the Funds

The administration of the three funds is vested in NSIA, which is further vested with
the authority to receive, manage and invest money on behalf of the funds and to
reinvest portions of the profits and proceeds generated through investments of the
funds.10 The Act also established a Governing Council (headed by the President)
whose function is only advisory.11 Allocation of money to the funds is to be deter-
mined by the Board of Directors of NSIA established under section 15 of the Act.
This need not be in equal proportion. What is required is that none of the funds shall

10 NSIA Act, s 4(2).

11 NSIA Act, s 7.
Public Wealth Management and Distribution in the Extractive … 43

be allocated less than 20% of any available funding.12 Currently, the allocation is as
follows: FGF: 40%, NIF: 40% and SF: 20% (Hove and Ncube 2014).

5.4 The Investment Framework

The NSIA Act provides an investment framework for each of the funds. The frame-
work mandates NSIA to develop an investment plan for the FGF and the NIF as
well as a reinvestment plan for the proceeds, interests and dividends derived from
each fund. There is no explicit requirement for such a plan to be developed for the
SF, but this would seem to be implicit in the provisions for SF since an investment
plan would at all times need to be developed. For the FGF, “the investment plan may
be subject to strict short-term, tailored confidentiality restrictions”.13 Investments in
the NIF are to focus on domestic infrastructure development in such areas as power,
gas, transport, agriculture, healthcare, housing and water resources, using both direct
investments and public–private partnerships.14 The Act allows NSIA to make finan-
cial investments with money in the NIF pending when it becomes practical to make
infrastructure investments [section 41(2)]. NSIA may enter into infrastructure co-
investment arrangements with private companies. Social infrastructure investments
in under-served sectors or regions that are likely to yield less economic returns are
limited to 10% of the funds in the NIF [section 41(5)]. Realised proceeds, interests
and dividends from each fund are to be reinvested in new or existing assets for that
fund (sections 40, 44). The investment allocation for the SF is split between hedge
assets and growth assets [section 47(1)].
In all cases, NSIA’s investments shall align with the country’s investment policy
and priorities. NSIA may keep its investment plans strictly confidential for a short
time to preserve its ability to effectively make strategic investments (sections 39(2),
41(3)).

5.5 Withdrawal of Funds from the SWF

The NSIA Act does not establish strict withdrawal conditionalities. Section 34 of the
Act authorises the Board, with the approval of the Governing Council, to declare that
funds be distributed from the “uninvested and uncommitted available funds” realised
from the profits of NSIA, provided that NSIA has set aside sufficient funds to meet its
anticipated operational costs before payment of any declared distributions, however,
which shall not be more than 60% of NSIA’s profits at the time of distribution. Such

12 NSIA Act, s 31.

13 NSIA Act, s 39(2).
14 NSIA Act, s 41(1).
44 C. Nwapi

declared funds are to be paid into the Federation Account for distribution to the
owners of the SWF according to their respective contributions.15
The Act contains withdrawal provisions specific to the SF. Section 47 gives the
Minister of Finance authority to direct NSIA to utilise the fund’s capital and assets
to supplement available resources to stabilise the economy. The Minister only needs
to demonstrate “urgency” and satisfy NSIA that the Budgetary Smoothing Amount
has been depleted and that actual revenue from hydrocarbons is lower than projected
revenue. The Minister may direct NSIA to release from the SF an amount equal to
the difference between actual and projected hydrocarbons revenue.16

5.6 The Constitutional Fragility of the NSIA Act

The passage of the NSIA Act and its eventual take off was more the product of a
political arrangement than a legal solution to the problems faced by the ECA. Right
from the beginning, state governors believed that the Act was unconstitutional for
violating the constitutional stipulations on revenue distribution in light of existing
Supreme Court decisions. Although following political discussions with the federal
government, the governors had decided to support the Act’s enactment, when faced
with increased financial burdens arising from the passage of a new minimum wage
law that increased workers’ salaries across the country, they withdrew their support
for the law and sought to truncate the eventual establishment of NSIA and the transfer
of any funds to it (Ugwuibe 2012). The governors threatened to challenge the Act
in court if the federal government went ahead with any transfer of funds. They had
earlier consented to the establishment of the fund but later claimed that the Act did
not accurately reflect the substance of what they consented to (Ezeani 2012). In late
2011, however, the governors reached a settlement with the federal government to
proceed with the establishment of NSIA and the transfer of $1 billion seed money
drawn from the ECA (Ugwuibe 2012; Ezeani 2012). The problem with the political
settlement–that is, the manner in which it was done–is that the constitutional question
still remains.
The constitutional question is whether money deposited (or to be deposited) in
the Federation Account can be transferred to another account instead of distributed
among the three tiers of government. Most analysts have cited section 162(3) of
the Constitution, which provides that all money in the Federation Account shall be
distributed among the three tiers of government, to argue that it cannot be done
(Ezeani 2012). This view, however, ignores the fact that the same section 162(3)
authorises the federal legislature to prescribe the “terms” and the “manner” in which
money in the Federation Account shall be distributed. While this does not allow the
federal legislature to unilaterally authorise the transfer of any money in the Federa-
tion Account to another account, such a transfer would seem to be constitutional if

15 NSIA Act, s 35.

16 NSIA Act, s 48.
Public Wealth Management and Distribution in the Extractive … 45

freely agreed to by all the three tiers of government. However, it is essential that the
agreement properly involves the three tiers of government without leaving out any
tier. This is where the NSIA Act fails.
Thus, the problem with the earlier political arrangement that established the ECA
was that it did not properly involve the three tiers of government. If money in the
Federation Account belongs jointly to the tiers, there is nothing in the constitution
or in the principle of fiscal federalism that prohibits the tiers from entering into an
agreement to save a portion of that money in a joint account, such as an SWF. It
does not violate the constitutional requirement that the money shall be distributed
among the tiers because each tier is simply contributing a freely agreed portion of its
share of the distribution to the SWF. Such an agreement would be lawful and binding
if it followed the constitutionally laid down procedure for making fiscal decisions
especially on the part of state governments. In this respect, the state governors must
obtain the approval of their state legislatures before entering into such an agreement
with the federal government. This is mandated by section 120 of the Constitution,
which provides as follows:
1. All revenues or other moneys raised or received by a State (not being revenues or
other moneys payable under this Constitution or any Law of a House of Assembly
into any other public fund of the State established for a specific purpose) shall
be paid into and form one Consolidated Revenue Fund of the State.
2. No moneys shall be withdrawn from the Consolidated Revenue Fund of the State
except to meet expenditure that is charged upon the Fund by this Constitution or
where the issue of those moneys has been authorised by an Appropriation Law,
Supplementary Appropriation Law or Law passed in pursuance of section 121
of this Constitution.
3. No moneys shall be withdrawn from any public fund of the State, other than the
Consolidated Revenue Fund of the State, unless the issue of those moneys has
been authorised by a Law of the House of Assembly of the State.
4. No moneys shall be withdrawn from the Consolidated Revenue Fund of the State
or any other public fund of the State except in the manner prescribed by the House
of Assembly.
It is clear from the above that revenues accruing to a state shall generally be paid
into a Consolidated Revenue Fund of that state [subsection (1)] and that a law of the
state legislature is required to authorise the state executive branch to allow money
to be withdrawn from the Fund [subsections (2)–(4)].17 Since the consent given by
state governors to the passage of the NSIA Act and the establishment of the SWF
did not follow this constitutionally laid down process, the Act is unlikely to pass
constitutional muster.
The popular view is that a constitutional amendment is required to legalise the
Act (see Olawuyi and Onifade 2017; Ekokoi 2015); this is not necessary. While it

17 Whether money from the Federation Account is first paid into the Consolidated Revenue Fund

of the state before a portion of it is transferred by the state to the agreed SWF, or that portion of
the money is transferred directly from the Federation Account to the SWF, makes no difference
provided that the transfer is backed by a law of the state legislature.
46 C. Nwapi

is true that “the Constitution does not provide for the SWF” (Olawuyi and Onifade
2017: 331), it need not provide for it for the fund to be legally established; moreover,
there is nothing in the Constitution that prohibits its establishment. It is submitted
that the NSIA Act can be regularised without any constitutional amendment. What is
required is for state governors to obtain statutory authorisations from their legislatures
to allow the transfer of the already agreed upon portion (under the NSIA Act) of their
constitutionally allocated revenue to the SWF. In addition, since local government
councils have a constitutional interest in the Federation Account,18 each state must
consult its local government councils to obtain their consent to the establishment of
the SWF. Failure to do so would render the SWF open to constitutional challenge by
local governments.
Other analysts have argued that the NSIA Act is fully consistent with section 80(1)
of the Constitution which provides as follows:
All revenues or other moneys raised or received by the Federation (not being revenues or
other moneys payable under this Constitution or any Act of the National Assembly into any
other public fund of the Federation established for a specific purpose) shall be paid into and
form one Consolidated Revenue Fund of the Federation.

It is argued that this provision “recognises the existence of revenues payable

under an Act of the National Assembly into different public funds established for
a specific purpose” and which are not payable into the Consolidated Revenue Fund
of the Federation (CRFF) and that “[t]he SWF is one of such funds” (Odude 2008).
Opponents of this view have argued, however, that the CRFF is an account that
belongs exclusively to the federal government, whereas the Federation Account
belongs to the Federal Republic of Nigeria (Amadi and Obutte 2018). That is to
say, all money due to the federal government, including money due to it from the
Federation Account, is paid into the CRFF (Amadi and Obutte 2018). There appears
to be no judicial authority in support of this interpretation. The Constitution itself
does not define the terms “Consolidated Revenue Fund of the Federation” and “Fed-
eration Account”. However, it defines “Federation” to mean “the Federal Republic
of Nigeria”,19 thereby suggesting that the above interpretation of section 80(1) is
wrong. However, section 120 of the Constitution also establishes the Consolidated
Revenue Fund of the State, into which shall be paid “[a]ll revenues or other moneys
raised or received by a State” (with exceptions similar to those established for CRFF
under section 80(1)). This companion provision strongly suggests that the CRFF
belongs exclusively to the federal government regardless of the definition of Feder-
ation provided under the Constitution.20 It follows that the constitutional question
remains. And unless and until it is resolved, the sustainability of the SWF established
under the NSIA Act will, as one scholar has suggested, “rely on the strength of the

18 Section 162 of the 1999 Constitution.

19 Section 318(1) pf the 1999 Constitution.
20 It must be pointed out that outside the definition of “Federation” provided in the Constitution,

the multiple contexts in which the Constitutional draftsperson uses the term that makes it unclear
whether it is referring to the federal government or to the Federal Republic of Nigeria.
Public Wealth Management and Distribution in the Extractive … 47

political deals cut between the state governors and the federal government, which
from previous experiences appear to be shaky agreements” (Ugwuibe 2012: 57).

5.7 Transparency and Accountability Mechanisms Under

the SWF

The NSIA Act [section 4(2)(d)] explicitly adopts a key prescription of the Santiago
Principles by specifically enjoining NSIA to “implement best practices with respect to
management independence and accountability, corporate governance, transparency
and reporting on performance”. To implement this principle, section 12 of the Act
contains reporting and disclosure provisions, requiring NSIA to provide written
yearly reports to the Governing Council “on the assets, liabilities, redemptions, reali-
sations, sales, general performance by asset class and significant trends affecting [its]
investment objectives”. Also, under section 36, NSIA is required to keep proper books
of accounts regarding its transactions and businesses in accordance with internation-
ally recognised financial reporting standards and generally accepted accounting prin-
ciples in Nigeria. And for every financial year, NSIA shall deliver its Annual Report
to the President, the Minister of Finance, the Central Bank Governor, the National
Economic Council, the National Assembly and the House of Assembly of each state
[section 37(1)]. The Annual Report shall be made accessible to the public. There are
also provisions mandating NSIA to publish its investment plans, policies and proce-
dures (see, e.g., section 39(2) of the Act). These provisions are commendable and
in 2016 Nigeria’s SWF was adjudged the most transparent in Africa, scoring 9/10
in the Linaburg-Maduell Transparency Index administered by the Sovereign Wealth
Institute (Diallo et al. 2016).
Yet, the Act contains a number of other provisions that undermine NSIA’s capacity
to effectively implement the Santiago transparency prescription. For instance,
the withdrawal rules give too wide discretion to political actors. For instance,
section 47(2) of the Act authorises the Minister of Finance to direct NSIA to “utilise
capital and assets” in the SF to supplement available resources to stabilise the
economy. The criteria set out for giving such direction is vague. The Act only requires
the Minister to demonstrate “urgency”, provided also the “Budgetary Smoothing
Account” has been depleted. It does not provide any guidance on what conditions
could be regarded as urgent (Olawuyi and Onifade 2017). There is no procedural
mechanism in the Act to ensure that the Minister’s demonstration of urgency can
be evaluated by the public. In addition, the Act does not stipulate preconditions for
withdrawal of money from the FGF. Also, section 34 gives the Board authority to
declare that uninvested and uncommitted available money in the funds be distributed
without establishing preconditions for making such a declaration other than that the
declaration shall be approved by a resolution of the Governing Council. In fact, the
granting of this authority to the Board, when combined with the authority granted to
the Minister of Finance to direct that money in the SF be utilised, makes if difficult to
48 C. Nwapi

know who has final authority over the utilisation of money in the SWF. These lacunae
have negative implications for transparency and accountability in the management
of the SWF.

5.8 The Question of Inclusivity

The NSIA Act opens up an important question about how a fiscal mechanism should
be designed and implemented to address the issue of over-concentration of power at
the centre, believed to be one of the most critical problems in Nigeria’s federalism.
In more practical terms, this question has to do with whether all stakeholders in the
funds are adequately involved in decision-making regarding the management of the
funds.
There is a lack of adequate representation of stakeholders in the Governing Council
of NSIA. The Council consists of the President and each of the state governors, the
federal Attorney General, the Minister of Finance and the Minister in charge of
national planning, the Governor of the Central Bank, the Chief Economic Advisor to
the President, Chairman of the Revenue Mobilisation, Allocation and Fiscal Commis-
sion, and four representatives of private sector. There is no representation for the FCT,
Local Government and Area Councils, which by virtue section 32(1) of the Act hold
ownership interests in the funds. In addition, the FCT, Local Government and Area
Councils are excluded from the entities to whom NSIA shall submit its Annual
Report. Scholars have also rightly pointed out the lack of stakeholder consultation
during withdrawal of money from the fund (Olawuyi and Onifade 2017). The Minister
of Finance determines when funds are to be withdrawn from the SF and instructs
NSIA accordingly.21 There is no requirement for the Minister to consult with the
states let alone the FCT and local government and area councils before determining
that funds should be withdrawn.
Another important inclusivity issue is whether the SWF effectively addresses the
needs of both present and future generations of Nigerians or whether one gener-
ation has been sacrificed for the needs of the other. Applying the theory of func-
tional distributive justice, it has been argued that a broader range of stakeholder
representation in the management of the SWF is needed to cater for the needs of
present and future generations (Olawuyi and Onifade 2017). One way to approach
this is to appoint people of diverse age and social groups onto the Board, the
Governing Council and the management team of NSIA. Under current arrangements,
the Governing Council shall have two representatives of the youth and regard shall
be had to gender equity in appointing persons to the Council.
Perhaps a better approach to the intra- and inter-generational equity question is
to first look holistically at the funds established under the NSIA Act to ascertain
whether if effectively implemented, the interests of present and future generations
would be catered for, and then to ask whether there are adequate provisions in the

21 NSIA Act, s 47(2).

Public Wealth Management and Distribution in the Extractive … 49

Act to ensure their effective implementation. It would appear that the three funds
established by the Act fully contemplate both intra- and inter-generational equity.
The SF is especially suited for meeting the needs of the present generation while
the FGF is especially designed to meet the needs of future generations. The NIF,
however, would serve both present and future generations in that the infrastructure
that would be developed, such as roads, rails, dams and healthcare systems, would
outlive the current generation. Are there adequate provisions in the Act to ensure the
effective implementation of the three funds? While there are obvious deficiencies in
the Act, as pointed out in the preceding sections, it would appear that much depends
on political will. So far, NSIA has been adjudged very positively on transparency,
governance and disclosure, size, domestic investment mandate and source of funding
by two independent ranking institutions. This is a positive sign for the realisation of
the objectives of the Act.

5.9 The Coexistence of the ECA and the SWF

Contrary to expectations, the enactment of the NSIA Act did not put an end to the
existence of the ECA. Both the ECA and the SWF established under the NSIA Act
are being operated concurrently. The reason for their coexistence is hard to explain.
From a legal standpoint, the NSIA Act says nothing about the continued existence
of the ECA. Since the ECA was not established by statute, a judicial pronouncement
would suffice to terminate its existence. Otherwise, what was required to bring it to an
end was the same political arrangement that brought it into existence in the first place.
Analysts believe it was due to “political struggles” between officials at the highest
levels of government that the ECA was not “subsumed” in the SWF (Investopedia
2018). Initial seed money deposited in the SWF was $1 billion drawn from the ECA
(Odude 2008). The natural expectation then was that the ECA would be fully absorbed
into the SWF but eight years later that is not yet the case. The prudence of managing
both accounts concurrently has been rightly disputed (see Odude 2008). However,
it does not seem that any more moneys have been directed to the ECA since the
NSIA Act was enacted. Instead, withdrawals have been progressively made from the
Account and distributed among the three tiers of government. If this trend continues,
then the ECA would be automatically shut down once all moneys in it have been
drawn.

6 Conclusion

Public wealth management in Nigeria is riddled with controversy. Few issues

surrounding it enjoy geo-political agreement. The most controversial is the question
of who should have control over the resources. The Constitution vests ownership in
the federal government, the propriety of which remains a vexed question in Nigerian
50 C. Nwapi

public debates. Behind the resource control debates is the question of the appropriate
resource revenue sharing formula for the country. Derivation is the current operative
principle. Under current arrangements, states receive 13% of the revenues gener-
ated from resources located within their territory. The federal government therefore
controls 87% of the resource wealth. Agitations by oil-producing states for state
resource ownership and control have been going on for decades but have not resulted
in any constitutional change in resource ownership. The current 13% derivation was
fixed under the 1999 Constitution. Although the federal legislature has constitu-
tional authority to increase it, it has not yet exercised that authority. The debate
around resource revenue distribution is a continuing one. It is centred exclusively
on oil rather than on both oil and mining, making it appear as though the %deriva-
tion applies to oil alone, whereas it applies to all natural resources. However, this is
arguably because the amount of shareable revenue from mining is low. As mining’s
contribution to GDP continues to rise, the solid mineral sector would likely assert its
place in the debate.
The fiscal regime for generation of revenue from extractive resources is charac-
terised by an assortment of instruments intended to ensure that extractive compa-
nies pay adequate revenue to the State. They include royalties, PPT, CIT, CGT and
VAT. Revenues generated from these sources are distributed among the three tiers of
government in line with the derivation principle. Various government administrations
have recognised the need for a resource-dependent country to “save for the rainy day”
to help it withstand external shocks induced by oil and commodity price volatility.
However, these funds were badly mismanaged due to lack of fiscal discipline on the
part of government.
The constitutionality of the NSIA Act remains a live issue in Nigeria. While this
chapter supports the view that the Act is potentially unconstitutional, it is not in
agreement with the view that a constitutional amendment is required to save the
Act. An agreement between the three tiers of government to establish an SWF is
fully compatible with the constitution and the principle of fiscal federalism. What
is needed to save the Act is for state governors to obtain the necessary statutory
approvals from their state legislatures and to consult with their local government
councils to obtain their consent to the transfer of funds from the Federation Account
to the SWF. It is hoped that state governors will one day take this step to lay to rest
the constitutional question.
Key lessons learned from the management of extractive resources in Nigeria
include: (1) effective management of natural resources within a federation requires
cooperation among the federating units; (2) resource revenue management frame-
works must have sound legal backing; (3) transparency and accountability are key to
the effective resource revenue management; and (4) political will to save is essential
for the success of SWFs.
Public Wealth Management and Distribution in the Extractive … 51

References

Abutudu, M. (2010). Federalism, political restructuring, and the lingering national question. In
S. Adejumobi (Ed.), Governance and politics in post-military Nigeria (pp. 23–60). New York:
Palgrave Macmillan.
Adango, Z. (2015). The principle of derivation and the search for distributive justice in the Niger
Delta region of Nigeria: The journey so far. Journal of Law, Policy and Globalization, 41, 115–133.
Agbaeze, E. K., et al. (2015). Resolving Nigeria’s dependency on oil—the derivation model. Journal
of African Studies and Development, 7(1), 1–14.
Aigbedion, I., & Iyayi, S. E. (2007). Diversifying Nigeria’s petroleum industry. International
Journal of Physical Sciences, 2(10), 263–270.
Akinola, S. R., & Adesopo, A. (2011). Derivation principle dilemma and national (dis)unity
in Nigeria: A polycentric planning perspective on the Niger Delta. Journal of Sustainable
Development, 4(5), 251–263.
Amadi, L., & Obutte, P. C. (2018). The treasury single account and the search for effective revenue
management in Nigeria’s oil and gas sector. Afe Babalola University: Journal of Sustainable
Development Law and Policy, 9(2), 101–124.
Anderson Tax. (2018). Federal High Court rules that payments for gas flaring activities
are not tax-deductible. https://andersentax.ng/federal-high-court-rules-that-payments-for-gas-fla
ring-activities-are-not-tax-deductible/. Accessed February 20, 2019.
Appiagyei-Atua, K. (2005). Self-determination v state sovereignty: A critique of the African
Commission’s decision in the Ogoni case. In I. Law & I. Peoples (Eds.), Joshua C & Niamh
W (pp. 313–314). Leiden: Martinus Nijhoff.
Ayoade, M. A. (2008–2010). Nigerian petroleum profits tax and financial incentives: 50-year
requiem? University of Ghana Law Journal 24:171–204.
Central Intelligence Agency. (2017). The World Factbook 2017. https://www.cia.gov/library/public
ations/the-world-factbook/rankorder/2244rank.html. Accessed February 20, 2019.
Debt Management Office. (2018). States, FCT and federal governments’ external debt stock as
at 30th June, 2018. https://www.dmo.gov.ng/debt-profile/sub-national-debts/2543-states-and-fed
eral-government-s-external-debt-stock-as-at-30th-june-2018/file. Accessed January 20, 2019.
Diallo, B., et al. (2016). Sovereign wealth funds and long-term investments in Sub-Saharan Africa.
World Bank Policy Research Working Paper 7903, https://documents.worldbank.org/curated/en/
736301480964634718/pdf/WPS7903.pdf.
Eguzozie, B. (2011). How sovereign wealth fund can drive Nigeria’s growth, infrastructure
development. Business Day Online. https://www.businessdayonline.com/NG/index.php/ana
lysis/features/21470-how-sovereign-wealth-fund-can-drive-nigerias-growth-infrastructure-dev
elopment. Accessed February 10, 2019.
Ekokoi, S. E. (2015). Legal and constitutional evaluation of the Nigerian sovereign wealth fund.
Journal of Sustainable Development Law and Policy, 5(1), 101–128.
Eyre, J. M. (2007). An economic analysis of natural resources sustainability for the mining sector
component. Nigeria, World Bank. https://openknowledge.worldbank.org/bitstream/handle/
10986/7941/561780ESW0whit10Box349489B01PUBLIC1.pdf?sequence=1&isAllowed=y.
Accessed February 22, 2019.
Ezeani, J. C. (2012). An overview of the Nigerian sovereign investment fund. The sovereign
wealth fund initiative, The Fletcher School, Tufts University. https://sites.tufts.edu/sovereignet/
files/2017/08/Archives-An-Overview-of-the-Nigerian-Sovereign-Investment-Authority.pdf.
Accessed December 20, 2018.
Fayomi, O (2018). Repositioning the Nigerian mining sector through improved regulatory and incen-
tives framework. SPA Ajibade & Co. https://www.spaajibade.com/resources/wp-content/uploads/
2018/06/NIGERIA-MINING-SECTOR-INCENTIVES-IN-PERSPECTIVE-Niyi.pdf. Accessed
February 20, 2019.
52 C. Nwapi

Finkel, A. M. (2017). Beyond best-in-class: Three secrets to regulatory excellence. In C. Coglianese

(Ed.), Achieving Regulatory Excellence (pp. 166–187). Washington, DC: The Brookings
Institution.
Frynas, J. G. (2001). Corporate and state responses to anti-oil protests in the Niger Delta. African
Affairs, 100(398), 27–54.
Ghebremusse, S. Z. (2014). Assessing the petroleum fiscal regimes of Nigeria, Ghana, and
Cameroon. LLM Thesis, University of Toronto. https://tspace.library.utoronto.ca/bitstream/1807/
67935/1/Ghebremusse_Sara_201411_LLM_thesis.pdf.
Hove, S., & Ncube, M (2014). Sovereign wealth funds as a driver of African development.
quantum global. https://quantumglobalgroup.com/wp-content/uploads/2017/10/Sovereign-Wea
lth-Funds-as-a-driver-of-African-development.pdf. Accessed February 24, 2019.
Idubor, R. (2015). Appraising taxation and the Nigerian oil industry. Journal of Law, Policy and
Globalization, 37, 188–197.
Ikpeze, N.I., Soludo, C.C., & Elekwa, N.N. (2004). Nigeria: The political economy of the policy
process, policy choice and implementation. In C. Soludo, O. Ogbu & H. Chang (Eds.), The
politics of trade and industrial policy in Africa: Forced consensus? (pp. 342–343). Trenton, NJ
and Asmara, Eritria: Africa World Press.
Ingelson, A., & Nwapi, C. (2014). Environmental impact assessment process for mining, oil and
gas projects in Nigeria: A critical analysis. Law, Environment and Development Journal, 10(1),
35–56.
Investopedia, (2018). Excess Crude Account (ECA). https://www.investopedia.com/terms/e/excess-
crude-account.asp. Accessed February 20, 2019
Kalu, N. K. (2008). State power, autarchy, and political conquest in Nigerian federalism. Lanham:
Lexington Books.
KPMG. (2014). Nigeria’s oil and gas industry brief . https://www.blog.kpmgafrica.com/wp-con
tent/uploads/2016/10/Nigerias-oil-and-gas-Industry-brief.pdf. Accessed March 1, 2019.
Lawal, T. K. (2013). Taxation of petroleum profit under the Nigeria’s Petroleum Profit Tax Act.
International Journal of Advanced Legal Studies and Governance, 4(2), 1–17.
Maduaka, A. G. (2014). Contributions of solid mineral sectors to Nigeria’s economic devel-
opment. Masters Thesis, Institute of Graduate Studies and Research, Eastern Mediterranean
University, Cyprus. https://i-rep.emu.edu.tr:8080/xmlui/bitstream/handle/11129/1684/Maduak
aAda.pdf?sequence=1. Accessed February 20, 2019
Ministry of Mines and Steel Development. (2008). National minerals and metals policy. https://www.
minesandsteel.gov.ng/wpcontent/uploads/2016/04/National_Minerals_and_Metals_Policy.pdf
Ministry of Mines and Steel Development. (2016). Roadmap for the growth and development of
the Nigerian mining sector. https://www.minesandsteel.gov.ng/wp-content/uploads/2016/09/Nig
eria_Mining_Growth_Roadmap_Final.pdf
Ministry of Mines and Steel Development. (2016). Roadmap for the growth and development
of the Nigerian mining industry. http://www.minesandsteel.gov.ng/wp-content/uploads/2016/09/
Nigeria_Mining_Growth_Roadmap_Final.pdf. Accessed January 20, 2019
Ministry of Petroleum Resources. (2017). National petroleum policy: Nigerian government policy
and actions. www.petroleumindustrybill.com/wp-content/uploads/2017/07/National-Petroleum-
Policy-Approved-by-FEC-in-July-2017.pdf. Accessed February 1, 2019
Ministry of Petroleum Resources. (2016). National Petroleum Fiscal Policy—Nigerian Govern-
ment’s Policy and Actions. https://www.lawyard.ng/wp-content/uploads/2017/03/Draft-National-
Petroleum-Fiscal-Policy.pdf. Accessed January 20, 2019
Natural Resource Governance Institute. (2017). Resource governance index 2017. https://resour
cegovernance.org/sites/default/files/documents/2017-resource-governance-index.pdf. Accessed
January 20, 2019
Nanfuri, P. (2018). Ghana ranks third in sovereign wealth fund index.Joy Business. https://www.myj
oyonline.com/business/2018/june-5th/ghana-ranks-third-in-sovereign-wealth-fund-index.php.
Accessed January 19, 2019
Public Wealth Management and Distribution in the Extractive … 53

National Bureau of Statistics. (2018). Nigerian gross domestic product report (Q3 2018).
file:///C:/Users/Owner/Downloads/GDP_Report_Q3_2018.pdf. Accessed January 26, 2019
National Bureau of Statistics. (2018). Nigerian domestic and foreign debt—Q4 and full
year 2017. https://www.proshareng.com/admin/upload/reports/11049-NIGERIANDOMESTI
CANDFOREIGNDEBT2017-proshare.pdf. Accessed January 20, 2019
Niger Delta Development Commission (Establishment) Act. (2000).
Nigerian Extractive Industries Transparency Initiative. (2017). The case for a robust oil savings
fund for Nigeria. NEITI Occasional Paper Series, Issue 2. https://www.proshareng.com/admin/
upload/reports/FinalNEITIOPSonOilSavingsFund.pdf. Accessed January 17, 2019
Nwapi, C. (2010). A legislative proposal for public participation in oil and gas development in
Nigeria. Journal of African Law, 54(2), 184–211.
Obi, C. (2018). Nigeria: The role of civil society in the politics of oil governance and revenue
management. In I. Overland (Ed.), Public brainpower: Civil society and natural resource
management (pp. 201–216). Basingstoke: Palgrave Macmillan.
Odude, F. (2008). The sovereign wealth fund should subsume the Excess Crude Account, Finan-
cial Nigeria. https://www.financialnigeria.com/the-sovereign-wealth-fund-should-subsume-the-
excess-crude-account-blog-350.html. Accessed December 20, 2018
Oguine, I. (1999). Nigeria’s oil revenue and the oil producing areas. Journal of Energy Natural
Resources Law, 17(2), 111–120.
Olawuyi, D. S., & Onifade, T. T. (2017). Promoting functional distributive justice in the Nige-
rian sovereign wealth fund system: Lessons from Alaska and Norway. Nigerian Yearbook of
International Law, 1, 317–354.
Omorogbe, Y., et al. (2002). The legal framework for public participation in decision-making on
mining and energy development in Nigeria: Giving voices to the voiceless. In D. N. Zillman
(Ed.), Human rights in natural resource development: Public participation in the sustainable
development of mining and energy resources (pp. 549–587). New York: Oxford University Press.
Shell v Federal Board of Inland Revenue. (1996). NWLR (Pt 466) 285.
Suberu, R. (2010). The Nigerian federal system: Performance, problems and prospects. Journal of
Contemporary African Studies, 28(4), 459–477.
Ugwuibe, C. (2012). Strengthening the Nigerian sovereign investment authority: A policy analysis
of the Nigerian Excess Crude Account and the Nigerian Sovereign Investment Authority Act. MA
thesis, University of California Los Angeles. https://cloudfront.escholarship.org/dist/prd/content/
qt5zn1h1d6/qt5zn1h1d6.pdf. Accessed January 11, 2019
Wahab, L., & Diji, C. J. (2017). Comparative analysis of Nigeria petroleum fiscal systems using
royalty and tax optimization models to drive investments. Oil and Gas Research, 3(3), 1–14.
Wilde, D (2016). Key issues in natural resource taxation and revenue management in
the commonwealth. Economic Paper 96, The Commonwealth Secretariat Economic Paper
Series. https://www.oecd-ilibrary.org/docserver/9781848599543-en.pdf?expires=1544711656&
id=id&accname=id36621&checksum=BD588FB061D411C9CC4CF3DB7C739B0F. Accessed
February 27, 2019.
World Bank. (2003). Nigeria: Policy options for growth and stability. Report No. 26215-NGA,
Washington, DC.
Public Wealth Management
and Distribution in Kenya’s Extractives
Sector

Kate Wanza Mavuti, Helen Hoka Osiolo, and Caroline Wanjiru Kariuki

1 Background

Countries that are endowed with extractive resources such as oil and gas can have
tremendous impact to the economy if the emanating wealth is well managed, allo-
cated, and distributed. Good governance of extractive resources creates employment
thus improving well-being among national citizens. At the same time, for govern-
ments, this may generate new revenue streams and fund basic government services
and stimulate further economic growth.
Despite this importance, extractive resources from many African countries remain
poorly managed with their ensuing wealth unequally distributed. According to EU-
UN partnership (2012), a raft of challenges contributes to new conflicts as well as act
as impediments to the peaceful resolution of existing ones including: poor engage-
ment of communities and stakeholders; inadequate benefit sharing mechanisms and
strategies, mismanagement of extractive resources, inadequate institutional and legal
frameworks, inadequate natural resources management and distribution, and poor
transparency and accountability among the relevant state and related agencies.

K. W. Mavuti (B)
Strathmore Extractives Industry Centre (SEIC), Strathmore University School of Law,
Nairobi, Kenya
e-mail: [email protected]
H. H. Osiolo
Center for Research in Applied Economics, Strathmore University Institute of Mathematical
Sciences, Strathmore University, Nairobi, Kenya
e-mail: [email protected]
C. W. Kariuki
Strathmore Institute of Mathematical Sciences, Strathmore University, Nairobi, Kenya
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 55
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_3
56 K. W. Mavuti et al.

The debate on who owns and who manages extractives resources is evident in
many developing countries and even more so for those countries with new discoveries
of extractives resources. Though there are diversified extractives resources across
countries, the fiscal regimes that determine how the revenues from extractives projects
are shared between government, companies, and communities also vary depending on
the fiscal tools. The International Monetary Fund reports that distinct fiscal regimes
for extractives industries are critical in addressing key tax challenges. For example,
extractives taxes that offer an attractive tax base/substantial rents based on efficiency
and equity measures, pervasive uncertainty in commodity prices as well as in relation
to geology, input cost, political risk, and asymmetric information, where the private
sector is considered better informed than government when it comes to undertaking
exploration and development. The government, on the other hand, is better informed
with regard to its own future fiscal intentions, high sunk costs including the long
production periods, extensive involvement of multinationals in some countries, and
of state-owned enterprise in others, raising questions about how to address tax and the
sharing of benefits from extractives (IMF 2012). Royalties, taxes, production sharing
systems, and bonuses are some of the fiscal tools available to establish a fiscal regime
to govern extractives resources (Natural Resource Governance Institute 2015).
This chapter seeks to identify the main extractives resources in Kenya; the fiscal
regime within its extractives industry and who owns the resources; and how extrac-
tives resources are managed and distributed. The chapter also sheds light on Kenya’s
proposed Sovereign Wealth Fund, which aims to manage and invest income from
current oil, gas, mineral, and other natural resources for future generations. While
two bills have been proposed to parliament, neither has been approved, and Kenya
remains without a Sovereign Wealth Fund.

2 Ownership of Extractive Resources in Kenya

The 2010 constitution of Kenya indicates under Article 62(1)(f) that public land in
Kenya includes minerals and mineral oils. Further, Article 62(3) provides that public
land, including the definition above, shall vest in and be held by the national govern-
ment in trust for the people of Kenya. This provision states that this land shall be
administered by the National Land Commission. What this essentially means is that
minerals and mineral oils are owned and controlled by the state for the benefit of the
citizenry. This constitutional provision of course reaches into the private ownership
of property, fair compensation, and/or reallocation to land owners when minerals or
mineral oils are found on their land.
Further, Article 69 (1) directs the state to guarantee sustainable exploitation,
utilization, management, and conservation of the environment and natural resources,
and to ensure that the accruing benefits are shared equitably, ensuring the resources
are utilized for the benefit of the people of Kenya. In Kenya’s nascent oil and gas
industry, the matter of equitable distribution has seen intensive debate; whereby, the
Public Wealth Management and Distribution in Kenya’s Extractives … 57

industry related legislation, that is, the Petroleum Act 2019, the Mining Act 2016,
and associated regulations, seeks to provide guidance on the matter.
Of further importance is Article 201 of the constitution, which provides that the
burdens and benefits of the use of resources shall be shared equitably between present
and future generations. Again, Kenya’s supreme law unequivocally prescribes the
equitable sharing and distribution of national wealth, including natural resources
wealth, not only among the national and county governments for the development of
the current population, but also for the benefit of future generations. This principle,
together with transparency and accountability, forms part of the principles of public
finance in Kenya.
Kenya’s extractives industry has experienced substantive legal, policy, and insti-
tutional reform in line with the Constitution 2010. The Mining Act 2016, specifically,
Article 6(1) (a–c), states that every mineral in its natural state in, under, or upon land
in Kenya or in or under a lake, river, stream, or water courses in Kenya, or in the
exclusive economic zone and an area covered by the territorial sea or continental
shelf, is the property of the Republic and is vested in the national government in trust
for the people of Kenya. This law applies to all minerals, which are detailed in the
First Schedule of the Mining Act, 2016 except for petroleum and hydrocarbon gases.
Further, in April 2016, the Ministry of Mining launched the Mining and Minerals
Policy 2016, which underpins the Mining Act, 2016. The policy ensures that key
issues related to sustainable exploitation of natural resources such as community
engagement, environmental issues, and the benefits from mining are addressed. In
line with the provisions of the Constitution of Kenya 2010, the Mining Act, 2016
bestows the ownership of minerals with the national government in trust for the
people of Kenya.
Likewise, the Petroleum Act 2019, which came into effect on March 28, 2019,
vests all petroleum existing in its natural condition within Kenya and its conti-
nental shelf, with the national government in trust for the people of Kenya. This Act
provides a framework for the contracting, exploration, development, and production
of petroleum and repeals the Petroleum (Exploration and Production) Act 1984.
The new Act also gives effect to relevant Articles of the Kenyan Constitution,
which apply to upstream, regulation of midstream, and downstream petroleum oper-
ations. The Act provides further that the national government may participate in
any phase of upstream operation and create a conducive environment for invest-
ment in petroleum operations and infrastructure development, including formula-
tion of guidelines in collaboration with relevant national government agencies on
development of petroleum investments and to disseminate them among potential
investors.
Echoing the state duty enshrined in the Constitution, the Act also mandates the
national government to ensure that petroleum operations and infrastructure develop-
ment are carried out for the benefit of the people of Kenya. In its effort to promote
petroleum operations and investments, the national government shall facilitate access
to land for exploration activities in accordance with the Constitution and any other
written law. In Kenya, negotiations over land rights can at times be highly charged due
to the historical legacy of contention over land ownership in Kenya. In addition, and
58 K. W. Mavuti et al.

in many cases, areas where extractives resources are discovered are mainly used for
agriculture and livestock production, residential or communal holdings, recreation,
transportation, and at times commercial activities, further exacerbating tensions.
The Kenyan legal regime over the past few years can be said to be alive to the
special and specific circumstances of land use and land ownership in Kenya while
seeking to promote sustainable exploitation of the natural resources found therein.
However, certain issues such as regulatory authorities and their scope, acquisition,
compensation, and relocation still require more legislative attention and review.
Unlike in other jurisdictions, where ownership of hydrocarbons or other natural
resources is directly tied to private land ownership, the Kenyan legal regime is clear
that the national government owns the resource, both onshore and offshore.
Additionally, the Energy Act, 2019 also came into effect on March 28, 2019 and
repealed the Energy Act, 2006. This Act consolidates the laws relating to energy,
provides for national and county government functions in relation to energy, promotes
renewable energy, promotes the exploration, recovery, and commercial utilization of
geothermal energy, provides regulation of midstream and downstream petroleum
and coal activities, among others (The Energy Act 2019). In relation to renewable
resources, Article 73 of the Energy Act, 2019 confers all unexploited renewable
energy resources under or in any land in the National Government of Kenya.

3 Main Extractives Resources in Kenya

Kenya is abundant in resources that largely remain untapped. According to the

Economic Survey (2019), the data on the contribution of mining and quarrying to
GDP is captured alongside that of forestry and logging, fishing and aquaculture, and
water supply to form the environment and natural resource sector. Though environ-
ment and natural resources as a sub-sector contributed to about 3.7% of GDP in
2014, this growth dropped to 3.2% of GDP in 2018. For mining and quarrying, the
growth has been steady at 0.8% in the same period. This was attributed to larger
significant growth rates in other industries than with or within the environment and
natural resources.
For mining and quarrying, key resources documented include: soda ash, fluorspar,
salt, crushed refined soda, carbon dioxide, diatomite, gold, coal, gemstones (cut),
gemstones (rough), and titanium ore minerals (illeminte, rutile, and zireon). Other
minerals that are not captured in the Economic Survey include limestone, manganese,
gypsum, and niobium.
Kenya’s petroleum sector on the other hand is described as a nascent sector.
According to the Ministry of Mining and Petroleum, the key petroleum projects
include oil and gas exploration, development of a crude oil pipeline, geoscientific data
acquisition and management to further inform the sector, enhancement of liquified
petroleum gas uptake, and the eradication of fuel adulteration, dumping and illegal
LPG refilling. Unlike the presence of mineral occurrence across the eight former
geographical regions in Kenya excluding Nairobi, petroleum resources are available
Public Wealth Management and Distribution in Kenya’s Extractives … 59

in very few regions. In particular, Kenya has four (4) petroleum exploration basins
and these are: Lamu Basin, Anza Basin, Mandera Basin, and Tertiary Rift Basin.
Kenya’s oil reserves in the Northern County of Turkana, which were discovered in
2012, have been estimated to be at 560 million barrels of oil (mnbl), which have been
described as 2C, signifying the best estimate of contingent reserves.
Oil and gas exploration in the country began in 1956 with the discovery of commer-
cially viable crude oil discovered in March 2012 with the discovery well—Ngamia
1 Well, in Lokichar Basin in Turkana County. To date, the National Oil Corpora-
tion reports that over 86 wells have been drilled with a majority within the Tertiary
Rift. In June 2018, Kenya launched the Early Oil Pilot Scheme (EOPS) reportedly
geared towards gathering technical data for the design and preparation of the Field
Development Plan (FDP) and to test the international market for Kenyan Crude. In
August 2019, Kenya reportedly flagged off the exportation of a cargo of approxi-
mately 200,000 barrels from the port of Mombasa, lifting the oil from the EOPS into
the international market. The transportation of crude oil has, however, seen its fair
share of challenges mainly due to poor infrastructure in certain areas and stoppages
due to protests mainly by community members highlighting issues of insecurity,
employment, and access to information, particularly about the beneficial sharing of
accruing benefits.
In Kenya, with the petroleum sector being a nascent yet fast developing sector, the
longer established mining industry affords us with comparative as well as complimen-
tary information. In this light, the Mining and Minerals Policy of 2016 identify key
factors that hinder the sector’s performance, which may also apply to the petroleum or
the oil and gas sector. To begin with is the legal regime; previously, the mining sector
operated under outdated legal frameworks (the Mining Act Cap 36 of 1940). The Act
did not consider several minerals that are mined and quarried on commercial basis.
It also failed to provide clear guidelines on procedures and time line for licensing
and supervision that resulted in cases of investors making speculations on when to
sell or hoard minerals. A similar set of circumstances existed in the petroleum sector
before the enactment of the Petroleum Act 2019.
Further, the linkages between mineral marketing and value addition are lacking.
This is due to several factors such as inadequate expertise, under development of the
mineral processing industry, a lack of appropriate technology, and high energy costs
that contribute to the low level of value addition to Kenya’s minerals. A lack of sector
strategies for the marketing, promotion, and value addition to minerals domestically,
regionally, and internationally of Kenya as a preferred mining destination limits the
full benefit from its mineral wealth. Further, efforts to reduce environmental degra-
dation and promote sustainable exploitation are hampered by wanting alignment
of regulatory polices between both the mining and petroleum sectors and the envi-
ronmental sector. Gender and labor issues have been identified in both sectors as
hampering sustainable development. For example, child labor particularly in arti-
sanal and small-scale mining, lack of access and control over land resources for
women, patriarchal decision-making processes in both the workplace and beyond
and either lack of or inadequate access to relevant information to facilitate sensiti-
zation of the wider community. Finally, despite the presence of a well structured,
60 K. W. Mavuti et al.

clear and enabling fiscal regime, there have still been calls to ensure transparency,
accountability, and predictability throughout the entire fiscal regime and benefit and
revenue collection, allocation, sharing, and management processes.

4 Fiscal Regime Within the Extractives Industry

The level of development of the extractives resource industry is largely defined by

the fiscal regime. While most governments would want to enhance development of
their extractives sector through fiscal regimes that are internationally competitive,
they must do so by balancing the interest of the host community; often being difficult
to achieve. Fees, royalties, and taxes are the common fiscal instruments applied to
both petroleum and mining resources in Kenya.
The fiscal system used in Kenya’s petroleum sector can be said to be a royalty/tax
system and production sharing hybrid contract. There are two main fiscal systems
employed in extractives: The concessionary or royalty tax system and the contractual-
based systems where production sharing contracts (PSCs) and service agreements
are classified. The choice on which fiscal system a country uses depends on the
laws, policies and regulations, and objectives of that country in the exploitation of its
natural resources. Thus, there is no one-size-fits-all system or preferred fiscal system
in the extractives sector.
The royalty tax system is characterized by factors such as the oil and gas companies
are contracted to explore for and produce oil and gas and where there are commercial
funds; upon production, title of the resource passes to the company who in turn pays
royalties on the resource produced. The companies also pay taxes on the profits from
the sale of the resource. On the other hand, with the contractual systems, title over
the resource remains with the state. Depending on the type of contract, the resource
company receives its compensation via a share of the actual production. As mentioned
above, the Kenyan scenario leans heavily toward the PSC system; however, the
companies are still mandated by law to pay taxes on their profits/income. While the
mining sector is required to make the payment of royalties to the state authorities,
the petroleum sector in Kenya does not pay royalties.

4.1 Production Sharing Contracts (PSCs)

According to the Petroleum Act, there are areas delineated for petroleum exploita-
tion known as “blocks.” Section 16 of the Act provides that the licensing regime for
these blocks for upstream operations shall be through an executed petroleum agree-
ment or a non-exclusive exploration permit for the purpose of obtaining geological,
geophysical, and geochemical information. The petroleum agreements or PSCs are
entered into between the state and the company and are negotiated after the conclu-
sion of bidding rounds. The Petroleum Act provides a model for the petroleum
Public Wealth Management and Distribution in Kenya’s Extractives … 61

agreement known as the Model Production Sharing Agreement (Model PSC), which
is prescribed in the Schedule of the Act. Just as the Petroleum Act 2019 repealed
the previous Act, the accompanying Model PSC repeals all other versions contained
in previous legislation. The Model PSC provides parties with a country-specific
template for further negotiation. It is within this PSC that Kenya and its contrac-
tors agree on fiscal terms and conditions for the lifespan of the agreement based on
both domestic laws and regulations as well as international norms and best prac-
tices. Section 53 of the Act bolsters this and provides that contractors (or oil and gas
companies) shall pay the state all taxes, relevant fees, and levies in such manner as is
stipulated in the petroleum agreement. Of note here is that despite the devolution of
government in Kenya with the introduction of county governments introduced by the
2010 Constitution, the fiscal repository for oil and gas exploration activities remains
with the national government. However, the Act makes reference to revenue sharing
of oil and gas proceeds in Section 58, which provides that ‘the national government’s
share of the profits derived from upstream petroleum operations shall be apportioned
between the national government, the county government and the local community’.
We shall discuss this further in the next section on revenue allocation.

4.2 Profit Petroleum Sharing

The hybrid system in Kenya’s petroleum PSC system is prescribed by clause 37 of

the Model PSC, 2019, which provides that profit petroleum shall be shared between
the state and the contractor on a quarterly basis, according to the value of the R-Factor
in respect of a specific contract area. This steers the country away from the previous
system where production share was determined by a daily rate of production. The
R-factor is defined as a ratio of cumulative receipts from the sale of petroleum to
cumulative expenditures. This ratio is initially zero (during exploration there is no
sale of petroleum while there may be considerable expenses) and gradually grows
with time. An R-factor less than 1.0 would mean that total expenditure exceeds total
receipts or revenue. An increase in the R-factor means an increase in the state’s profit
share or revenue.1
The Kenyan Petroleum Act thus provides the following as the application of the
R-factor for the share of profit petroleum Table 1.

4.3 Fees

An applicant or a holder of mineral right, a mineral dealer’s license or a diamond

dealer’s license are obliged to make payment of fees or charges as prescribed by the

1 Contracts
for Petroleum Development, Part 2, World Bank https://siteresources.worldbank.org/
INTOGMC/Resources/cambodia_oil_gas_newsletter_8.pdf.
62 K. W. Mavuti et al.

Table 1 Profit petroleum sharing formula for every calendar quarter

R-factor Government share (%) Contractor share (%)
Less than 1.0 50 50
Equal to or greater than 1.0 and less than 2.5 65 35
Equal to or greater than 2.5 [75] [25]
Source Clause 37 of the Model PSC, 2019

Kenyan Gazette notices toward application fees, report filing fees, fees for access
to geological data, and fees for access to public registers. Similarly, in petroleum,
contractors or a holder of a petroleum agreement must pay annual fees prescribed
by the Petroleum Act to include surface fees, training fees, and “such other fees that
may be prescribed.”

4.4 Royalties

As mentioned above, Kenya’s petroleum sector does not make use of the royalty
system. However, in mining, mineral right holders are obliged to make payments of
royalty to the state as per the prescribed rates, manner, and within a specified period.
Even so, mineral samples removed for purposes of testing, shall not be subject to
royalty unless they exceed the maximum value stipulated in regulations. Royalties
payable according to the Mining Act shall be distributed as follows: seventy percent
to the national government; twenty percent to the county government; and ten percent
to the community where the mining operation occurs.
This is in contrast to the petroleum sector where rather than royalties being shared
among national and county governments and the community; instead, it is the national
government’s share of profits derived from upstream operations, or what is otherwise
known as the government’s share of profit petroleum.

4.5 Ring Fencing

This is a financing model that aims to block expenses incurred to be used against
revenues derived from the same license area. Ideally, ring fencing limits the ability to
utilize losses from one license area against another. With regard to Kenya’s petroleum
sector, ring fencing is applicable in the upstream sector; losses from one block cannot
be used to reduce the taxable income of another.2 Expenditure incurred by a contractor
in a license area can only be offset against income derived from the same license
area.

2 Taxation in the Upstream oil and gas sector, Oraro and Company Advocates, https://www.oraro.

co.ke/2018/09/14/taxation-in-the-upstream-oil-and-gas-sector/.
Public Wealth Management and Distribution in Kenya’s Extractives … 63

4.6 Corporate Tax

Corporate companies are subjected to a direct tax on profits as stated in the Kenya
Income Tax Act, which provides information on the determination of taxable income
and rates of taxation. The Act stipulates a normal rate of 30% for resident companies
and 37.5% for non-resident companies. However, the Income Tax Act does not
presently provide specific rules for determining the value of sales of hydrocarbons. In
its ninth Schedul, however, does provide for specific deductions of expenses incurred
in the exploration, development, and production phases in determining the taxable
income:
• Exploration costs: including capital expenditure incurred in undertaking explo-
ration operations shall be fully deductible for tax purposes in the year in which
incurred.
• Development expenditure: excluding plant and machinery and social infrastruc-
ture is depreciated for tax purposes at a rate of 20% per annum (straight line)
commencing the year after the asset is brought into use and the year in which
production commences.
• Operating costs: including geological and geophysical (G&G) and intangible
drilling costs are fully deductible in the year incurred.
The Income Tax Act requires oil and gas companies to withhold tax at a rate
of 10% on dividends paid. In the repealed Petroleum Act, this provision appeared
to conflict with the provisions therein, which stated that all income taxes including
that on dividends are carved out of the government’s share of production hence a
"deemed" income tax. This position has, however, been remedied by the Petroleum
Act 2019, which under Clause 39 of the Model PSC provides that the government’s
share shall be exclusive of all taxes payable by the contractor therein mandating the
contractor to remit the income tax.

4.7 Capital Gains Tax

In Kenya, capital gains tax, which had been suspended since 1985, was reintroduced
effective January 1, 2015. Gains arising on the disposal of all qualifying assets by
oil and gas companies (except share and license interest disposals, as discussed in
3.3 above) are subject to capital gains tax at the rate of 5%.
64 K. W. Mavuti et al.

4.8 Transfer Pricing

This covers taxes levied against transfers of interest in either oil, gas, and mining
agreements/licenses. Currently, Kenya has a broad transfer pricing regime with no
specifications for the oil and gas sector.

4.9 Value Added Tax (VAT)

The VAT Act No. 35 of 2013 stipulates that registration for VAT is compulsory, where
the annual turnover is expected to be KES 5 million and more in taxable supplies. VAT
is considered a consumption tax levied on designated goods and services with a stan-
dard applicable rate of 16%. The supply or importation of the following goods shall
be considered exempt supplies upon recommendation from the cabinet secretary.
The taxable supplies, exclude motor vehicles imported or purchased for direct and
exclusive use in geothermal, oil or mining prospecting or exploration, by a company
granted prospecting or exploration license in accordance with Geothermal Resources
Act (Cap. 314A), production sharing contracts in accordance with the provisions of
Petroleum (Exploration and Production) Act (Cap. 308) or mining license in accor-
dance with the Mining Act (Cap. 306). These goods are also subject to levies such as
1.5% Railway Development Levy (RDL) paid on all goods imported into the country
and may vary as stipulated in the Finance Act of 2019.

4.10 Withholding Tax on Natural Resource Income

The resident withholding tax rates for royalty or natural resource income are stipu-
lated at five percent of the gross amount payable. Further, the following payments
made by a licensee to a non-resident shall be subject to withholding tax: (i) 20% on
royalties or natural resources; (ii) 10% on dividends; (iii) 15% on interest payments;
and (iv) 12.5% on management or professional fees. Withholding tax on service fees
paid to non-resident subcontractors for services provided to the contractor are at a
rate of 5.625%. However, this does not apply where the non-resident has a perma-
nent establishment in Kenya; in which case, the permanent establishment is liable to
corporation tax at the non-resident rate of 37.5%.
Public Wealth Management and Distribution in Kenya’s Extractives … 65

4.11 Tax Losses

Losses estimated under the tax rules may be carried forward against income from
the same source for a maximum of ten years, including the year in which the losses
arise. It is only for natural resources where losses can be carried back indefinitely.

4.12 Rehabilitation Expenditure

Amounts spent on rehabilitation incurred by a licensee is subject for deduction for

tax consideration. Conversely, if such amounts are removed and reimbursed to the
licensee, it is subject to tax. The approved decommissioning plan is also subject to
income tax.

5 Revenue Allocation and Distribution in Kenya’s

Extractives Sector

The Mining Act, 2016 states that the holder of a mineral right shall pay royalty to
the state according to the prescribed rates set by the government. Mineral royalties
provide monetary compensation to the people of Kenya, as owners of the minerals
until they are won, for the loss of Kenya’s non-renewable asset (The Mining (Royalty)
Regulations 2017). The Mining Act, 2016 provides for sharing of revenue from royal-
ties between the national government, county government, and local communities.
Article 183(5) of the Act declares that the royalties payable shall be apportioned as
follows: (i) 70% to the national government; (ii) 20% to the county government; and
(iii) 10% to the community where the mining operations occur.
In relation to resources under the petroleum sector, the Petroleum Act, 2019
provides for sharing of revenue from upstream petroleum operations to ensure that
the county governments and local communities benefit directly from exploitation of
petroleum resources located in their counties and sub-counties. Upstream petroleum
operations involve the process of exploration, development, and production of crude
oil and natural gas. In particular, Section 58 of the Act stipulates that the national
government’s share of the profits will be shared out as follows: (i) 75% to national
government; (ii) 20% to the county government; and (iii) 5% to the local commu-
nity, payable to a trust fund managed by a board of trustees established by the
county government in consultation with the local community. The Act also mandates
parliament to review these percentages within ten years.
The Energy Act, 2019 also provides for revenue sharing between the national
government, county government, and local communities in relation to geothermal
energy. Specifically, Section 85(3) of the Act stipulates that royalties received by
the national government from geothermal energy shall be paid into the treasury of
66 K. W. Mavuti et al.

the national government and distributed between the national government, county
government and the local community as follows: (i) 20% to the county government;
(ii) 5% to the local community, payable through a trust fund managed by a board
of trustees established by the local community and (iii) the remaining 75% shall be
treated as national revenue to be dealt with in accordance with Article 203 of the
Constitution of Kenya.

6 Managing Kenya’s Extractive Resources Though

a Sovereign Wealth Fund

A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is

commonly established from revenues obtained from natural resources. This revenue
is professionally managed and invested in equity, debt, property, or other areas of
potential growth so as to benefit current and future generations. Kenya’s Constitution
2010 provides for a SWF as a Constitutional Public Fund to be established by an Act
of Parliament under Article 206(1)(a) (Constitution of Kenya 2010). In July 2013,
the Presidential Taskforce on Parastatal Reforms was appointed by the President
of Kenya with the aim of addressing sectoral challenges while achieving govern-
ment policy priorities including developing a framework for the establishment of a
Sovereign Wealth Fund. The creation of a SWF for Kenya is a policy choice that
is consistent with Kenya’s Vision 2030 objectives of achieving greater intergener-
ational equity and prudent management and investment of future natural resources
revenue (GoK 2013). There have been two proposed Sovereign Wealth Fund Bills
in Kenya. These are the National Sovereign Wealth Fund (NSWF) Bill 2014 and the
Kenya Sovereign Wealth Fund (KSWF) Bill 2019.

7 The National Sovereign Wealth Fund (NSWF) Bill 2014

The proposed National Sovereign Wealth Fund (NSWF) Bill 2014 aims to secure
income from current oil, gas, mineral, and other natural resources for future gener-
ations. This will be accomplished through investing in a diversified portfolio of
medium and long-term investments. The fund will aid in building a savings base
to be used for national development, stabilize the economy from excess volatility
in revenues or exports, and enhance intergenerational equity for future generations.
According to the NSWF Bill 2014, the initial start-up capital of the fund shall be 10
billion Kenyan shillings. Additional sources of financing for the fund shall include
capital from the privatization of state corporations, dividends from state corporations,
oil, gas, and mineral revenues allocated to the national government and revenue from
other natural resources.
Public Wealth Management and Distribution in Kenya’s Extractives … 67

The NSWF Bill 2014 proposes the establishment of a professionally managed

mixed commodity and non-commodity fund with three main funds within it. Thirty
percent of the fund deposits will be directed to the Stabilization Fund, forty percent
to the Infrastructure and Development Fund, and thirty per cent to the Future Genera-
tions Fund. These proportions are subject to periodic reviews by the NSWF Council,
who provide advice and general direction about the funds. The main objective of
the Stabilization Fund is to insulate the economy from the impact of volatility in
revenues, including mineral and petroleum revenues. The Infrastructure and Devel-
opment Fund aims to provide funding of infrastructure in Kenya for economic and
social development, while the Future Generations Fund aims to provide funding for
future generations of Kenya with revenue accrued from minerals, petroleum reserves,
and exploitation of other exhaustible natural resources. Moreover, deposits in the fund
will not be used for the government’s day-to-day operations but will be invested to
generate returns for the state.
In relation to the proposed management of the fund, the National Sovereign
Fund Board of Trustees will be established and entrusted with the responsibility
of managing the fund. The Board shall consist of a chairperson appointed by the
president, with the approval of Parliament; the Principal Secretary in the Ministry
responsible for the National Treasury; the Principal Secretary in the Ministry for
planning; three persons appointed by the President; the Chief Executive Officer of
the fund; and the Corporation Secretary (The National Sovereign Wealth Fund Bill
2014). The National Sovereign Wealth Fund Council will provide advice and general
direction to the Board. The Council shall comprise the President, the Cabinet Secre-
tary to the National Treasury, the Cabinet Secretary responsible for Economic Plan-
ning, the Cabinet Secretary responsible for Mining, the Cabinet Secretary responsible
for Energy and Petroleum, the Attorney General, the chairperson of the Board, and
the Chief Executive Officer of the Board (The National Sovereign Wealth Fund Bill
2014).

7.1 The Kenya Sovereign Wealth Fund (KSWF) Bill 2019

Further to the National Sovereign Wealth Fund (NSWF) Bill 2014, the Kenya
Sovereign Wealth Fund (KSWF) Bill 2019 was proposed and was open for comments
from stakeholders and the public in February 2019 via press release by the National
Treasury. This Bill is currently scheduled for submission to the National Assembly
in Parliament for approval. According to Bauer, Olan’g, and Mihalyi (2019) from
the Natural Resource Governance Institute, the proposed KSWF Bill incorporates
elements that promote effective, accountable, and transparent management of natural
resource revenues. Key elements of the Bill include clear objectives, clear deposit
rules, significant public disclosure requirements, and competitive and transparent
selection of external managers.
Similar to the NSWF Bill 2014 proposal, the KSWF Bill 2019 also recom-
mends the establishment of three distinct components of the fund: the stabilization
68 K. W. Mavuti et al.

component, the infrastructure development component, and the urithi (Swahili word
meaning inheritance) component:
• The purpose of the stabilization component is to insulate expenditure of the
national government from fluctuations in resource revenues and manage shocks
that may affect macro-economic stability;
• The infrastructure development component shall provide funding for public sector
infrastructure development priorities to foster a stronger and more inclusive
growth and development; and
• The purpose of the urithi component is to build a savings base for future gener-
ations by providing an endowment to support development when the revenue
from minerals and petroleum is depleted, distributed wealth across generations,
and generated an alternative stream of income to support expenditure on capital
projects for future generations.
These three components have found clearer and better defined objectives, which
is an improvement from previous drafts of the Bill. This seeks to avoid the problem
of ambiguity and potential mismanagement of funds in the specific components.
Further, Section 8 of the Bill provides that at least fifteen percent of the funds in
the holding account will be channeled to the stabilization component; at least sixty
percent to the infrastructure development component; and at least ten percent to the
urithi component. An additional source of funds for each of the components shall be
the investment incomes earned on the respective components.
In addition, the KSWF Bill 2019 states that transfers to the stabilization component
shall cease when it grows to twenty percent of GDP, and the share shall be utilized to
service national debt or may be distributed to either of the two other components. In
situations, where there is a windfall in resource revenues, the windfall may be used
for debt servicing to reduce national debt; transferred to the stabilization component;
transferred to the infrastructure development component to provide basic services
such as education, health care; or transferred directly to Kenyan citizens through tax
cuts (Kenya Sovereign Wealth Fund 2019).
The management of the KSWF shall be assigned to a Board, which shall consist
of a chairperson appointed by the President on nomination by the Cabinet Secretary,
the Principal Secretary to the National Treasury or an alternate appointed by the
Principal Secretary in writing; the Principal Secretary responsible for matters relating
to petroleum or an alternate appointed by the Principal Secretary in writing, Governor
of the Central Bank or an alternate appointed by the Governor in writing, three
other persons appointed by the Cabinet Secretary from outside of government, and
the Chief Executive Officer who shall be an ex-officio member with no rights to
vote. The Bill provides clear and comprehensive Board mandates and procedures;
this too has been hailed a considerable improvement on previous drafts of the Bill.
With the management of the KSWF outlined under the Bill, it is proposed that the
administration of the fund be governed by the Public Finance Management Act as
well as the KWSF Bill 2019.
Public Wealth Management and Distribution in Kenya’s Extractives … 69

However, the KSWF Bill 2019 has been critiqued for having inadequate indepen-
dence and oversight. This is because all board members are either directly or indi-
rectly nominated by the Office of the President, including the auditor-general who
audits the fund. Bauer et al. (2019) have recommend ensuring at least three board
members are nominated by non-executive bodies, e.g., parliament or professional
associations. Further, as drafted, the KSWF Bill 2019 proposes a Board that includes
the Principle Secretary of Petroleum but not the Principle Secretary of Mining, yet
the Bill speaks of funds obtained from mineral and petroleum resources.
Other areas for improvement are identified as: a need to reduce asset manage-
ment risks because the Bill does little to provide processes that cushion against or
mitigate high-risk investments; a need to improve the aspect of transparency and
accountability of the management and administration of the fund, more specificity
for instance the need for guidelines as to what constitutes "significant depletion" of
mineral and petroleum resources; and a general need to highlight principles of sustain-
able development. The investment management issue is particularly a concern when
dealing with the urithi component; of note, the Bill does not provide for "withdrawal"
from the component but rather "transfers" which shall be invested in accordance with
the provisions of the Bill. The Bill does not go into detail about these transfers, which
may need more detailed procedures when regulations are rolled out. Many of these
areas of improvement might be considered in upcoming drafts as many stakeholders
have headed the call by the Treasury to provide comments on the Bill. At the time of
publication of this edited book, the authors remain vigilant for the revised versions.

7.2 Kenya Sovereign Wealth Fund Draft Policy 2019

There is also the Kenya Sovereign Wealth Fund (KSWF) Draft Policy 2019. The
National Treasury has called for comments from stakeholders. In its current draft,
the policy outlines its objectives to guide the utilization of natural resource income
for inclusive growth and development and to secure income from current resources
for future generations. The Draft Policy states that the scope covers revenues from
the petroleum and mining sources payable to the national government. The scope of
the KSWF Bill and Draft Policy has been a recurrent area of concern and issue with
stakeholders requiring a clear and unambiguous provision as to whether they cover
all mineral and petroleum revenues or only surplus revenues. As currently drafted,
the KSWF Bill 2019 and the KSWF Draft Policy 2019 provide that they cover mineral
and petroleum resources payable to the national government presupposing that this
means all mineral and petroleum revenues. One of the obvious issues that arises is
the matter of either complementarity or conflicting provisions with the Mining Act
2016 and the Petroleum Act 2019 with regard to the management of mining and
petroleum revenues.
70 K. W. Mavuti et al.

8 Conclusion

Kenya’s public wealth management systems for the extractives sector have seen and
continues to see much positive growth and experience legislative review to reflect
such growth. The Constitution of Kenya 2010, the Petroleum Act 2019, the Mining
Act 2016 as well as other relevant pieces of legislation and policies continue to
propel the country further into sustainable and effective management of mineral
and petroleum resources for the benefit of the current population as well as future
generations. A 2019 Bill proposes a Sovereign Wealth Fund for Kenya, but has not
yet been approved at the time of this writing. However, there is still much room
for improvement in the legislation and regulations as the landscape of the Kenyan
extractives sector changes.
Kenya has made an admirable effort to propose ways in which Kenya’s resources
can be managed thus ensuring economic stability and guaranteeing future genera-
tions benefit from Kenya’s current natural resources. There remain high expectations
across stakeholder groups for the principles of responsible leadership, good gover-
nance, and sustainable development outlined under the Constitution of Kenya 2010
to emanate from the management of extractives wealth.

References

Bauer, A., Olan’g, S., & Mihalyi, D. (2019, March 6). Kenya proposes transparent, but risky, new
sovereign wealth fund. Retrieved from Natural Resource Governance Institute website: https://
resourcegovernance.org/blog/kenya-proposes-transparent-risky-new-sovereign-wealth-fund.
Deloitte. (2014). Kenya’s petroleum fiscal regime. https://www2.deloitte.com/content/dam/Deloitte/
ke/Documents/tax/tax_Kenya_petroleum_fiscal_regime_2014.pdf.
Deloitte. (2016). Oil and gas taxation in Kenya. https://www2.deloitte.com/content/dam/Deloitte/
global/Documents/Energy-and-Resources/gx-er-oil-and-gas-taxguide-kenya.pdf.
EU-UN Partnership. (2012). Toolkit and guidance for preventing and managing land and natural
resources conflict. EU and The United Nation Interagency Framework Team for Preventive Action.
GoK. (2013).Report of the presidential taskforce on Parastatal Reforms. Retrieved from https://
www.cofek.co.ke/Report%20of%20The%20Presidential%20Task%20force%20on%20Parasta
tal%20Reforms.pdf.
Government of the Republic of Kenya, GoK. (2010). Constitution of Kenya. Government Printers,
Nairobi: Kenya.
Government of the Republic of Kenya, GoK. (2014).The national sovereign wealth fund bill, 2014.
Government of the Republic of Kenya, GoK. (2016a). Draft National Extractive Policy. Ministry
of Mining, Nairobi: Kenya.
Government of the Republic of Kenya. (2016b). Mining and minerals policy. The popular version.
Retrieved from https://www.idlo.int/sites/default/files/pdfs/highlights/Kenya%20Mining%20P
olicy%20Popular%20Version-LowRes.pdf.
Government of the Republic of Kenya. (2016c). The mining (royalty) regulations, 2017.
Government of the Republic of Kenya, GoK. (2018). The Tax Laws (Amendment Bill, 2018.
Government Printers, Nairobi: Kenya.
Government of the Republic of Kenya. (2019a). The energy act, 2019. , Pub. L. No. Kenya Gazette
Supplement No. 29 (Acts No. 1).
Public Wealth Management and Distribution in Kenya’s Extractives … 71

Government of the Republic of Kenya, GoK. (2019b). Petroleum Act No. 2 of 2019. Government
Printers, Nairobi: Kenya.
Government of the Republic of Kenya, GoK. (2019c). Mining Act No. 12 of 2016. Government
Printers, Nairobi: Kenya.
Government of the Republic of Kenya, GoK. (2019d). Economic survey. Government Printers,
Nairobi: Kenya.
Government of the Republic of Kenya, GoK. (2019e). The Finance Act No. 23 of 2019. Government
Printers, Nairobi: Kenya.
Government of the Republic of Kenya, GoK. (2019f).Draft Kenya sovereign wealth fund bill, 2019.
Government of the Republic of Kenya, GoK. (2019g). Draft Kenya sovereign wealth fund policy,
2019.
Harraz, H. Z. Petroleum laws: Types of international petroleum contracts (Slideshare) https://www.
slideshare.net/hzharraz/topic-4-types-of-petroleum-contracts-agreement
International Monetary Fund, IMF. (2012). Fiscal Regimes for extractive industries: Design and
implementation. IMF, Washington D.C: USA
Kenya National Bureau of Statistics. (2019). Economic survey 2019. Retrieved from Kenya Ministry
of Energy. (2018). The State Department of Petroleum. Retrieved from Ministry of Energy
website: https://energy.go.ke/?p=328
Ministry of Petroelum and Mining website. https://www.petroleumandmining.go.ke/contact-us/
Muchiri, G. Raxation in the upstream oil and gas sector. https://www.oraro.co.ke/2018/09/14/tax
ation-in-the-upstream-oil-and-gas-sector/.
National Bureau of Statistics website. https://www.knbs.or.ke/?wpdmpro=economic-survey-2019
Natural Resource Governance Instituted, NRGI (2015). Fiscal Regime design: What revenues
government will be entitled to collect. RGI Reader.
Petroleum Economist. (2019). Kenya enters the oil business. https://www.petroleum-economist.
com/articles/politics-economics/africa/2019/kenya-enters-the-oil-business
Sigei, G. C. The taxation of the extractives industry (mining, oil and gas), 4th annual
tax summit. https://summit.kra.go.ke/wp-content/uploads/2018/10/Taxation-of-the-Extractive-
Industries-Mining-oil-and-gas.pdf.
Tullow Oil Kenya website: https://www.tullowoil.com/operations/east-africa/kenya
United Nations Conference on Trade and Development, UNCTAD. (2012). Extractive industries:
Optimizing value retention in host countries. UNCTAD, Geneva: Switzerland.
Wanyagathi Maina, A. (2019). The Kenyan tax regime for the oil and gas sector: An international
tax perspective to policy and practical challenges. Revista de Derecho Fiscal n. 14, 203–219,
enero-junio de.
World Bank. (2007). Contracts for Petroleum Development, Part 2. https://siteresources.worldbank.
org/INTOGMC/Resources/cambodia_oil_gas_newsletter_8.pdf
Overview of Extractive Resources
Management in Indonesia

Rivana Mezaya, Yudo Anggoro, Wisnu Jaluakbar, and Wulan Asti Rahayu

Abstract Since the first drill that struck oil in 1884, the extractive industry has been
the key contributor to the Indonesian economy. Being blessed with natural resources,
the Indonesian Constitution strictly mandates these resources to be used for the
welfare of the people with the Government acting as the representative of the people,
placed as the guardian of these natural resources. The regulatory regimes over the two
main extractive sectors, oil and gas as well as minerals and coal, have experienced
changes over the years. These changes correspond to the political changes that the
country was experiencing, from being a newly independent nation to a reformed
democracy with a focus of decentralising power.

1 Introduction

Since the first drill that struck oil in 1884, the extractive industry has been the key
contributor to the Indonesian economy. Being blessed with natural resources, the
Indonesian Constitution strictly mandates these resources to be used for the welfare
of the people with the Government acting as the representative of the people, placed
as the guardian of these natural resources. The regulatory regimes over the two main
extractive sectors, oil and gas as well as minerals and coal, have experienced changes
over the years. These changes correspond to the political changes that the country

R. Mezaya (B) · Y. Anggoro · W. A. Rahayu

School of Business and Management, Bandung Institute of Technology, Bandung, Indonesia
e-mail: [email protected]
Y. Anggoro
e-mail: [email protected]
W. A. Rahayu
e-mail: [email protected]
W. Jaluakbar
SKK Migas, Taskforce of Upstream Oil and Gas Business Activities, Jakarta Selatan, Indonesia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 73
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_4
74 R. Mezaya et al.

was experiencing, from being a newly independent nation to a reformed democracy

with a focus of decentralising power.
Nevertheless, the Constitutional mandate did not change, granting ownership of
natural resources to the State, and the Government as the Mining Authority. However,
third-party involvement in the sector has always been deemed to be important espe-
cially with considerations of requirements of capital and technology. Arguably,
regimes of Production Sharing Contracts for Oil and Gas, and Contracts of Works
for Mineral and Coal, are the answer to this. After decades of growth and the success
of the extractives industries, peaking in the 1980s and 1990s, Indonesia’s production
started to decline particularly in response to low numbers of exploration permits and
further investment. This, coupled with rapidly increasing demands, led to Indonesia
becoming an importer of oil. This trend came at a time where political and regime
changes were made. Despite the trend, Indonesia still has significant reserves of
resources. However, while it is yet to maximise the management of its natural
resource profits, it has improved its management of profit sharing between the Central
and Regional Governments. It is yet to explore and adopt other fund management
approaches such as establishing funds to further boost the economic impact of its
natural resources. In this chapter, we examine how extractive resources are regulated
in Indonesia, but first we offer an overview of sovereign wealth funds internationally.

2 Overview of Sovereign Wealth Funds

Sovereign Wealth Funds (SWF) are a government-saving fund separate from the
State’s budget and managed to make some particular purpose investment to gain
maximum returns (Devlin and Brummit 2007). Butt et al. (2008) (cited in Alhashel
2015) define SWFs not only from the purpose point of view, but also from the source
of the Fund itself. They state that SWFs are the state-owned investment vehicle that
invests globally in various types of assets ranging from financial to real to alternative
assets. These investment vehicles are usually funded by commodity export revenues
or the transfer of assets directly from official foreign exchange reserves. In some
cases, government budget surpluses and pension surpluses are also transferred into
SWFs. Lowery (2007) (cited in Griffith-Jones and Ocampo 2008) provides a sharp
definition of SWF and highlights the way SWFs must be managed separately from
official foreign exchange reserves. SWFs must be invested for long term sustainable
profit and target high risk, high return investment so that it can grow the wealth of
the State (Kimmitt 2008; IMF 2007, cited in Griffith-Jones and Ocampo 2008).
From these definition statements, we can conclude that there are several critical
success factors for the sustainability of SWFs. The first essential factor is the source of
funds must be able to guarantee the continuity of foreign exchange surplus. Second,
the economic purpose is a fundamental reason why a nation develops a SWF. The
third factor is the way SWFs are managed, which includes who has the primary role
in making an investment decision and the relationship of a SWF to the State budget.
Overview of Extractive Resources Management in Indonesia 75

The last factor is how the SWFs are invested and whether the investment results build
better wealth of state or social development.
Over the past few years, the existence and rapid development of Sovereign Wealth
Funds has attracted increasing attention. Presently, the total number of SWFs oper-
ated globally is around 80 and those are valued at $8 Trillion (2018) (SWFI 2018,
cited in Bahoo et al. 2019), which increased 2.5 times compared to 5 years before
(around $3 Trillion in 2013) (Truman 2009: IFSL 2009, cited in Gould 2010). The
total funds raised in SWF around the world exceed hedge funds and private equity
firms. At 2017, SWF doubled the overall hedge fund amount and tripled the size
of private equity funds (Megginson and Gao 2019). SWFs have existed since 1953
when the first one was established in Kuwait under the name Kuwait Investment
Authority to manage the country’s oil revenue surplus. Three years later, the Pacific
Island of Kiribati developed its own SWF called the Revenue Equalisation Reserve
Fund (RERF). Following these two initial countries, in the 1970s, many oil-exporting
countries, particularly in the Middle East, set up their own SWFs.
According to Aizenman and Glick (2009), the increasing price of commodities,
mainly oil, is one reason behind the recent high accumulation of foreign assets in
SWFs. Thus, it is not surprising that the number of SWFs tends to increase sharply
in periods when the oil price is high. The second reason behind the high number of
foreign assets in SWFs is the hoarding of foreign exchange excess by non-natural
resources countries for precautionary motives where they transfer some parts of them
to particular investment vehicles to gain high profit. Based on Griffith-Jones and
Ocampo (2008), commodities, mainly oil and gas, recently accounted for approx-
imately 70% of the total value of SWFs. However, Bahoo et al. (2019) observed
that commodities only contribute to around 55%, while 33% are accounted for by
non-commodities, and 12% held by other types of assets. One country with an active
SWF in Southeast Asia is the non-commodity nation of Singapore. Hunt’s (2016)
(cited in Megginson and Gao 2019) analysis of Singapore’s SWF is that it is one
of the most effective funds internationally, able to increase its state domestic social
economy under the Temasek Holding and Singapore Investment Corporation. These
two funds contribute to 2% of Singapore’s GDP and 12–15% of the government’s
annual operating budget. Hence, through its SWF, the Singapore Government can
better finance its social expenditure without increasing the tax burden on its citizens,
thereby improving social welfare.
On the other hand, oil-producing countries that manage their revenue under SWFs
are dominated by developing countries. Examples of developing nations that have
successfully initiated SWFs from the extractives industry include Algeria, Azer-
baijan, Botswana, Brunei, Chile, Gabon, Iran, Kazakhstan, Kiribati, Kuwait, Libya,
Nigeria, Oman, Qatar, Sudan, Saudi Arabia, UEA. Timor Leste and Trinidad Tobago.
There are two fundamental economic purposes for developing SWFs from natural
resources revenue. The first one is the Stability Fund, which aims to reduce the
impact of natural resources revenue volatility (linked to the pro-cyclical pattern of
export price or volume). This means the government will accumulate resources when
the rates of export are high and pay when they are low (Griffith-Jones and Ocampo
2008). The second economic purpose is the Saving Fund, which is intended to store
76 R. Mezaya et al.

wealth for consumption or investments of future generations. Timor Leste and Kiri-
bati are two countries in the Pacific area, which are focusing on the savings purpose
rather than the stability purpose. However, in the implementation process, these two
purposes cannot be distinguished.
Some oil-producing countries that utilise SWFs to manage government revenue
from exhaustible natural resources to improve country or state development have
aided intergenerational equity and macroeconomic stability, while others have strug-
gled to bring about improvements in wellbeing (Gould 2010). The United Arab
Emirates and Saudi Arabia show the highest SWFs with the source of funding stem-
ming from the extractives industry. Those two nations successfully developed their
country by using the revenue from the extractives industry due to the huge number
of oil-products. On the contrary, there are some countries in the Pacific, which aim
for similar things. Table 1 describes those country efforts in managing SWFs coming
from natural resources.
From Table 1, two main causes lead to the decreased performance of SWFs value.
First, integrating SWFs and the State budget without a proper and clear rule on
withdrawal procedure, as was experienced by Kiribati and Papua New Guinea (before
the year 2000). The second is the wrong investment strategy, which was experienced
by Nauru. Across those Pacific countries, Timor Leste is an excellent example in
managing SWFs. This country provides regular reports so that the SWFs are well-
monitored. Even though the investment strategy needs to be improved by doing a
diversification, current strategy has led to an increase in economic growth.
In terms of fund management, the key factors that differentiate SWFs from other
investors are their independent arrangements, ownership, management and control
systems. SWFs are directly or indirectly owned and controlled by the government
or government representatives (Bahoo et al. 2019). Some countries tend to manage
SWFs directly via the central banks and/or finance minister (Truman 2009). Norway’s
SWF stems from the government pension fund-global and is managed by the govern-
ment indirectly through a national bank. Still, it is controlled by the Norwegian
parliament.
SWFs investment strategy is aimed at minimising exposure from the oil and
mining industry. The conventional investment strategy will rely on a financial instru-
ment or bilateral relationship on financing the infrastructure development in the
neighbouring country. Another alternative of SWFs investment strategy, consid-
ered relatively safe, is to allocate the funding on the developed country instrument,
which cover financial instruments such as bonds and property investment. Recently,
PWC (2019) argue that SWFs investment must be diversified into new technology
development by financing the new technology start-up.
Several factors must be well-evaluated to have an excellent SWF performance,
which can give sustainability improvement for state wellbeing and country economic
growth. One of them has a steady source of funds that can provide continuous supply
for SWFs. The precise economic purpose also being a critical point that must be
decided before managing SWFs, especially when the fund is coming from the extrac-
tives industry in which we have to deal with price volatility. The third important factor
is in defining the role of SWFs management. Robust procedure on the use of SWFs to
Overview of Extractive Resources Management in Indonesia 77

Table 1 SWFs management in Pacific Countries

Country Source of Funds SWFs name SWFs management impact
and investment
Kiribati Phosphate mining Revenue Since economic is increased
Equalisation dominated by public drawdowns and
Reserve Fund sector, SWFs equity market falls,
integrated with state combined
budget (fiscal significant
surpluses a re added domestic inflation
to the fund and any due to high
budget shortfalls are international food
financed via and fuel price in
drawdowns, the real 2008 have reduced
per capital value is the rea1 per capita
kept constant value of RERF
Nauru Phosphate mining Nauru Phosphate Poor NPRT Investment loses at
Royalties Trust management by the same time when
(NPRT) investing in phosphate price
international was falling down in
property rather than 90’s caused the
fixed-income assets fiscal deficits, as
or equity composed government
of four funds: LT revenue fel1 and
Investment Fund, expenditure
The Lane Owners’ continued to
Royalty Trust Fund, increase
The Housing Fund,
and the
Rehabilitation Fund
Timor Leste Economy is The Petroleum BPA and the Transfer from the
dominated by an Fund established in government publish Petroleum Fund
offshore oil and gas August 2005 to quarterly report to Finance around
sector; non-oil manage royalty and have a transparency 90% of the National
economy: tax revenue from on fund Government’s
subsistence oil and gas performance and budget. Increase
agriculture and currently on the annual economic
government process of having growth to an
consumption and monthly pubic average 9% over
investment report. Being a 2007–2009
member of There may be
International Forum strong case for
of SWF investing more in
Al1 investments are Timor Leste’s
putting on physical and human
developed country capital. With such a
government bonds, low capital base,
10% of the fund the social return
may be invested in form such
equities-not enough expenditure could
to maintain the be higher than the
domestic financial returns the
purchasing power, Petroleum Fund
need investment can achieve (Collier
diversification et al. 2009)
(continued)
78 R. Mezaya et al.

Table 1 (continued)
Country Source of Funds SWFs name SWFs management impact
and investment
Papua New Dominated by PNG Mineral Tax, Royalty, and The Fund’s Capital
Guinea resource extraction, Resource Dividend Payments then used to finance
primarily gold, oil, Stabilisation Fund from all mining and the budget. The
and copper (MRSF) established oil enterprises were MRSF was held by
in 1974 placed in the MRSF in the Bank of PNG
rather than in (central bank), not
consolidated invested, and was
revenue. Aim of the managed by
fund was to reduce selected
the impact of departmental
mining revenue secretaries. The
volatility on the Fund was
budget (Parsons and effectively close in
Vincent 1991) 1999, with final
balance used to
reduce the
country’s
ballooning debt
Source https://treasury.gov.au/publication/economic-roundup-issue-1-2010/economic-roundup-issue-1-
2010/managing-manna-from-below-sovereign-wealth-funds-and-extractive-industries-in-the-pacific

cover state budget can avoid a significant decrease in the value. However, in terms of
investment strategy, some countries such as Singapore and Norway have proven that
being flexible and diversification will empower the SWFs impact on state develop-
ment. In the end, the ability for SWF manager to dance in the rain instead of waiting
for the storm to pass will decide the success of Sovereign Wealth Funds management.

3 Ownership of Extractive Resources in Indonesia

Extractive resources in Indonesia is owned by the State and considered public goods.
This principle is enshrined in Article 33 of the 1945 Constitution of the Republic
of Indonesia (“Constitution”), which states that “branches of production which are
vital to the State and affect the livelihood of the majority of the people shall be
controlled by the State” and “land, waters and natural resources therein shall be
controlled by the State and shall be used for the maximum welfare of the people”.
Under these clauses, the rights of ownership to the natural resources are given to
the State with the purpose to be used for the welfare of the Indonesian people. This
Article embodies the principles of “economic democracy” in which the economy is
organised as a collective endeavour, and prioritises welfare of the people. Through
this provision, the right to mineral resources is separated from the rights to the land.
The implementing laws of Article 33 of the Constitution relating to extraction
of natural resources were issued in 1960 identifying two categories of the mining
sector: (1) minerals, and (2) oil and natural gas. Minerals were regulated through
Overview of Extractive Resources Management in Indonesia 79

Law No. 37 of 1960 while oil and gas were regulated through Law No. 44 of 1960.
These laws were consistent with the Constitution, granting the rights to the natural
resources to the State, not to the holder or owner of the land, while providing an
opportunity for the private sector to extract natural resources through the granting of
economic rights from mining activities (although for Oil and Gas, this early law gives
authority to mine or mining rights to State Enterprises, which could then contract
with third party (private corporations) as contractors).
These laws experienced changes throughout the years, and the latest changes
happened after Indonesia went through a reformation era starting in 1998, which
saw more efforts to democratise the economy through liberalisation and lessen the
role of the Government in business operations. These newer laws are Law No. 22
of 2001 concerning Oil and Gas (“Oil and Gas Law”) and Law No. 4 of 2009
concerning Mineral Resources and Coal Mining (“Mining Law”). Nevertheless, the
newer laws still maintain the Constitutional mandate regarding ownership.
The term “State” as owner of natural resources based on the Constitution is further
defined in implementing regulations. For Oil and Gas, the Oil and Gas Law regulates
that “The control by the state as… shall be conducted by the Government as the
holder of the Mining Authority” with Government being the Central Government
of the Republic of Indonesia. While the upstream business activities are opened for
private sector participation through a Cooperation Contract (ref. Article 6 paragraph
(1) of the Oil and Gas Law), the Cooperation Contract shall at least contain the
following requirements:
a. the ownership of natural resources shall remain in the hands the Government up
to the point of transfer;
b. the management control of operations shall be by the Implementing Body;
c. all capital and risk shall be borne by the Business Entity or Permanent
Establishment.
From these provisions, it can be concluded that for upstream activities:
• Mineral rights are with the State;
• Mining rights are with the Government through the Ministry of Energy and
Mineral Resources; and
• Economic rights are given to Contractors/Oil Companies.
In this context, Mineral Rights are the rights that deal with the ownership of the
minerals in the ground (in situ); Mining Rights are the rights to bring the minerals to
the surface; and Economic Rights deal with the ownership of the minerals once they
have been mined (Utomo 1999). Under the Cooperation Contract, mineral rights,
mining rights, and also the economic rights are vested in the state. The investor only
realises economic rights based on its working interest share of production at the point
of export once commercial production commences (Machmud 2002).
Meanwhile in the Minerals and Coal sector, the 2009 Mining Law no longer
adopts contractual regime as in the Oil and Gas Law. The Mining Law regulates that
minerals and coals are exploited through a licencing regime. The mineral rights are
controlled by the Government while the economic rights are with those who have
80 R. Mezaya et al.

obtained the licence (Izin Usaha Pertambangan or IUP). This 2009 Mining Law is a
departure from the previous regime where minerals and coal were exploited through
Contracts of Works where private corporations entered into contracts directly with
the Government to be given a concession to a specific area of work. Even though it
is a concession-like contract, the Contract of Works is not a common concessionary
contract since it is considered rights in personaam not rights in rem, which can be
treated as a property and mortgaged (see Kusumaatmadja 2013).
The concessionary-like regime in the mineral and coal sector required royalty
from the private corporation deriving from the awarding of concession rights over
a certain area and the natural resources within. The title to the natural resources
from the Government passed at the point of extraction (different with a common
concession contract where title passes when the concession is given even before
extraction). This is a different approach from the Oil and Gas Law that adopts a
production sharing contract approach where title passes to the investor to its share of
production at the point of export. The investor assumes all the pre-production risk and
recovers both cost and profit share from production, in predetermined proportions,
once commercial production from the contract area commences (Machmud 2002).

4 Main Extractive Resources in Indonesia

Indonesia is rich in natural resources, particularly in hydrocarbons and mining.

The extractive industries contribute 7% to the Gross Domestic Products (“GDP”),
totalling 21% of export, amounting to 10% of government revenue and providing
1.2% of total employment in the country. Table 2 lists Indonesia’s extractive
resources.

4.1 Oil and Gas

Indonesia was a significant oil-exporting country that joined OPEC in 1962. Its
oil peaked in 1995 where the production was 1,624,000 barrels of oil per day. In
the following decade, it experienced a decline in oil and gas production attributed
largely to the lack of exploration activities and investment in the sector. The 1998
Asian economic crisis as well as the fundamental reform in government that followed
contributed to this lack of investment since it provided a lack of certainty for investors.
Indonesia made fundamental changes to its Oil and Gas regime in 2001 through the
Oil and Gas Law, and to its mining regime in 2009 through the Mining Law. It also
changed its geothermal regime twice in a decade, in 2006 and 2015 through the
Geothermal Law.
This decline in production happened while Indonesia experienced a rapid increase
in its domestic consumption. By 2003, Indonesia had become a net-importer of oil.
Nevertheless, Indonesia still has a significant amount of oil reserves. Indonesia sits
Overview of Extractive Resources Management in Indonesia 81

Table 2 Indonesia’s extractive resources

Commodity Reserves Unit Significance
Oil 7390 Million stock tank barrels Indonesia ranks as the world’s 27th
largest in terms of crude oil reserves
Gas 150 Trillion standard cubic feet Indonesia ranks at the world’s 14th
largest in terms of natural gas
reserves
Gold 4248 Metric tonnes Indonesia ranks as the world’s 5th
largest in terms of gold reserves
Lead 1.6 Metric tonnes Indonesia ranks as the world’s 2nd in
terms of lead reserves
Zinc 7 Metric tonnes
Nickel 577 Million metric tonnes
Bauxite 180 Million metric tonnes
Silver 4104 Metric tonnes
Copper 4161 Million metric tonnes
Coal 31.4 Billion metric tonnes Indonesia ranks as the world’s 10th
largest in terms of coal reserves
Tin 0.7 Metric tonnes
Source EITI Indonesia, https://eiti.org/indonesia#extractive-industries-contribution

at number 26 of the top crude oil-exporting countries in 2017, with export value in
the amount of USD 5.2 billion or 0.6% of the total export value in the world for
crude oil. While for gas, Indonesia sits at number 8 with an export value of USD 8.9
billion or 3.8% of the total world’s export.

4.2 Minerals and Coal

Indonesia has a significant amount of minerals and coal reserves. It is an important

player in the global mining industry with significant production of coal, copper, gold,
tin and nickel. It is the second-biggest coal exporter after Australia, exporting USD
17.9 billion worth of coal in 2017 or 16.1% of the world’s production. It holds 3%
of the world’s coal reserves and is ranked 10 for the world’s largest reserve.
Based on the data reconciliation in the coal sector at the end of 2018, the Ministry
of Energy and Mineral Resources stated that Indonesia has 116 billion tonnes of
coal resources and 37 billion tonnes of coal reserves, which can last for 76 years
based on the latest production target of 486 million tonnes in the year 2018. In 2018,
the Mining Industry contributes 4.98% to the Indonesian GDP and made up 16% of
Indonesian exports.
82 R. Mezaya et al.

5 Fiscal Regime in the Extractive Resources Industries

in Indonesia

The fiscal regime in Indonesia varies depending on the commodity, such as

a. For the Oil and Gas sector, the fiscal regime is Production Sharing Contract (PSC)
adopting an in-kind basis approach;
b. For the Mining sector, the fiscal regime is Royalty and Tax (R/T) which adopts
cash mechanism.

5.1 Oil and Gas

Fiscal regimes relating to the extractive resources are mostly designed to balance the
interests amongst labour and capital as well as land/resource owners. The Govern-
ment as land/resource owner also plays a role as the policymaker who has an interest
in capturing as much economic rent as possible through various levies, taxes, royal-
ties and bonuses. At the same time, the Government needs to capture this economic
rent efficiently while considering gains for the private sector, which plays a role as a
contractor to extract these resources. The private sector is exposed to the high risks
in the extractive resources industries; thus, the profit margin should be large enough
to accommodate the high risks.
The Government has tried to capture the economic rent from the upstream
activities through the following:
a. signature bonuses or production bonuses during the production phase;
b. royalties/first tranche petroleum;
c. production sharing;
d. taxes;
e. state participation (indirect, through state-owned enterprises).
Below is the illustration for the allocation of revenues and profit in the Cost
Recovery scheme (Fig. 1).
Based on the considerations above, the Government created a fiscal system to
address an important question of whether an exploration or development is feasible.
The Oil and Gas Law differentiates upstream business activities (exploration and
exploitation) and downstream business activities (processing, transport, storage and
commerce) and stipulates that upstream activities are controlled by the Government
through “Joint Cooperation Contracts” between the business entity and the executing
agency. Downstream activities are controlled by business licences issued by the
regulatory agency for downstream businesses.
After previously adopting a concessionary system, Indonesia first introduced the
Production Sharing Contract (PSC) to the world as a fiscal regime in the upstream oil
and gas sector in 1961. The Indonesian PSC model was adopted by many countries,
including Chile, Guatemala, Israel, Ivory Coast, Egypt, India, Peru, Libya, Malaysia,
Overview of Extractive Resources Management in Indonesia 83

1. Bonuses
2. Royalties
3. production
sharing
Economic Government Take
4. Taxes
Profits
5. Government
Total
participation
Revenues
6. Other
Company Take
Exploration Cost
Total
Total Development Cost
Cost **)
Cost*) Production Cost
Abandonment Cost

*) Total Cost from Company’s point of view

**) Total Cost from Government’s point of view

Fig. 1 Cost recovery scheme

Syria, Trinidad, Oman and Sudan (Machmud 2002).1 The PSC was designed with
consideration that oil and gas is a high risk as well as capital and technology-intensive
business, thus needing private sector participation. To address this, the sector needs a
system that is flexible to changes in the economy but also able to provide long-term
certainty. The issue of ownership is also one of the key considerations in selecting the
PSC regime compared to the concessionary regime. Under a concessionary system,
the Contractor has the title to mineral resources (e.g. crude oil) produced against
which it pays royalties and taxes. Under the PSC system, the Government retains
title to the mineral resources as mandated by the Constitution.
Under the PSC system, the Government and Contractor agree to split the produc-
tion by a certain percentage measured in terms of revenue. Operating costs are
recovered from production through Cost Recovery as defined by the PSC, and the
Contractor has the right to take and separately dispose its shares of oil and gas (with
title to the hydrocarbons passing at the point of export or delivery). The PSC sets the
share or take of the Contractor in a fixed percentage of gross production (before tax). It
is calculated after recovery of the Contractor’s costs under the cost recovery scheme.
Production sharing should not be confused with profit sharing. Profit sharing is often
not advantageous to owners of the resources, as they have no control at all over cost
(Kusumaatmadja 2013). While in the production sharing system, the Government
still controls cost through approval mechanisms of plans of developments and other

1 Tengku Nathan Machmud, The Indonesian Production Sharing Contract: An Investor’s Perspective,

p. 39.
84 R. Mezaya et al.

procurement processes considering that these costs would be then recovered after
production.
A PSC involves the sharing of crude production between the Government and
Contractor, which consists of the following financial terms:
a. Cost Recovery
Expense generally allowable for cost recovery includes:
1. Current year operating cost from a field of fields with a previous Plan of
Development (PoD) Approval by the Government, intangible drilling cost on
exploratory and development of wells, as well as the cost of inventory when
landed in Indonesia.
2. Depreciation of capital cost calculated at the beginning of the year during
which the asset is Placed into Service (PIS). The depreciation method is either
the declining balance or double decline balance method, and based on individual
asset amounts multiplied by depreciating factor as stated in the PSC.
3. Un-recouped operating and depreciation cost from previous years. If there
is not enough production to recoup cost, these may be carried forward to the
following year with no limit.
b. Investment credit
An investment credit (IC) is available on direct development and production capital
cost as negotiated and approved by Government. The credit ranging from 17%–
55% of the capital cost of development, transport and production facilities which
were historically available. The IC must be taken in oil and gas in the first years of
production but can generally be carried forward to later years.
The Ministry of Energy and Mineral Resources (MEMR) issued Ministerial Regu-
lation No. 08/2005 on the Marginal Oil Field incentive programme. The regulation
provides contractor with an additional cost recovery of 20% when working with
marginal oil field. This treatment is likely to be applied similarly to an investment
credit (i.e. cost recoverable but taxable).
c. Equity share
Any production that remains after IC and cost recovery is split between the Govern-
ment and the Contractor. The Indonesian PSC has evolved through five “generations”
with the main change being the production sharing split. The second and third gener-
ations of PSC, which were issued after 1976, removed the earlier cost recovery cap of
40% of revenue and confirmed an after tax oil equity split of 85/15 for Government
and the Contractor, respectively.
Below is the comparison between generations of PSCs in Indonesia (Table 3).
To most recent, PSC generation is based on the Oil and Gas Law of 2001, which
founded a fundamental change in the Oil and Gas management. Pertamina, the
National Oil Company, which previously acted on behalf of the Government in nego-
tiating with Contractors no longer played that role. The Government established a
separate public entity, BP Migas (now SKK Migas or the Taskforce for Upstream Oil
Overview of Extractive Resources Management in Indonesia 85

Table 3 Generations of PSCs in Indonesia

New PSC Gen IV PSC Gen III (1984) PSC Gen II PSC Gen I
Contracts (incentive (1978) (1966)
% package
1988–1989)
FTP 20% – –
Cost CR 100% 40% CR limit
recovery (no limit)
Equity to be split (before tax)
Government (oil) 71.1538% (oil) 65%
(gas) 65.9091%
42.3077–32.6923% (gas)
31.8181%
Contractor (oil) (oil) 35%
28.8462% 34.0909%
(gas) (gas)
57.6923–67.3077% 68.1818%7
DMO 25% after 25%
allocation 60 months
DMO Fee 10% of export US$ 0.2/bbl Full price for
price first 5 years of
production,
US$ 0.2/bbl
thereafter
IC 17% 17% 20% –
Tax 48% 56% Paid by
contractor
Share of production after tax
Government Frontier: <50 85% (oil) 85% (oil)
MBOPD = 70–65% (gas) 70% (gas)
80%
50–50
MBOPD =
85%
>150
MBOPD =
90%
Contractor Frontier: <50 15% (oil) 15% (oil)
MBOPD = 30–35% (gas) 30% (gas)
20%
5–150
MBOPD =
15%
>150
MBOPD =
10%
86 R. Mezaya et al.

Fig. 2 Changes in Fiscal Regime in Indonesia. Source SKK Migas

and Gas), which is tasked with the management of natural resources and enters into
contracts with Contractors on behalf of the Government. Pertamina with a separate
law became a limited liability wholly owned State-owned Enterprise, which acts as
a Contractor in PSCs. Since 2012, SKK Migas became a quasi-part of the Ministry
of Energy and Mineral Resources based on the Constitutional Court decision to
return the management and supervisory function of the Oil and Gas industry to the
Government through the Ministry of Energy and Mineral Resources, specifically the
Directorate General of Oil and Gas.
There were also several changes in the fiscal regime, as illustrated below (Figs. 2
and 3).
Under the PSC system, the production is split in a way as illustrated by the chart
below:
The arrangement above enables the Government, without risking its own resources
in the beginning, to attract Contractors with capital and technological capabilities
required to extract the natural resources, but still maintain ownership of the resources
at the end.
In 2017, the Government introduced the Gross Split scheme in oil and gas upstream
contracts. The new scheme was introduced in the Minister of Energy and Mineral
Resources Regulation No. 8 of 2017 (“MEMR 8/2017”), which came into force in
January 2017, and is further regulated by its subsequent revisions. The new scheme
departed from the cost recovery mechanism in the previous PSC to a direct split
between Government and Contractor’s take of the production (before tax) regardless
of Contractor’s operational costs. The Gross Split scheme was first applied to the
Offshore North West Java in January 2017 in the new PSC where the state-owned
Pertamina took over the contract after the previous PSC expired.
Overview of Extractive Resources Management in Indonesia 87

Fig. 3 Production sharing contract in Indonesia. Source SKK Migas

Table 4 Gross split scheme

Crude oil (%) Natural gas (%)
Government take 57 52
Contractor take 43 48

The Gross Split has two main components that are (a) the base split component;
and (b) the adjustment component that allocates the shares as follows (Table 4).
The Gross Split scheme also takes into account two additional components, which
are: (a) variable component and (b) progressive component. Variable components
consider factors of field development stage, field location, depth of reservoir, avail-
ability of supporting infrastructure, reservoir type, CO2 content, H2S content, gravity,
domestic content during field development and production methods (water injection
or enhanced oil recovery) to adjust the split between Government and Contractor.
While the progressive components are to be adjusted monthly by SKK Migas consid-
ering additional shares available for the Contractors based on a reversed sliding scale
based on cumulative production over a certain period. The higher the cumulative
production, the lower the additional share.
The Government sees that this scheme does not depart from what is required of
extractive resources management as regulated in the Constitution and in the Oil and
Gas Law (Nurtjahyo 2017). The Gross Split scheme maintains ownership title of
the mineral resources in the Government until point of delivery while it maintains
certain control of operational management through SKK Migas. The Contractor is
still responsible to provide capital and bear all the development risks. Under the
88 R. Mezaya et al.

scheme, because there is no cost recovery, SKK Migas will not need to approve all
operational decisions; its approval will be reduced to endorsing the more general
Work Plan and Budget. This kind of relaxation is intended to accelerate bureaucratic
processes in Oil and Gas management, which had been part of the main grievances
by investors about the sector. However, despite not having the cost recovery scheme,
the Gross Split ministerial regulations also provide that the assets acquired by the
Contractor are owned by the Government.
The following chart illustrates the difference between the cost recovery and gross
split schemes (Fig. 4).
In the two years that the scheme was offered, there was very little appetite proven
by the small numbers of interests by Contractors during the new field tendering
process. The public seems to be in a waiting mode for a stronger certainty and
regulation of this scheme, given that the revision to the Oil and Gas Law is still being
discussed in the parliament, despite already being in the legislation priority plan in
2014–2019.

Fig. 4 PSC versus gross split. Source Ministry of energy and mineral resources
Overview of Extractive Resources Management in Indonesia 89

5.2 Mining

The Mineral and Coal sector is regulated by the 2009 Mining Law and its imple-
menting regulations. It adopts a licencing requirement for extraction by private corpo-
rations in the form of Mining Licence (Izin Usaha Pertambangan or IUP) or Special
Mining Licence (Izin Pertambangan Khusus or IUPK). Existing Contracts of Works
was to be converted into IUP or IUPK accordingly.
All IUP or IUPK holders are required to pay production royalties at varying rates,
depending on the mining scale, the production level and the mining commodities
price (PWC 2019). The following is production loyalty rates applicable to IUP and
IUPK holders (Table 5).
In addition to the above rates, holders of IUPK are subject to an additional royalty
of 10%. Other than these royalties, holders of IUP and IUPK are also subject to
certain taxation regime applicable to the mining sector as regulated by Government
Regulation No. 37 of 2018 concerning the Treatment of Taxation and/or Non-Tax
State Revenues in the Mineral Mining Business.
Another fiscal obligation imposed to the mining sector is the export duties that
are tied to the progress of a certain licence holder’s progress in building a refining
facility/capacity. This is due to a new regulation under the 2009 Mining Law that
bans exports of ore. However, the Government relaxed this provision by allowing
some exports of ore subject to export licence and duties while continuing to impose
obligations to the exporters to build refining facilities/capacities domestically.

Table 5 Production royalty

Commodity Production royalty rate (%)
rate
Coal 3–7
• Open pit 2–6
• Underground
Nickel 4–5
Zinc 3
Tin 3
Copper 4
Iron 3
Gold 3.75
Silver 3.25
Iron Sand 3.75
Bauxite 3.75
90 R. Mezaya et al.

6 Management of Funds from Extractive Resources

in Indonesia

Under the Indonesian treasury system, all State revenues are managed by the Ministry
of Finance. The Ministry of Energy and Mineral Resources as the Ministry respon-
sible for the Oil and Gas and Mining sectors will be allocated some budget to execute
its regulatory and supervisory capacity through the State Budget managed by the
Ministry of Finance.
At the time this chapter is written, there is no sovereign or dedicated fund for
extractive resources in Indonesia. State revenue from extractive resources becomes
part of the ordinary State revenue and is used to fund development and operational
programmes as planned in the annual State Budget.
However, Indonesia is in the process of reforming its Oil and Gas Law, a process
it has been undergoing since 2011. In the draft of the revised Oil and Gas Law,2 there
is a chapter on Oil and Gas Fund. Further, regulations on this matter are still unclear,
and are mandated to be governed through subsequent Government Regulation. The
Academic Background section of this draft mentioned the need for the Oil and Gas
Fund and look at the practices of Norway, Timor Leste, Thailand, Kazakhstan, and
Ghana for guidance.
In 2015, the debate about the Oil and Gas Fund took centre stage in the context
of establishing a Renewable Fund. In the 2015 draft of the revised Oil and Gas
Law, it is expressly stated that one of the purposes of the Oil and Gas Fund is
to support renewable energy development in Indonesia.3 However, this expressly
stated purpose is not found in the 2018 draft, which states that the Oil and Gas Fund
is to be used for activities relating to the replacement of oil and gas reserves through
exploration, development of oil and gas infrastructure, as well as oil and gas research
and development.4
The Oil and Gas Fund will consist of certain percentages of5 :
1. First Tranche Petroleum (FTP);
2. Bonuses payable to the central government based on contracts and/or the Oil and
Gas Law; and
3. Any levy payable to the state based on laws and regulations.

2 House of Representative Oil and Gas Law Draft of September 2018, as referred to in Arvirianty
2019.
3 House of Representative Oil and Gas Law Draft of 2015.
4 Article 63 (2), Chapter IV, Oil and Gas Law Draft, September 2018.
5 Article 63 (3), Chapter IV, Oil and Gas Law Draft, September 2018.
Overview of Extractive Resources Management in Indonesia 91

This was already a departure from the previous drafts where the contribution to
the Oil and Gas Fund was to be accrued from a certain portion of total commer-
cial production specially set aside, outside of the portion of the Government or
Contractor.6
The revised draft Oil and Gas Law mandates the making of Government Regula-
tions to further regulate the Oil and Gas Law. This means that even after the enactment
of the revised Law, there will still be some time before the Oil and Gas Fund can
be established, pending the enactment of said Government Regulations. Since the
Law will unlikely regulate a timeline for the Government Regulations, it would be
unpredictable. As a reference, the first Government Regulation enacted under the old
Oil and Gas Law was only enacted three years after, with the latest one only issued
10 years after.7
In the meantime, some local governments have tried to establish their own Oil
and Gas Fund in the form of putting aside some of their portion of oil and gas
revenue sharing fund (dana bagi hasil/DBH) into an endowment fund to be used
to fund development programmes in their specific localities such as in Bojonegoro
and Musi Banyuasin. However, at the time this chapter is written, there has been no
successful establishment of such an endowment fund. There were concerns relating
to committing the amount of funds for a long period of time while their investment
plan is not clear yet.

7 Distribution of Funds from Extractive Resources

to Regions and Other Entities in Indonesia

After the reform of 1998, the Indonesian Government focused on decentralisation

of power to the regions, which also led to a fairer, more proportionate, and efficient
distribution of economic benefits, including the distribution of benefits from extrac-
tive resources. The decentralised government structure in Indonesia is divided into
three main categories: (1) Central Government, (2) Provincial Government and (3)
District (and/or City) Government. By law, the Central Government only holds power
over six matters: foreign policy, defence, security, judiciary, monetary and fiscal and
finally religious affairs (Law No. 32 of 2004 on Decentralisation). Other matters are
reserved for Provincial and District Governments, depending on the scope.
The reformed benefit-sharing mechanism to honour the commitment to decentral-
isation is reflected in Law No. 33 of 2004 concerning Fiscal Balance between Central
and Regional Governments and its implementing regulations through Government

6 House of Representative Oil and Gas Law Draft of 2015, “jumlah tertentu dari hasil total produksi

komersial yang disisihkan secara khusus di luar bagian Pemerintah Pusat dan kontraktor”, trans-
lated as “a certain amount of the total commercial value of the production will be set aside outside
of Government and Contractor’s take”.
7 UU 22/2001 on Oil and Gas, PP 35/2004 on Upstream Oil and Gas Activities, PP 79/2010 on Cost

Recovery.
92 R. Mezaya et al.

Regulation No. 55 of 2005 concerning Fiscal Balance Funding. The Fiscal Balance
Regulations adopt a distribution mechanism known as Revenue Sharing Fund (Dana
Bagi Hasil/ DBH). DBH comes from the revenue post at the National Budget, which
is allocated to the regions based on a certain percentage to fund regional needs in order
to implement decentralised powers (Article 1 point 20 of Law No. 33 of 2004 and
Article 1 point 9 of Government Regulation No. 55 of 2005). The Natural Resources
DBH include DBH from the forestry, fisheries, mining, oil, gas and geothermal
sectors.
In principle, tax, royalties and income directly linked to extractive resources in
Indonesia are collected by the Central Government. This income will be blended
in the National Treasury without specific earmarked uses. The Central Government
will then distribute some of this income to the Regional Governments (provinces or
districts), both those where the extractive resource originated from (the producing
regions) and those who do not produce the extractive resource (the non-producing
regions) to ensure equity for all Indonesians. Income received by the Central Govern-
ment that is used to be the basis of distribution to regional governments is the Net
Operating Income.
DBH is allocated based on the following two principles:
1. “By Origin”, whereas the producing region receives a bigger percentage of
revenue sharing while the other regions in one province receive an aggregate
percentage.
2. “By Actual”, whereas the revenue shared to the regions, both the producing
region and otherwise, is based on realisation of tax and non-tax revenue in the
same year.
The source of DBH that will be distributed to the regions comes from taxes and
extractive resources income. DBH from taxes include those part of the land and
building tax, levies on the acquisition of rights over land and buildings (BPHTB),
and income tax.
Below is DBH mechanism that comes from tax (Table 6).
DBH that comes from natural resources is distributed based on the following
criteria:
1. Forestry, in the form of:
a. Forest Utilisation Business Permit Fee (Iuran Izin Usaha Pemanfaaan
Hutan/IIUPH)
b. Forest Royalties (Provisi Sumber Daya Hutan/PSDH)
c. Reforestation Fund
2. Mining, in the form of:
a. Land Rent
b. Royalty from Exploration and Exploitation
3. Fisheries, in the form of:
a. Commercial Fisheries Charges
Overview of Extractive Resources Management in Indonesia 93

Table 6 Revenue sharing fund mechanism

No. Tax Central Reg. Proportion
Gov. (%) Gov. Province (%) Producing Other Upah
district (%) districts Pungut
(%) (%)
1 Land and 10 90 16.2 64.8 9
building tax
2 Levies on the 20 80 16 64
acquisition of
rights over
land and
buildings
(BPHTB)
3 a. Domestic 80 20 8 8.4 3.6
individual
income
tax (Art.
25 dan
Art. 29)
b. Income 80 20 8 8.4 3.6
tax Art. 21

b. Fisheries Levy
4. Oil extraction
5. Gas extraction
6. Geothermal production, in the form of:
a. Government take
b. Land rent and royalty.
Below is the distribution of natural resources DBH (Table 7).
Aside from the above distribution of funds, the Provinces of Aceh and West
Papua are given an additional 55% for Oil DBH and 40% for Gas DBH due to their
special autonomy status, which should be earmarked to fund education and health
programmes (Ministry of Finance 2017).
Even though the distribution of fund to the regions is already regulated by
percentage, there is still criticism by the regional governments regarding certainty of
income from extractive resources. This is because the actual distribution is conducted
only after the annual financial audit, which overlaps with the State budgeting cycle
for the next year. This means that regional governments often have to use inaccurate
assumptions of projected income to budget for the next year’s spending.8 Another
criticism regarding the portion for the producing regions is that some regions argue
that the central government takes too much of the income from extractive resources

8 https://eiti.ekon.go.id/eiti-untuk-perbaikan-pengalokasian-dana-bagi-hasil-dbh/.
94 R. Mezaya et al.

Table 7 Natural resources revenue sharing fund

No. Types of revenue Central Reg. Gov. Proportion
sharing Gov. (%) (%) Prov. (%) Producing Other districts
district (%) (%)
1 Forestry
a. IHPH 20 80 16 64 –
b. PSDH 20 80 16 32 32
c. Reforestation 60 40 – 40 –
2 Mining
a. Land rent from 20 80 16 64 –
producing
district
b. Land rent from 20 80 80 – –
producing
province
(c) Royalty from 20 80 16 32 32
producing
district
(d) Royalty from 20 80 26 – 54
producing
province
3 Fishery 20 80 Distributed in aggregate to all regions in
Indonesia
4 Oil
a. From 84.5 15.5
producing
district
15 3 6 6
0.5a 0.1 0.2 0.2
b. From 84.5 15.5
producing
province
15 5 – 10
0.5 a 0.17 – 0.33
5 Gas
a. From 69.5 30.5
producing
district
30 6 12 12
0.5a 0.1 0.2 0.2
b. From 69.5 30.5
producing
province
(continued)
Overview of Extractive Resources Management in Indonesia 95

Table 7 (continued)
No. Types of revenue Central Reg. Gov. Proportion
sharing Gov. (%) (%) Prov. (%) Producing Other districts
district (%) (%)
30 6 12 12
0.5a 0.1 0.2 0.2
6 Geothermal 20 80 16 32 32
a Earmarked for primary education

while already taking control of income tax for both corporations and individuals.9
These criticisms have been subject of review by the Constitutional Court, the only
court authorised to review laws passed by the parliament, upon challenges by various
civil society organisations as well as regional governments. However, the Constitu-
tional Court has consistently rejected those challenges and thus the laws on balancing
of State revenue amongst the Central and Regional governments still stand.

8 Conclusion

Since its independence in 1945, Indonesia has experienced changes in government,

which inevitably modifies its ways of regulating its natural resources and the relevant
industries. All the while, the fundamental principle of natural resources as public
goods to be used for the welfare of the people did not change. This principle was
strengthened in recent years through various Constitutional Court decisions, which
in essence provided guidance for the Government as regulator of this sector. The
challenges lie with the Government on how to maximise the impacts of the natural
resources industry to the Indonesian economy. Strategic initiatives should be taken
with considerations that although Indonesia has significant natural resource reserves,
it is depleting and competing for investments. The Government has attempted to adopt
new approaches in order to further investment in the extractive industry, such as the
new gross split scheme in oil and gas, or obligation to process ore domestically
in the mineral and coal sector to add value to the industry as well as converting
contracts of works to mining licences for regulatory purposes. However, these new
policies are not without their challenges since investment in the natural resources
sector requires a degree of certainty and is made for a relatively long period of time.
The gross split scheme has yet to be accepted by the industry, shown by low interest
for fields requiring the adoption of the gross split scheme, and no new fields is yet
to be contracted with this scheme. The obligation to process ore in the mineral and
coal sector and the conversion from contract to licencing regime were met with
various challenges to the Constitutional Court and the Supreme Court, and resulted

9 https://eiti.ekon.go.id/eiti-untuk-perbaikan-pengalokasian-dana-bagi-hasil-dbh/.
96 R. Mezaya et al.

with no less than five revisions to the Government Regulation regulating this matter.
From this experience, changes need to be applied gradually and in close consultation
with all stakeholders, particularly the industry, to avoid any significant hindrance
in the implementation stage, and any potential breach of existing obligations to the
investors.
While continuing to reform its natural resources sector, Indonesia also experiences
challenges from the change to decentralisation where local governments have more
authority to issue licences, including environmental and several mining licences.
These relatively new authorities resulted in extra layers of bureaucracy for the sector.
The Extractive Industries Transparency Initiative (EITI) Indonesia noted that there
were at least 2522 non-clear and clear (CNC) mining licences, partly due to the
implementation of local authorities in licencing, which sometimes created overlap-
ping licences across regions. Even though the intention was to lessen the gap between
local citizens with its ownership of mineral resources, governance on implementation
by local authorities needs to be improved to create certainty for investment.
In dealing with the revenues from its natural resources, Indonesia should continue
to explore the establishment of a sovereign fund to further optimise the economic
impacts of its natural resources. Especially considering that there might be changes in
the near future that require heavy investment from the Government, such as the move
to renewable energy and the scarcity of financing for the extractives sector. It should
also continue to explore better and fairer ways to redistribute profits from natural
resources exploitation to the regions, continuing its already positive effort to do so
since the reformation twenty years ago. These new strategies should be considered
and taken sooner rather than later to ensure that natural resources are truly leveraged
for the maximum welfare of the people, as its Constitution consistently mandates.

References

Aizenman, J., & Glick, R. (2009). Sovereign wealth funds: Stylized facts about their determinants
and governance. International Finance, 12(3), 351–386.
Alhashel, B. (2015). Sovereign wealth funds: A literature review. Journal of Economics and
Business, 78, 1–13.
Arvirianty, Anastasia. RUU Migas Digodok, Ini Bocorannya, 24 January 2019, available
at https://www.cnbcindonesia.com/news/20190124101358-4-52136/ruu-migas-digodok-ini-boc
oran-rancangannya, accessed on 29 November 2019.
Bahoo, S., Alon, I., & Paltrinieri, A. (2019). Sovereign wealth funds: Past, present and future.
International Review of Financial Analysis, 101418.
Butt, S., Shivdasani, A., Stendevad, C., & Wyman, A. (2008). Sovereign wealth funds: A growing
global force in corporate finance. Journal of Applied Corporate Finance, 20(1), 73–83.
Collier, P., Van Der Ploeg, R., Spence, M., Venables, A. J. (2009) Managing resource revenues in
developing economies. IMF Staff Papers, 57(1), 84–118.
Constitution of the Republic of Indonesia and Explanatory Memorandum attached to the 1945
Constitution, available at https://www.dpr.go.id/jdih/uu1945, accessed on 29 November 2019.
Constitutional Court of the Republic of Indonesia. Decision No. 36/PUU-X/2012, 2012, available
at https://www.bphn.go.id/data/documents/36-2012.pdf, accessed on 29 November 2019.
Overview of Extractive Resources Management in Indonesia 97

Devlin, W., & Brummitt, B. (2007). A few sovereigns more: The rise of sovereign wealth funds.
Economic Round-up, 119.
Extractive Industries Transparency Initiative (EITI) Indonesia. Country Overview, available at
https://eiti.org/indonesia#extractive-industries-contribution, accessed on 29 November 2019.
Erlangga, Doni. EITI untuk Perbaikan Pengalokasian Dana Bagi Hasil, 2017, avalaible at https://eiti.
ekon.go.id/eiti-untuk-perbaikan-pengalokasian-dana-bagi-hasil-dbh/, accessed on 29 November
2019.
Gould, M. (2010). Managing manna from below: Sovereign wealth funds and extractive industries
in the Pacific. Economic Round-Up, 1, 63.
Griffith-Jones, S., & Ocampo, J. A. (2008). Sovereign wealth funds: A developing country
perspective.
House of Representative, Republic of Indonesia. Draft Law on Revision to Law No. 22 of 2001 on
Oil and Gas, 2015, available at https://www.dpr.go.id/doksileg/proses2/RJ2-20150626-022308-
2742.pdf, accessed on 29 November 2019.
IMF. (2007). Global Financial Stability Report, Annex 1.2, September 2007, Washington DC,
International Monetary Fund.
International Financial Services London (IFSL). (2009). Sovereign wealth funds 2009, March.
https://dio.org/www.ifsl.org.uk/upload/CBS_Sovereign%20Wealth%20Funds%202009.pdf.
Kimmitt, R. M. (2008). Public footprints in private markets, Foreign Affairs, 87, 1. January/February
2008.
Kusumaatmadja, M. (2013). Indonesia’s national policy on offshore natural resources: Some legal
issues. Indonesian Journal of International Law, 10(4).
Lowery, C. (2007). Remarks on sovereign wealth funds and the international financial system. US
Department of the Treasury.
Machmud, T. N. (2002). The Indonesian production sharing contract: An investor’s perspective.
Journal of Energy and Natural Resources Law, 20(3).
Megginson, W. L., & Gao, X. (2019). The state of research on sovereign wealth funds. Global
Finance Journal, 100466.
Ministry of Energy and Mineral Resources, Republic of Indonesia. Rekonsiliasi Data, Sumber
Daa Batubara Indonesia Kini 166 Miliar Ton, Cadangan 37 Miliar Ton, 2018, available
at https://www.esdm.go.id/id/media-center/arsip-berita/rekonsiliasi-data-sumber-daya-batubara-
indonesia-kini-166-miliar-ton-cadangan-37-miliar-ton, accessed on 29 November 2019.
Ministry of Finance, Republic of Indonesia. Handbook on Allocation of Natural Resources Revenue
Sharing Fund, 2017, available at https://www.djpk.depkeu.go.id/wp-content/uploads/2017/06/
Buku-Pegangan-Perhitungan-Alokasi-DBH-SDA.pdf, accessed on 29 November 2019.
Nurtjahyo, Prahoro. Expert Staff to the Minister ESDM on Investment and Infrastructure Devel-
opment on Answering Doubts on Gross Split, 2017, available at https://www.esdm.go.id/assets/
media/content/content-menjawab-keraguan-terhadap-gross-split-tanggapan-atas-opini-dr-mad
jedi-hasan-potensi-permasalahan-dalam-gross-split.pdf, accessed on 29 November 2019.
Parsons, D., & Vincent, D. (1991). High stakes: Mineral and petroleum development in papua new
guinea. Institute of National Affairs Discussion Paper No. 49. Port Moresby.
PWC. Mining in Indonesia: Investment and Taxation Guide, 2019, available at https://www.
pwc.com/id/en/energy-utilities-mining/assets/mining/mining-guide-2019.pdf, accessed on 29
November 2019.
Republic of Indonesia, Law No. 37 of 1960 on Mining.
Republic of Indonesia, Law No. 44 of 1960 on Oil and Gas.
Republic of Indonesia, Law No. 22 of 2001 on Oil and Gas.
Republic of Indonesia, Law No. 4 of 2009 on Mineral and Coal Mining.
Republic of Indonesia, Law No. 32 of 2004 on Decentralization.
Republic of Indonesia, Law No. 33 of 2004 on Fiscal Balance Between the Central and Regional
Governments.
Republic of Indonesia, Government Regulation No. 55 of 2005 on Revenue Sharing.
Republic of Indonesia, Government Regulation No. 35 of 2004 on Upstream Oil and Gas Activities.
98 R. Mezaya et al.

Republic of Indonesia, Government Regulation No. 79 of 2010 on Cost Recovery.

Truman, E. M. (2009). A blueprint for sovereign wealth fund best practices. Revue d’economie
Financiere, 9(1), 429–451.
Utomo, S. P. (1999). Butir-Butir dalam Penyusunan Rencana Undang-undang tentang Usaha
Pertambangan Minyak dan Gas Bumi.
The Social Fund: A Brazilian Sovereign
Wealth Fund

Hirdan Katarina de Medeiros Costa and Isabela Morbach Machado e Silva

Abstract In conjunction with expectations of an increase in revenue from the explo-

ration of oil and gas after the discovery of Brazil’s pre-salt layer, important issues
emerged on the best methods of administering public revenue in the benefit of current
public interest and futures generations. In this context, the Executive Branch sent to
the National Congress a proposal for a new regulatory framework for the formulation
and implementation of public policies in the energy sector. As part of this policy a
Social Fund of petroleum (i.e. a Sovereign Wealth Fund) was created in order to
create a source of resources for social and regional development, through programs
and projects aimed at combating poverty and stimulating development. In light of
this, this chapter will describe the main aspects of Brazil’s Social Fund.

Keywords Public finance law · Non-renewable natural resources · Social fund and
sovereign wealth fund

1 Introduction

The possibility of exploiting abundant oil in the Brazilian pre-salt layer has raised
the possibility of several economic effects for Brazil (Rodrigues and Sauer 2015).
The volume of revenue generated by the oil activity can bring development as well
as economic losses due to market currency imbalance and economic dependence
on these revenues. This phenomenon is labelled as “resource curse” or “paradox
of plenty” (Auty and Gelb 1986; Conway and Gelb 1988; Gelb et al. 1988; Auty
1988, 1991, 2003, 2005; Bacon and Tordo 2006; Sachs and Warner 1995, 1997,
1999, 2001). In order to minimise such problems, Sovereign Wealth Funds (SWF)

H. K. de Medeiros Costa (B) · I. M. M. e Silva

University of São Paulo, IEE, São Paulo, Brazil
e-mail: [email protected]
I. M. M. e Silva
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 99
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_5
100 H. K. de Medeiros Costa and I. M. M. e Silva

have been used as a tool for achieving distributive justice, as well as energy justice
(considering resource policy taxation) (Heffron 2018; Heffron and McCauley 2017).
Classified as a SWF, Brazil created a Social Fund (hereinafter referred to as SF).
The central challenge of the SF was to design a legal and financial mechanism to
convert this temporary and volatile source of income, that is, the economic exploita-
tion of oil and gas, into a source of income that is regular and stable for current and
future budgetary activities (Costa 2010, 2018, de Medeiros Costa 2012; Silva and de
Medeiros Costa 2019).
It is part of this challenge to protect the SF against discretionary changes promoted
by the Executive and Legislative Branches of the government—for example, by
avoiding the use of the SF for addressing possible public deficit problems (including
budget deficits)—but at the same time, to use these same resources for the promotion
of social development (Jordan et al. 2013).
With the possibility of changing Brazil’s status to be among the largest reserves
of oil and gas in the world, the Executive Branch was obliged to discuss the question
of extractives resources and to define new arrangements for their allocation. These
include: defining objectives and targets, outlining public policies and economic plan-
ning, taking into account the harms of oil exploration, observing other producing
countries and cases of occurrence of the resource curse phenomenon. In this context,
the Executive Power sent to the National Congress a proposal for a Regulatory Frame-
work, formed by four bills, which gave rise to Law 12.276/2010, Law 12.304/2010
and Law 12.351/2010.
The proposals brought three main innovations for the formulation and imple-
mentation of public policies in the Brazilian energy sector, since (i) a new regula-
tion was established for the exploitation of petroleum in the area of pre-salt—the
system of production sharing; (ii) a new public company was created, responsible
for the management of oil and gas production and sales distribution contracts in
the area of pre-salt, called the Brazilian Petroleum and Natural Gas Administration
Company—Pre-Sal Petróleo SA (PPSA); and (iii) the creation of a Sovereign Wealth
Fund called the Social Fund, with an accounting and financial remit, directly linked
to the Presidency (de Medeiros Costa et al. 2017a).
The Social Fund was created by Law 12.351/2010, which provided for general
regulation about exploration and production of oil, natural gas and other fluid hydro-
carbons under the production sharing regime in areas of the Pre-Salt and in strategic
areas, defining its purpose, objectives, structure and sources of resources, among
other measures. Therefore, this chapter describes the SF, analyses its structure and
draws out lessons to be learned.

2 The History of the Brazilian Social Fund (SF)

In Brazil, the Oil Law and Law No. 7990/89 currently provide for the ways the
‘government takes’ should be divided between federal entities and agencies of the
federal government (Costa and Santos 2013). Historically, the legal provisions did
The Social Fund: A Brazilian Sovereign Wealth Fund 101

not contain specific requirements as to how the revenues should be applied by these
entities and agencies (de Medeiros Costa 2012). Law 12.734/2012 changed those
provisions (Costa 2018). Indeed, there were only a few restrictions to the management
of government oil and gas revenues in Brazil, namely:
• Law 7.990/89, providing for the distribution of the share of royalties provided in
the concession contract, representing 5% of production, in Article 8, provides a
prohibition to invest such funds to pay debts, except government debts, and for
the payment of permanent staff (Costa and Santos 2013), and
• Resolution No. 43/2001 of the Senate, providing for domestic and foreign credit
transactions of the government entities, in Article 5, VI, that states the prohibition
to anticipate ‘government take’ revenue concerning the period after the term of
office of the Head of the Executive Branch; note that these prohibitions do not
apply to capitalization of pension funds or to repay debt with the government.
The absence of a specific regulation of expenditure of government oil revenues
could increase the occurrence of the oil curse in Brazil, because in the case of states
and municipalities, expenditure can be concealed by macroeconomic policies subject
to federal decisions. Costa and Santos (2013) found indications of a resource curse
in the municipal executive data for the localities studied where they observed a
failure to adhere to Law 7.990/89, with public expenses being directed toward paying
personnel. Also, they found that the oil industry in the municipalities did not observe
social and economic human rights, nor were the municipal executives transparent,
thereby hindering the monitoring of, and popular participation in, the administrative
process.
In view of the large oil and gas reserves discovered in the pre-salt layer in deep
waters off the Brazilian coast, on August 31st, 2009, the Government sent to the
Congress Bill No. 5.940/09, creating a Pre-Salt Social Fund (SF) for the purpose
of regulating government funds relating to the exploration and production of oil
and gas. Then, in 2010, this Congress Bill became Law 12.351 that created the SF
(de Medeiros Costa et al. 2010). Historically, according to this Congress Bill No.
5.940/09, the accounting and financial nature of the Social Fund is directly linked
to the Presidency, in order to provide a regular source of funds for the performance
of projects and programs in the areas of poverty alleviation and the development of
education, culture, science and technology and environmental sustainability (Brasil
2010a; de Medeiros Costa et al. 2010, 2017a).
It was determined that the following funds are allocated to the Social Fund: (i) the
portion of the signature bonus amount to be allocated by production sharing contracts;
(ii) the portion of the royalties to which the Government is entitled, upon deduction
of those to its specific agencies, as established in the production sharing contracts;
(iii) the income resulting from the sale of oil, natural gas and other hydrocarbon
fluids of the Government, as defined by law; (iv) the results of financial investments
on their cash and cash equivalents; and (v) other funds that may be allocated by law
(de Medeiros Costa et al. 2010, 2017a; Costa 2018).
102 H. K. de Medeiros Costa and I. M. M. e Silva

3 The Characteristics of the Social Fund

As it was conceived, the Social Fund can be considered a sovereign wealth fund, with
allocation characteristics and intergenerational purposes (i.e., savings formation and
promotion of development) (Costa 2018; Silva and de Medeiros Costa 2019). There
is a clear linkage of resources, provided in the Brazilian Constitution itself, which
authorizes the creation of these kind of funds.
The Social Fund can still be classified as a sovereign wealth fund, according to
the classification proposed by the International Monetary Fund, which distinguishes
five modalities, depending on their dominant characteristics: stabilization funds,
savings funds, investment funds, development funds and pension funds (Backer
2016). According to Scaff1 (2013), the SF in Brazil is closer to being a savings
fund with its focus on future generations.

4 The Social Fund and Its Management

Law 12.351/2010 states that a Deliberative Social Fund Board (DSFB) will be created
with the duty to decide on the priority and the allocation of resources recovered
from the fund, which will involve representatives of civil society and the Federal
Government, with the composition, duties and operation established in the Executive
Branch (Brasil 2010b).
However, according to Law 12.351/2010, the Social Fund will be actually
managed by the Financial Management Committee of the Social Fund (FMCSF),
whose composition and operation will also be established by the Executive Branch.
The FMCSF will have the duty to define: (a) the amount to be annually recovered
from the SF with its financial sustainability being ensured; (b) the expected minimum
return; (c) the type and level of risk that may be undertaken in the making of invest-
ments; (d) the minimum and maximum percentages of funds to be invested in the
country; (e) the minimum and maximum percentages of funds to be invested abroad;
(f) the minimum and maximum percentages of funds to be invested by the economic
activity or sector; and (g) the minimum capitalization to be achieved (Brasil 2010b).2
Regarding the control system, Law 12.351/2010 defines that financial statements
and results of the Social Fund’s investments will be developed and assessed every
six months, the Ministry of Finance will submit on a quarterly basis to the Congress

1 Scaff (2013: 518) says: “And the FS is a typical Fund made up of incomes derived from the
exploitation of petroleum resources or, in the nomenclature of the IMF, a savings fund for future
generations”.
2 In order to promote the investment in assets in Brazil and abroad, the Federal Government, with

funds from the Social Fund, could also participate, as the sole member, of a specific investment fund
for such purpose. Payment of the shares of the fund will be authorized by an act of the Executive
Branch, after opinion of the FMCSF is heard. The investment fund will set out operational matters
of administrative and financial management and the prudential rules of investment supervision.
The Social Fund: A Brazilian Sovereign Wealth Fund 103

a report performance, and a future decree of the Executive Branch will define the
other supervisory rules of this fund (Brasil 2010b).
Indeed, by analysing the proposal, the level of discretion granted to the Executive
Branch is of great concern. First, we can see that the Social Fund is virtual, as it will
be created within the normal budgetary process of the Government, being directly
linked to the Presidency. There is no independent institution responsible for the fund
management: the composition and operation of both the DSFB and FMCSF will be
established by the Executive Branch, which, in principle, will keep the control of
these two agencies in the hands of the Government, i.e., such agencies will not be
given political independence or institutional autonomy.3

5 The Social Fund and Its Analysis

There are no limits to the types of investments that may be made by the Fund. The
lack of limitations to investments in oil and gas projects, for example, can result in
great risk due to the lack of encouragement to economic diversification. Similarly, the
limitations of location, so important to prevent the appreciation of the real exchange
rate, and further inflationary pressures resulting from the expansion of local aggregate
demand are addressed only indirectly. Moreover, the FMCSF has the duty of defining
the minimum and maximum percentages of funds to be invested in Brazil or abroad.
According to Gelb and Auty, the direct involvement of the Government in the
allocation of revenues from oil and gas, in the way proposed in Bill No. 5.940/09,
can lead to poor allocation of these funds. Gelb and Auty claim that specific regulation
should be created to bind the government revenues from oil and gas, protecting the
management of these revenues from the discretion of the Executive Branch, in order
to force long-term investments such as in infrastructure. This would be in addition
to the creation of funds for promotion and development, thereby allowing for the
competitiveness of other industries.
It is a logical reasoning that government oil and gas revenues are temporary
revenues and belong not only to the present generation but also to future generations.
Therefore, their inclusion in government accounts as if they were taxes, without a
specific regulation as to their condition, necessarily leads to mismanagement of these

3 Bucheb (2004), The autonomy of the regulatory agencies and the job security of their leaders,
jus navigandi. The essential requirements for independence or political and institutional autonomy
are: (1) job security of the leaders: impossibility of dismissal, except for a serious misconduct
determined by due process of law; (2) fixed term of office; (3) appointment of officers backed by
political parties; (4) impossibility of administrative appeal to the Ministry to which it is bound:
no hierarchical instance to review its acts, except judicial review; (5) Management autonomy: not
being bound to any government level; and (6) Establishment of own sources of funds to the agency,
if possible generated from the very exercise of the regulatory activity.
104 H. K. de Medeiros Costa and I. M. M. e Silva

funds, generating significant losses to the present generation and even greater losses
to future generations.4
Under the Brazilian Government’s proposal, it is not known whether the Social
Fund will be primarily a stabilization or a savings fund. The Fund’s goals, according
to the Bill, among others, are to: (i) provide regular source of funds for social devel-
opment, in the form of projects and programs in the areas of poverty alleviation
and development of education, culture, science and technology and environmental
sustainability; and (ii) mitigate the income and price fluctuations in the national
economy, resulting from changes in the income generated by production activities
and exploration of oil and other non-renewable resources, which are characteristics
of stabilization funds; and (iii) provide long-term public savings through revenue
earned by the Government, which are a characteristic of a savings fund.
The vagueness of the legislation is also reflected in the choice of applying discre-
tionary rules, not linked ones. The law lists in Article 1 the areas that will benefit from
the creation of the Social Fund. The specific criteria for investment of funds, however,
will be defined by the FMCSF, and the decision on the priority and the allocation of
the funds recovered from the Social Fund is the prerogative of the DSFB.
All such decisions made by the Government may result in future losses to society.
Although there is a control system of the Fund’s decisions, as proposed in the Bill, the
questioning of government decisions after the event is superfluous, since the scope
of the review, judicial or not, of discretionary administrative decisions is limited and
its legal possibility is even questioned.

6 Brazilian Law 12.351/2010

When the Government sent the Bill 5.940/2009 related to creation of a Pre-Salt Social
Fund to the National Congress in 2009, it argued that the Fund should be created
because of three crucial points (MME 2009). All of them were dealing with the
nature of the hydrocarbon industry revenues. Those points are found in Item 2 of the
Memorandum 119/2009 (MME 2009). The first and second points are the finiteness of
the natural resource itself, which leads to temporal limitation of the income derived
from oil exploration and the volatility of international oil and natural gas prices,
characterized by factors that go beyond the simple supply-demand equation (MME
2009). The last point relates to Dutch Disease, because the purpose is to mitigate
the volatility of prices and of incomes into the national economy (MME 2009). The
third item of the mentioned Memorandum relates to the benefits of the exploitation
of these resources for future generations: “Governments must act to prevent only
the current generation enjoying the benefits of the exploitation of finite resources.
For this it is necessary that the oil and gas wealth will be transformed into active

4 The referred loss will be suffered over a period of time and by means of methods of transmitting
the resource curse.
The Social Fund: A Brazilian Sovereign Wealth Fund 105

Table 1 Brazilian rate of

Urban area Rural area Total
illiterates—aged 15 or older
(in 2010) 7.3% 23.2% 9.6%
Source IBGE (2010a, b)

enjoyment which can be extended in time, even after the oil and/or gas has run out”
(MME 2009).
When the Law 12351/2010, which actually created the SF was approved by
Congress in December 2010, there was a prediction in Article 47, §2º which stated
that “50% of the total revenue earned by the Fund should be invested in programs for
public education development, with a minimum of 80% for basic and child education”
(Brasil 2010b). However, former President Luis Inacio Lula da Silva (Lula) vetoed
the Article on the revenues from oil and natural gas exploration focused on royalties.
Thus, discussion continued in the Brazilian National Congress (Brasil 2010b).
Despite this veto, Congress continued to argue that the revenues should be directed
to education. They said the best way to benefit from oil wealth over time, even after
the oil and gas have run out, is to invest those revenues in education (de Medeiros
Costa et al. 2010; ADPM 2019). They considered the Brazilian weakness in education
has been causing also a deficit in other areas, such as the shortage in skilled workers
(de Medeiros Costa et al. 2010; ADPM 2019). In fact, the data from IBGE (2010a,
b) shows high levels of illiteracy for 15 years old people and older (Table 1).
Also, according to the IPEA (2012), the labour productivity in Brazil is historically
low, showing very little growth over the years. Measured in terms of gross domestic
product (GDP) for employed persons, labour productivity in Brazil is three times
lower than in South Korea, four times lower than in Germany and five times lower
than in the United States. In Brazil, college enrolments are low (IPEA 2012).
Although the debate in Congress had gone on, former president Lula wrote in the
consideration of his veto: “the Social Fund is a long term savings in order to ensure
the intergenerational benefits arising from the exploration of pre-salt. In this context,
it is not appropriate to establish in advance which areas to be prioritized among
those already considered, including education. For this reason, the Law created the
Advisory Board of the Social Fund, which will be the interface with the demands
of society, and that it will allow adjusting, over time, the definition of its funds
rescued” (Brasil 2010a). Thus, in the final text of the Law 12.351/2010, all of the areas
were equally sharing the investments. Article 47 remained with the following areas:
education; culture; sports; public health; science and technology; the environment;
and mitigation and adaptation to climate change (2010a).
However, in relation to the Social Fund, the Provisory Measure (PM) 592/2012,
edited by the former Brazilian President Dilma Rousseff, changed Lula’s decision,
and the third paragraph of Article 47 of Law 12.351/2010 stipulates that 50% of
the proceeds of return on the Social Fund capital must be dedicated to education,
according to later regulation (Brasil 2012a).
The remaining 50% should be allocated to programs and projects in the areas of
culture, sports, public health, science and technology, the environment and mitigating
106 H. K. de Medeiros Costa and I. M. M. e Silva

and adapting to climate change. Also, this PM included Article 50-B in Law 9.478/97
stating that revenues from royalties and special participation relating to contracts
signed after 3th December of 2012 must be directed to education (Brasil 2012a).

7 Brazilian Law 12.734/2012 and a New Path

The new rules of the distribution of royalties focus on future contracts under the
production sharing system. After all, the Law 12.734/2012 was approved at the end
of 2012. From the new royalties’ rate on oil production, 22% of the offshore royalties
and 15% of onshore royalties will be allocated to the Pre-Salt Social Fund (Brasil
2012b) (Table 2).
Considering the relationship between the distribution and the destination of those
royalties, there is no doubt that the amount they will represent may influence choices
and decisions to the Brazilian Government (Brasil 2012b). The SF was created as a
mechanism to help avoid Dutch Disease in Brazil, which could be caused by big oil
discoveries in the pre-salt area, as well as for serving as an intergenerational fund. It
is clear that Law n. 12.734 did not change these purposes.
Although the SF will receive 22% of the royalties share of the offshore produc-
tion, the exact amount of the financial resources that will go to education and the
other social areas remains vague. All scenarios of the SF are based on hypothe-
sized percentages, however, the social demand in Brazil is based on facts and needs.
Moreover, some Congressmen questioned why this amount should be directed only
to education while the need for healthcare remains a critical issue (Jornal do Brasil
2012). Also, it was not clear, for example, what percentage of revenue from pre-salt
will be used in the early years for the capitalization of the SF (Oliveira 2010). From
2012 to 2018, the SF’s revenues have increased mainly because of pre-salt production
(Portal do Brasil 2016; Petrobras 2016) (see Graph 1).
The Law 12.734 did not change the structure of the SF, which was defined by Law
12.351 and Financial Ministers will monitor the Fund. Thus, the influence of Minis-
ters within the social areas in this Fund could be questioned. On the other hand, there

Table 2 Distribution of royalties among the different beneficiaries (% of total royalties)

Beneficiares Onshore (%) Offshore
Producer States 20 22
Producer Municipalites 10 5
Municipalities impacted by oil and natural gas loading and unloading 5 2
facilities operations
Special Fund of Non-producer States 25 24.5
Special Fund of Non-producer Municipalites 25 24.5
Social Fund of the Pre-Salt 15 22
Source Law 12734/2012 (Brasil 2012b)
The Social Fund: A Brazilian Sovereign Wealth Fund 107

Graph 1 PSSF’s revenues [US$ (1 US$ = 3,364 R$ Brazilian currency (average to 2018). Available
at: https://economia.acspservicos.com.br/indicadores_iegv/iegv_dolar.html)]. Source Inforoyalties
(2019)

were concerns about the Presidential behaviour related to the SF, because histori-
cally the Federal Government has been using its financial reserves as an instrument
to guarantee the primary surplus (de Medeiros Costa et al. 2010; Costa 2018).

8 Conclusion and Lessons to Be Learned

As noted, the Brazilian Social Fund is indeed a sovereign wealth fund, its purposes
are mixed, combining the functions of a stabilization fund and an intergenerational
savings fund. It is the exclusive property of the Federal Government, as a legal person
under domestic public law. Brazilian states and municipalities do not participate in
its domain or management.
These circumstances pertaining to the ownership of the SF appear to move in
the opposite direction of successful SWFs. The Federal Government should not be
considered highly dependent in terms of oil and mineral revenues. On the other hand,
at other government levels, such as the Brazilian states and municipalities dependent
on oil resources that did not create their own funds during promising economic
periods, they are in a worrisome situation, to say the least (Costa and Santos 2013).
The mere existence of legislation to carefully regulate the funds is perhaps not
as important as the enforcement of these rules. It is necessary that the Fund is well
established as per the management and investment policies recommended by those in
charge. Nevertheless, more important than the system informing who is responsible
for such policies and what penalties to impose in cases of noncompliance, is to
108 H. K. de Medeiros Costa and I. M. M. e Silva

make sure those rules are followed. It is always necessary to ascertain which de facto
practices are efficient, accountable and beneficial over what the legislative framework
suggests.
We therefore emphasise that the low levels of fiscal discipline in Brazil—as it is
indicative of a change in the rules governing the allocation of the Fund’s values even
before its creation—can lead to the failure of the SF’s objectives.
Moreover, as highlighted by Silva and de Medeiros Costa (2019: 166), that the
Brazilian government can have adopted the seven principles explained by Heffron
et al. (2018) and use them as a framework for modelling the Social Fund to ensure
distributive justice in practice. The seven principles speak to: natural resource
sovereignty; access to modern energy services; energy justice; prudent, rational and
sustainable use of natural resources; protection of environment, human health &
combatting climate change; energy security and reliability; and resilience (Heffron
et al. 2018).
The general rules of the SF are largely established. However, they do not become
discipline. In Brazil there is a strange phenomenon of laws with not enough or enough
enforcement. Such unstable levels of enforcement have not contributed to the social
and economic development of the country. Instead, an institutional environment of
convenience has been created to the detriment of legal and institutional security. This
is a concrete risk and the SF, about which authorities, academia and organized society
should address and it begs the following question: how to make the Brazilian Social
Fund a concrete instrument and not only a formal device?
Sovereign wealth funds can take on several roles or goals. Within their appli-
cations, SWFs can be a fundamental tool for better national savings management,
especially for those nations exposed to international economic volatility. SWFs also
can be an important tool against the “resource curse” or the “paradox of plenty”. In
the Brazilian context, in which SWFs are federal property and they play dual roles
(i.e. a mix of stabilization and integrational fund), some lessons can be garnered:
1. The fact that Brazil—as a federal union—is not considered as highly dependent
on oil and mineral revenues, weakens the enforcement of its SWF. On the other
hand, subnational states are highly dependent on those revenues. They could
establish their own SWFs in order to save for the future;
2. The legal and political enforcement matters in order to evolve and strengthen
SWFs;
3. Fiscal Discipline is perhaps more important than the establishment of detailed
legislation.

Acknowledgements We gratefully acknowledge support of the RCGI—Research Centre for Gas

Innovation, hosted by the University of São Paulo (USP) and sponsored by FAPESP—São Paulo
Research Foundation (2014/50279-4) and Shell Brasil, and the strategic importance of the support
given by ANP (Brazil’s National Oil, Natural Gas and Biofuels Agency) through the R&D levy
regulation.
The Social Fund: A Brazilian Sovereign Wealth Fund 109

References

ADPM. Congressmen approved royalties to education. Available at https://www.adpmnet.com.br/

index.php?option=com_content&view=article&id=242:senado-aprova-proposta-que-destina-
75-dos-royalties-do-petroleo-a-educacao-e-25-para-a-saude&catid=12&Itemid=107. Accessed
June 16, 2019.
Auty, R. M. (1988). Oil-exporters’ disappointing diversification into resource-based industry: the
external causes. Energy Policy 13, 230–242.
Auty, R. M. (1991). Resource-based industry in boom, downswing and liberalization: Mexico.
Energy Policy, 11, 13–23.
Auty, R. M. (2003). Third time lucky for Algeria? Integrating an industrializing oil rich country
into the global economy. Resour. Policy, 29, 37–47.
Auty, R. M. (2005). Transition reform in the mineral-rich Caspian region countries. Resource Policy,
27, 25–32.
Auty, R., & Gelb, A. (1986). Oil windfalls in a small parliamentary democracy: Their Impact on
Trinidad and Tobago. World Development, 14(9), 1161–1175.
Bacon, R., & Tordo, S. (2006). Experiences with oil funds: Institutional and financial aspects. Energy
Sector Management Assistance Program (ESMAP). Washington D.C., USA: The International
Bank for Reconstruction and Development/The World Bank.
Backer, L. C. (2016). Sovereign wealth funds as regulatory chameleons: The Norwegian sovereign
wealth funds and public global governance through private global investment. Available at
https://litigation-essentials.lexisnexis.com/webcd/app?Action=DocumentDisplay&crawlid=1&
doctype=cite&docid=41+Geo.+J.+International’l+L.+425&srctype=smi&srcid=3B15&key=
97e14f1968976e98161bc39dcb00c887. Accessed June 16, 2019.
Brasil, Presidência da República Federativa do. (2010a). Casa Civil. Subchefia para Assuntos
Jurídicos. Mensagem n. 707, DE 22 de dezembro de 2010. Available at https://www.planalto.
gov.br/ccivil_03/_Ato2007-2010/2010/Msg/VEP-707-10.htm. Accessed June 16, 2019.
Brasil, Presidência da República Federativa do. (2010b). Lei 12.351, de 22 de dezembro de
2010. Available at https://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2010/Lei/L12351.htm.
Accessed June 16, 2019.
Brasil, Presidência da República Federativa do. (2012a). Provisory Measure 592, de 03 de outubro de
2012. Available at https://www.planalto.gov.br/ccivil_03/_Ato2011-2014/2012/Mpv/592.htm.
Accessed June 16, 2019.
Brasil, Presidência da República Federativa do. (2012b). Lei 12.734, de 30 de novembro de
2012. Available at https://www.planalto.gov.br/ccivil_03/_Ato2011-2014/2012/Lei/L12734.htm.
Accessed June 16, 2019.
Bucheb, J. A. (2004). The autonomy of the regulatory agencies and the job security of their leaders.
Revista Jus Navigandi, ISSN 1518-4862, Teresina, ano 9, n. 210, 1 fev. 2004. Disponível em:
https://jus.com.br/artigos/4783. Accessed June 16, 2019.
Conway, P., & Gelb, A. (1988). Oil windfalls in a controlled economy. Journal of Development
Economics, 28, 63–81. ((North-Holland)).
Costa, H. K. M. (2012). O princípio da Justiça Intra e Intergeracional como elemento na destinação
das rendas de hidrocarbonetos: temática energética critica na análise institucional brasileira.
São Paulo: Universidade de São Paulo.
Costa, H. K. M. (2018). Royalties de Petróleo, Justiça e Sustentabilidade (1st ed.). Rio de Janeiro:
Synergia.
Costa, H. K. M., & Santos, E. M. (2013). Institutional analysis and the—resource curse—in
developing countries. Energy Policy, 63, 788–795.
110 H. K. de Medeiros Costa and I. M. M. e Silva

Costa, H. K. M., Simões, A., & Santos, E. M. (2017a). Integral sustainability as driving force for
paradigmatic change in human lifestyle. Sustentabilidade Debate, 8, 100–110.
Costa, H. K. M., Simoes, A. F., Dos Santos, E. M., & Silva, I. M. M. (2017b). Modificações
Legislativas E Impactos Nos Royalties E Na Participação Especial Destinados Aos Órgãos Da
Administração Direta. Revista de Políticas Públicas da UFMA, 21, 959–981.
Costa, H. K. M., et al. (2010). Uma análise do Projeto de Lei nº 5.940/2009: Fundo Soberano do
pré-sal. In Rio Oil & Gas: Expo and Conference, 2010, Rio de Janeiro. Rio Oil & Gas (pp. 1–12).
Rio de Janeiro: IBP.
Gelb, A. H., et al. (1988). Oil windfalls: Blessing or curse? Oxford: Oxford University Press.
Heffron, R. J. (2018). The application of distributive justice to energy taxation utilising sovereign
wealth funds. Energy Policy, 122, 649–654.
Heffron, R. J., & McCauley, D. (2017). The concept of energy justice across the disciplines. Energy
Policy, 105, 658–667.
Heffron, R. J., Ronne, A., Bradbrook, A., Tomain, J. P., & Talus, K. (2018). A treatise for energy
law. The Journal of World Energy Law & Business, 11(1), 34–48.
IBGE (Instituto Brasileiro de Estatística). (2010a). Social indicators. Available at https://www.
ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=2019&id_pagina=1.
Accessed June 16, 2019.
IBGE (Instituto Brasileiro de Estatística). (2010b). Pesquisa Industrial Mensal, time series. Available
at https://seriesestatisticas.ibge.gov.br/lista_tema.aspx?op=0&no=8. Accessed June 16, 2019.
Inforoyalties. (2019). Indicadors. Available at https://inforoyalties.ucam-campos.br/informati
vo.php. Accessed June 16, 2019.
IPEA (Instituto de Pesquisas Estatíticas Aplicadas). (2012). Qualification of labor is analyzed.
Available at https://www.ipea.gov.br/portal/index.php?option=com_content&view=article&id=
16476. Accessed June 16, 2019.
Jordan, L., de Medeiros Costa, H. K., Santos, E. M., Simoes, A. F. (2013). The Brazilian Sovereign
Fund and the Brazilian Social Fund: A measure of the efficiency of Brazilian Sovereign Wealth
Funds in fighting the resource curse and the Dutch disease. In 4th Meeting of Latin-American
Energy Economics, 2013, Montevideo, Uruguay. Proceedings of the 4th ELAEE, April 8–9,
2013—Montevideo—Uruguay (pp. 1–20). Montevideo: ELAEE4.
Jornal Do Brasil. (2012). Dilma fará ‘análise exaustiva’ da lei dos royalties. Available
at: https://www.jb.com.br/pais/noticias/2012/11/08/dilma-fara-analise-exaustiva-da-lei-dos-roy
alties/. Accessed June 16, 2019.
MME (Ministério de Minas e Energia). (2009). Projeto de Lei 5940/2009. Available at https://
www.mme.gov.br/documents/10584/1657891/Projeto_de_Lei_5940.pdf/383d7cd5-ed89-400c-
b513-b7bf843003e1. Accessed June 16, 2019.
Oliveira, R. (2010). Valor Econômico (SP): Superávit primário com e sem petróleo. Available
at https://www.ipea.gov.br/portal/index.php?option=com_content&view=article&id=6608&Ite
mid=75. Accessed June 16, 2019.
Petrobras. (2016). Nossos novos recordes no pré-sal. Available at https://www.petrobras.com.br/
fatos-e-dados/nossos-novos-recordes-no-pre-sal.htm. Accessed June 16, 2019.
Portal Brasil. 2016. Pré-sal representou um terço da produção nacional de petróleo em janeiro. Avail-
able at: https://www.brasil.gov.br/economia-e-emprego/2016/04/pre-sal-representou-um-terco-
da-producao-nacional-de-petroleo-em-janeiro. Accessed June 16, 2019.
Rodrigues, L. A., & Sauer, I. L. (2015, December). Exploratory assessment of the economic gains
of a pre-salt oil field in Brazil. Energy Policy, 87, 486–495. https://doi.org/10.1016/j.enpol.2015.
09.036
Sachs, J. D., & Warner, A. M. (1995). Nature resource abundance and economic growth. NBER
Working paper series, Cambridge, MA.
Sachs, J. D., & Warner, A. M. (1997). Nature resource abundance and economic growth, Harvard
University, Working Paper, revised version.
Sachs, J. D., & Warner, A. M. (1999). The big push, natural resource booms and growth. Journal
of Development Economics, 59, 43–79.
The Social Fund: A Brazilian Sovereign Wealth Fund 111

Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. Natural Resources and
Economic Development. European Economic Review, 45, 827–838.
Scaff, F. F. S. (2013). Royalties decorrentes da exploração de recursos naturais não renováveis. Tese
de Livre-Docência em Direito Financeiro. Universidade de São Paulo, Mimeo.
Silva, I. M. M., & Costa, H. K. M. (2019). Brazilian social fund: The lessons learned from the
norway fund experience. Energy Policy, 129, 161–167.
Public Wealth Management
and Distribution in Iran

Zoha Abdolalizadeh

1 Introduction

Iranian officials and planners have always been concerned about the optimum use of
the country’s oil and gas revenues, as well as maintaining stability in the way those
revenues are applied to the national budget. Various methods were implemented
in pre-revolutionary development programs, including the establishment of a Plan-
ning and Budget Organization in 1948 to ensure the efficient use of these resources
(Arab-mazar and Noormohammadi 2016). Using oil revenues to build production
and infrastructure capacity was an important incentive for the establishment of this
organization; but from the very beginning, the government was forced to spend part
of the natural resource proceeds (Hadi-zonooz 2010). As oil revenues increased,
corresponding investment in public utilities was also required, and the public infras-
tructure budget became greater. A shortfall in tax revenue resulted in an even greater
need to rely on the proceeds from oil sales.
For many years, another part of the income was invested in for-profit production to
prevent companies from the need to offset their losses with more oil revenues. If they
were profitable, the country’s production capacity and tax revenue would increase.
The devastating impact of oil revenue fluctuations on Iran’s economic stability is
another important issue. With the rise in global market oil prices over recent decades
and an increase in national income, Iranian politicians have turned oil dollars into
Iranian Riyals. This has resulted in an increase in the economic development of a
specific sector at the expense of a decline in others and injected a temporary boom to
the country’s economy, with accompanying inflation. The situation presented various
complications, including the “Dutch disease” and “rentier state”, where resources

Z. Abdolalizadeh (B)
Senior Legal Specialist, Dana Energy Company, Tehran, Iran
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 113
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_6
114 Z. Abdolalizadeh

are rented externally (Sadatrasoul et al. 2015). However, unstable oil prices fell
after a few years, and the swollen economy (fuelled by deflated demand, and huge
government spending on new hires and half-finished projects) became the centrepiece
for offsetting the deficit. There was no other choice than to borrow from the central
bank, which brought a new wave of inflation.
This strategy hit industrial and agricultural productivity, which had already lost
production potentials because of cheap imports during the boom. Inflation rose in
both sectors, although as a result of different issues. With foreign exchange earnings
rising, the monetary base swelled with a net increase in the central bank’s foreign
assets; and because of the government’s budget deficit during the recession, the
monetary base also rose through the net increase in government debt to the central
bank.
The idea of a foreign exchange reserve account was adopted and articulated in
Article 60 of the Islamic Republic of Iran’s Third Development Plan (2000–2005),
in order to stabilize the country’s economy (Abbasi 2008). This account was also
maintained in the subsequent Fourth Development Plan (2005–2010). The overall
policies of the Fifth Development Plan (2011–2016), under Paragraph 22, empha-
sized a shift towards oil and gas revenues with the creation of a National Development
Fund. To implement these policies, the Statute of the National Development Fund
was adopted in Article 84 of the Fifth Development Plan, and the foreign exchange
account maintained by new duties in Article 85 of the Fifth Plan.
Here, we first describe how the financial relationship between the government
and Iran’s oil formed a basis for a foreign exchange reserve account in the Third
Development Plan (2000–2005) and its performance in this, as well as the Fourth
Development Plan (2005–2010). The Statute of the National Development Fund,
together with the new face of the Reserve Account in the Fifth Development Plan
(2011–2016), is outlined, alongside the strengths and weaknesses of the strengths
and weaknesses of all the Plans.

2 Establishment of Foreign Exchange Reserve Account

in Iran

There are now more than 60 National Oil Funds around the world that operate under
different mechanisms. Creating foreign exchange reserves or oil funds is one strategy
undertaken by countries to manage oil wealth. These funds are either used to solve
the problems created by oil revenue fluctuations (stabilization funds), or part of
the revenue is saved for future generations (savings funds). Both goals can also be
pursued in tandem.
Petroleum funds are created for the same purpose, which is to help governments
deal with the challenges and problems arising from oil revenues. There are generally
two purposes: first, to create a stabilization fund to balance the budget. This antici-
pates and confronts the problem of revenue volatility. Second, attending and being
Public Wealth Management and Distribution in Iran 115

proactive to the future. In this case, a savings fund would be created to set aside a
portion of oil revenues for future generations. The philosophy behind this is based
on the presumption that oil is a national asset. For this reason, oil revenues can only
be used for investment whether inside or outside the country, while allocating them
to current and consumption costs is not permitted.
In 1996, the Iranian government faced greater projected foreign exchange earn-
ings, and a reform bill was submitted to parliament to spend more than 6000 billion
Rials on the approved budget. However, in 1997, the government had to submit
amendments to parliament to borrow this amount from the central bank because of
a lack of oil revenue (PRC 2001). This experience forced policy-makers at the time
think about how to design a system of stability for the Iranian economy. Prior to ratifi-
cation of the Third Development Plan, experts at the Ministry of Petroleum proposed
the establishment of a foreign exchange fund which would store surplus income from
the government’s proposed production ceiling, to be used for investment.
The proposal did not take into account how to prevent unbudgeted fluctuations,
and the impact of the oil revenue trap. This trap occurs when the means of production
and investment are diverted to an industry that brings economic prosperity. However,
the result negatively impacts other parts of the economy, leaving it undiversified and
vulnerable if the oil sector undergoes a downturn. Even though it was flawed, the
proposal was therefore accepted by the Planning and Budget Organization as Article
60 of the Third Plan. Under it, the government was obliged in 2001 to introduce
the Foreign Exchange Reserve Account of Crude Oil Revenue and the Rial Reserve
Account at the Central Bank of the Islamic Republic of Iran. Its mechanism specified
that the surplus of foreign exchange earnings higher than the Plan’s anticipated
figures would be reserved in this account, and whenever oil revenues experienced
a decline, withdrawals would be made, enabling the currency to be converted into
Rials. The Plan prohibited the government from using the account to compensate its
tax or any other kind of income reduction. However, after the Rial revenues for each
year’s budget were forecasted, short-term lending from the remaining currency was
permitted for production and investment activities (Haji-Mirzaee 2006).
Instead of predicting oil prices, those creating the Third Plan considered managing
prices to adjust annual budgets. For example, no matter what the price of oil would
be in 2001, about $13 billion oil revenue was projected for the annual budget, which
would be offset by the failure to meet the reserve requirement. With the sharp rise
in oil prices on the world market less than six months after the Third Development
Plan was announced in 2000, MPs amended Article 60. The Rial Reserve Account
was removed, and only one account was designated the Foreign Exchange Account
from crude oil export. The amendment also changed the figures for oil export earn-
ings forecasted in 2000 and 2001. It additionally allowed the government to spend
up to 50% of the foreign exchange reserve account on investment and to provide
part of the credit needed for production and entrepreneurship projects. As well,
116 Z. Abdolalizadeh

non-governmental sectors were provided with a portion of the credits for industrial,
mining, agricultural, transportation and engineering services.1
In 2000, the Executive Regulation of Article 60 of the Plan was adopted. A Board
of Trustees was established, and this consisted of the Chairman of the Manage-
ment and Planning Organization, the Minister of Economic Affairs and Finance, the
Chairman of the Central Bank, and four delegates elected by the President. At least
two ministers were put in place to enforce the law and make decisions on matters
such as determining how the rate of return was to be calculated, and when conces-
sional facilities were to be repaid. They would also prioritize plans for when these
facilities would be used.
According to this regulation, proposed projects would benefit from foreign
exchange facilities after operating banks had conducted technical and economic
reviews, and once approval was granted by the relevant ministries. The acquisition
period of the facility for investments and experimental operations was up to three
years, and the maximum loan repayment term was five. The method of depositing
foreign exchange funds into the reserve account was also specified. In order to ensure
public funding, the central bank was obliged to deposit the equivalent of 100% of the
foreign exchange earnings from the crude oil export to the relevant public revenue
account during the first four months of the year. And from the fifth month to the
ceiling of the year’s currency creation obligation, it had to deposit the equivalent of
one-twelfth of the said ceiling into the public revenue account. The remainder was
to be deposited into the foreign exchange reserve account, and after fulfilling the
annual budget, all amounts received would be deposited into the currency account.
Article 5 of the regulation provided that foreign exchange facilities users shall repay
the principal and the interest accrued in accordance with national foreign exchange
regulations. The granting of foreign exchange facilities to projects approved under
the Law of Attraction and Protection of Foreign Investments of Iran (joint ventures)
was authorized under the same Article.
The interesting point in this regulation is the Central Bank’s requirement to pay
interest on the maintenance of the account, referred to in Article 7 (Mardoukhi 2005).
The Foreign Exchange Reserve Account Board set a maximum of 7.5% interest per
annum on customer lending facilities. The operating bank was required to deposit
3% of the interest received in the same currency from the customer into the foreign
exchange reserve account. The facility rate for industrial restructuring plans, which
included at least 50% of available machinery and existing equipment, was minus
0.25%, and the facility rate for investment projects in deprived provinces was minus
0.5%. The deduction from interest accrued to accelerate the utilization and repayment
over the planned period was 10% for six months, and 15% for one year.

1 “Overview of Foreign Exchange Reserve Accounts Out of Crude Oil Exports, related to the
Modification Plan of Section B: Amendments to the Third Development Plan Act”.
Public Wealth Management and Distribution in Iran 117

3 Foreign Exchange Reserve Account Input Resources

and Expenses

Foreign Exchange Reserve account resources included

1. The difference between the real income and the share of oil revenues allocated
to the annual state budget in the Third and Fourth Plans;
2. Receiving the principal and benefit of the facility paid from the account; and
3. Revenue from interest received from the Central Bank.

Expenses included
1. Withdrawal from the account, equivalent to the deficit of crude oil export earnings
forecast for the year;
2. Withdrawal from the account, equivalent to up to 50% of the balance to pay off
loans to non-government investors and entrepreneurs; and
3. Other options according to related laws.

4 Foreign Exchange Reserve Account in the Fourth

Development Plan (2005–2010)

The Fourth Development Plan was designed with a focus on accelerating economic
growth, empowerment, and expanding the private sector. The account was given a
special place in the Plan, and Article 1 assigned to it. This Plan did not differ greatly
from its predecessor, except that the government was now allowed to provide at least
10% of available resources to Agribank (Keshavarzi Bank), in the non-governmental
sector. Agribank was to invest and distribute this amount to justified agricultural
schemes, and to provide working capital to the private sector for export expansion
projects. (Hadi-zonooz and Pileh-foroush 2013)
Similar to Article 60 of the Third Plan, the Fourth Plan allowed the government
to invest up to 50% of the account balance for investment. It could provide part of
the credit required for industrial, mining, agricultural, transportation projects and
services (including tourism, etc.), to non-governmental companies who had been
approved on technical and economic grounds by the relevant specialized ministries
(Khalesi and Farhadikia 2009).
This permission was protected as a duty of government in Article 28 (2) of the
Law “On Amendments to the Law of the Fourth Plan of Economic, Social and
Cultural Development of the Islamic Republic of Iran and the Implementation of the
General Policies of Article Forty-Fourth of the Constitution”, and the Government
was required to adopt policies to allocate 40% of the account balance from the
previous year to the non-governmental sector. In addition, if there was a demand,
accompanied by technical and economic justification plans in the private sector, the
government would be obliged to allocate funds to applicants from this balance. The
general rule was that the share of the private sector in any given year shall not be less
118 Z. Abdolalizadeh

than 40% of the withdrawal from the account in that year. Paragraph (3) of the same
Article also enabled the Board of Trustees of the Account and the Central Bank of
Iran to increase the share of foreign exchange facilities to the private sector, part of
the Foreign Exchange Reserve Account, or the Central Bank of the Islamic Republic
of Iran to be used as a deposit with operating banks and to open foreign exchange
credit lines. This share could additionally be used for external and other payment
facilities (Mahdavian 2007).
Implementing Regulations of Article 1 of the Fourth Development Plan was
approved by the Cabinet in 2005. It was similar to the Article 19 by-law of the
Third Development Plan Act, with minor modifications. Article 7 of the by-law
allowed the Board of Trustees to pay the remaining 30% of the account balance to
state-owned banks as a shareholder in the private financing syndicate, in accordance
with the Law on Non-Usury Banking approved in 1984, to be used to increase the
capacity of the facility. In Note (2) of Article 8, users of foreign exchange facilities
were required to repay principal and interest in the same currency as the facility
granted. Article 11 reduced the number of Board Trustees from seven to five, and
the President’s representatives were removed.
Other structural changes associated with the account included the cabinet’s deci-
sion to amend the Implementing Regulations in 2008. With the amendment of the
Implementing Regulations of Article 1 of the Fourth Development Plan, the func-
tions of the Board of Trustees were delegated to the “Economic Commission” of
government, and in all the provisions of this code, the term Board of Trustees was
replaced by “Economic Commission”.
The performance of the account has been directly related to the government’s fiscal
policy since its establishment. Prior to the Third Plan, oil revenues were largely
allocated to the general government budget. In spite of repeated amendments to
Article 60 and the establishment of the Foreign Exchange Account during the Third
Plan period, government withdrawals from the account led to a significant share of the
oil export revenue being applied to the general government budget. The government
increasingly withdrew funds from the account during the Fourth Plan period.
The public budget’s dependency on oil revenues was about 68% in 2000 when
the account was established. This amount gradually declined and reached its lowest
level in 2004 (43.3%). However, it has increased since 2005,2 reaching its highest
level (69.6%) in 2006 (Abbasi 2008).
It is noteworthy to calculate the real share of oil revenues in Iranian government
expenditures. Since 2005, the accounts have been used for government expendi-
tures outside the national budget. Also, the amounts paid to the National Iranian Oil
Company to produce crude oil have not been seen as a total government cost and
as a result are not included in the percentage of public budget dependency on oil
revenues. The general budget’s dependency on oil revenues was actually higher.

2 This happened after 2004 governmental election in which the right won the election.
Public Wealth Management and Distribution in Iran 119

5 Account Performance in the Third and Fourth

Development Plans (2000–2010)

The provision designed to stabilize the Plans was revised more than all other arti-
cles. These revisions and withdrawals were made when oil revenues were less than
expected in the Third Plan, but also when the government faced a surplus in oil
export revenues during the Plan’s executive years. This experience continued with
the implementation of Article 1 of the Fourth Development Plan. From 2000 to 2009,
about $164 billion was deposited into the account, and over $160 billion withdrawn
in total. The notable point is that the government expenditure was far greater than
funds granted to facilities; more than 90% of total withdrawals were made by the
government during that time, with the remainder spent on facilities to the private
sector (Hadi-zonooz and Pileh-foroush 2013). This reflects the fact that the mere
existence of a foreign exchange reserve account has not led to governmental financial
discipline.
During the execution years of the Third Plan (2000–2005), about $30 billion
was deposited into the foreign exchange reserve account, and about $20 billion
withdrawn, $4 billion of which paid to private sector facilities. The numbers for the
Fourth Plan (2005–2010) were $134 billion deposited, and $140 billion withdrawn,
including $12 billion for private sector facilities. It should be noted that although
about 10% of the account balance was allocated for the private sector, about 50% of
the instalments were reportedly delayed.

6 Foreign Exchange Reserve Account and National

Development Fund Under the Fifth Development Plan
(2011–2016)

The account in the Third and Fourth Plans had two tasks:
1. To stabilize the budget in the event of a decrease in oil revenues and prevent the
damage of oil shocks to the balance of the country’s economy; and
2. To save part of the oil revenue for future generations by converting these funds
into a productive investment.
Assigning this account with these two roles simultaneously led the parliament
to allow the government to withdraw funds from it to accelerate implementation of
development plans, as well as to address some budgetary problems (Kianpour 2010).
It seems there are specific reasons why the account’s performance fell short, and why
it could not fulfil its tasks. It failed to support the country’s economic development,
which included deficiencies in the Planning and Budget Law, and in decision-making
mechanisms (Hadi-zonooz 2009).
The following are some of the account’s bugs:
120 Z. Abdolalizadeh

1. The possibility of withdrawal from the account to support the government’s

general budget;
2. A lack of independent institutions for policy-making, implementation and
monitoring of resources and costs;
3. Interference of tasks (stabilizing and developmental roles);
4. Sequential reforms and amendments of the relevant laws, and non-adherence of
the executive and legislative powers to statutory approvals in different periods;
5. The lack of transparency of banking responsibilities, and interference with the
responsibilities of the account’s trustees regarding large projects; and
6. The impossibility of an independent audit.
Building on the unsuccessful Foreign Exchange Reserve Account experience, the
National Development Fund structure in the Fifth Development Plan was designed
to
1. Establish the existence of the account to continue only for the purpose of
balancing the country’s general budget and to maintain its stability; and
2. Set up a National Development Fund in order to convert part of the oil proceeds
into productive economic resources and capital.

7 Foreign Exchange Reserve Account in the Fifth

Development Plan (2011–2016)

In the bill of the Fifth Development Plan, it was proposed to convert the Foreign
Exchange Reserve Account into a National Development Fund. But eventually with
parliamentary scrutiny, the continued use of the Foreign Exchange Reserve Account
with a narrower task description was adopted in Article 85 of the Fifth Development
Plan.
With Article 60 of the Third Plan and Article 1 of the Fourth Plan, only surplus
crude oil revenues were transferred to the account, but in Article 85 of the Fifth Plan,
government revenues from the export of petroleum products and gas exports could
also be deposited into it, in addition to revenues from crude oil and gas condensate
exports (either in cash or barter).
Another important feature of the Fifth Development Plan, contained in Article 85,
was the government’s responsibility to keep track of the collection of instalments, as
well as the interest accrued from facilities granted from the account and deposited into
it. In addition, given the billion-dollar account’s obligations and the lack of sufficient
resources to fulfil these obligations, this Plan stipulated that the account would bear
its remaining obligations to the non-governmental, private and cooperative sectors,
and any new commitment was forbidden.
Public Wealth Management and Distribution in Iran 121

8 National Development Fund Under the Fifth

Development Plan and Its Statute

Paragraph 22 of the General Policies of the Fifth Development Plan emphasized

that the National Development Fund was established with the aim of changing the
pervasive approach of using oil and gas and their revenues for public financing
and budgeting, to productive economic resources instead. To implement this policy,
Article 76 of the government’s proposed bill was allocated to the National Develop-
ment Fund. This article, set out in the form of a by-law and passed by the cabinet,
outlined the Fund’s charter and other key decisions for managing the fund.
Fund’s statute begins with this statement that indicates: “The National Develop-
ment Fund of Iran, hereinafter referred to as the “Fund”, is established to turn a
portion of the revenues originated from selling oil, gas, gas condensate and oil prod-
ucts to durable wealth and productive economic investments as well as preserving the
share of future generations from the oil and gas resources and products.”3 It should
be noted that the statute does not indicate principal matters such as the main purposes
of the fund (stabilization or saving), its obligations and related enforcements. The
uncertainties have severely affected the fund’s procedures and function. For instance,
despite the fact that statute determines the fund’s spending, the restrictions and regu-
lations have been neglected and deviated in many cases. To clarify, here, the specific
spending terms are reviewed. The statute confines the fund’s expenditure in six items
as following:
1. to grant financial facilities to the private and cooperative sector as well as
the economic entities owned by public non-governmental institutions, to be
invested in production and development with economic, financial, and technical
feasibility,
2. to grant financial facilities to Iranian private and cooperative companies awarded
international tenders for the export of engineering and technical services, through
the fund’s resources or syndicated facilities,
3. to grant purchase credit to the buyers who purchase Iranian goods and services
in the export-target markets of Iran,
4. to invest in foreign monetary and financial markets,
5. to grant financial facilities to foreign investors on competitive and economic
viability grounds in order to attract and protect investors in Iran in accordance
with Principle 80 of the Iran’s constitution,
6. to pay for expenses of the fund.4
The statute sets some restrictions including the ban on using fund to cover costs,
acquisition of capital assets and repaying debts of the government in any form and
shape, which has been violated from the very beginning of the operation of fund.
Besides, there is a ban imposed on the facilities, which should be paid in foreign

3 http://en.ndf.ir/About-NDF/Articles-of-Association.
4 http://en.ndf.ir/About-NDF/Articles-of-Association#111628-i---the-funds--spending.
122 Z. Abdolalizadeh

currencies, indicating that the recipients are not allowed to convert the foreign
currency into Rial in the domestic market.5
The subsequent articles explain the details of shares of the resources in fund. As
mentioned, the principal resource of fund is composed of at least equivalent to 30%
of the revenues from exporting oil (crude oil, gas condensates, gas and oil products)
during the period of the Fifth Development Plan (2011–2016), while its amount is
determined in the annual budget. Besides, at least 20% of the value of swap of the
mentioned items should be allocated to the fund. These shares should increase on an
annual basis by three percent. In addition, there are another resources including fifty
percent of the cash balance of reserve account at the end of each year since 2011,
resources available from international money markets under the permission of the
Board of Trustees in accordance with relevant rules and regulations, net profit of the
fund during the financial year, interest of the fund’s resources with the Central Bank
of Iran, not less than the average of interest rate of the Central Bank of Iran’s deposits
in foreign markets, with calculation and payment every three months, and twenty
percent of resources subject matter of Part D of Paragraph 4 of the 2011 Annual
Budget Law.6
Key features of the National Development Fund were
1. Separate elements, including the Board of Trustees, the Executive Board, and
the Supervisory Board for policy-making, implementation, and oversight;
2. Decision-making to be made by a nine-member board of trustees with a decisive
majority (in addition to the head of the Iran’s Chamber of Commerce, Industries
and Mines, and the head of the Iran’s Cooperative Chamber as a supervisor
without voting right);
3. The Board of Trustees to be required to include its decisions in the official gazette
of the country as well as in one of the major newspapers;
4. The Board of Directors to have five members selected by the Board of Trustees
and appointed by the President. Dismissal of the members of the Board and
acceptance of their resignation to be conditional on confirmation of a two-thirds
majority ballot by the trustees;
5. The Supervisory Board to be consisted of: the president of the Supreme Audit
Court of Iran, the president of Inspectorate General of the country, and the
president of the General Audit Office. This board is required to submit their
supervisory report every six months to Parliament and to the Board of Trustees
(Hadi-zonooz and Pileh-foroush 2013);
6. In the first year of the program, Fund Resources would include 20% of the
revenues derived from exports of crude oil and gas condensates and petroleum
products, whether in cash or barter. The share of the deposits would also increase
by 3% points each year;

5 http://en.ndf.ir/About-NDF/Articles-of-Association#111628-i---the-funds--spending.
6 According to this paragraph, petroleum ministry shall deposit any revenue from export of crude
oil directly into the Treasury accounts of the country as a whole, after deducting the buy-back
reimbursements. The Central Bank is obliged to deduct twenty percent (20%) of this account on a
monthly basis as the share of National Development Fund and deposit it into the relevant account.
Public Wealth Management and Distribution in Iran 123

7. The most important tasks of the Fund were the provision of facilities and
loans to the private sector, cooperatives and enterprises owned by public non-
governmental organizations, and to invest in international financial and monetary
instruments;
8. It was forbidden to use the fund’s resources for spending credits and the acqui-
sition of capital assets as well as the repayment of government debt in any form;
and
9. The loans were to be in foreign currency, and investors did not have the right to
exchange them into Rials on the domestic market.

9 Performance of the National Development Fund of Iran

From the approved foreign exchange facilities, only 28% has been definitely paid.
Concerning the composition of accepted projects, it can be said that in total more
than 42% of projects accepted belong to public non-governmental organizations.
However, according to the paragraph “d” of the statute of the Fund, the total amount of
funds allocated from banks’ resources to non-governmental public institutions (such
as municipalities, social security and foundations) and subsidiaries and affiliates shall
not exceed 20% of Fund resources (NDFI 2018).
By the end of the last year, the Fund has also signed agency contracts in Rials
with a total of 314 billion Riyals with 25 state-owned and privately owned banks,
out of which about 50% are allocated to plans and projects submitted by operating
banks (NDFI 2018) Although Rial payments have been made mainly with legal
authorizations, the purpose of the Fund of the fund is to provide facilities only in
foreign currency, and according to the Fund’s Statute, investors using these facilities
are not allowed to convert the currency into Rials in the domestic market.

10 Conclusion

Iran’s Fifth Development Plan (2011–2016) set out to change the way oil funds are
organized in Iran, but as the National Development Fund’s performance illustrates,
in practice, shifting from an account to a fund resulted in no significant progress
(Pile-Foroush et al. 2018).7
Under the current situation, the Iranian government’s financial decision-making
system lacks integration and coherence. It cannot prioritize and pursue the goals of
Development Plans by defining policies that are cost-effective and implementable
within a certain revenue ceiling. If oil revenues cannot be properly managed because
institutional conditions are needed, which includes an integrated budgetary system,
a new mechanism (such as the oil fund) will sooner or later suffer the same bugs as

7 Pile-Foroush et al. (2018).

124 Z. Abdolalizadeh

the current, established financial system, and it will not solve institutional problems
(Shirkhani et al. 2010).8
One reason for this is the lack of attention to Iran’s medium-term expenditure
framework. It seems the prerequisite for success would be to set a ceiling table for
all government spending, with a realistic forecast based on the average of the past
12 years, together with current oil prices, and an anticipation of those prices three
years ahead. An additional requirement would be the fundamental institutionalization
of the budgetary system and an optimal performance of the Iranian oil fund. By setting
a ceiling and placing restraints on spending, the next necessary correction would be
to show the non-oil budget deficit in the budget document. This simple, yet key,
recommendation does not apply for most oil-producing countries.
If politicians have short-term horizons, they take their own interests into account.
In the face of demands from various groups in society, they will opt to spend more
on oil revenues in the short run, both in legal and even illegal ways. In other words,
if the interests of a regulatory system are always that the immediate use of petroleum
resources is required, the oil fund mechanism will not succeed. This feature is one of
the most important factors affecting the failure of Iran’s Foreign Exchange Reserve
Account or the National Development Fund.
All in all, if costs are not taken into account realistically, and compulsory percent-
ages (e.g. 30% annually) are taken into account as a share of the oil fund—regardless
of the country’s economic conditions—it will base its economic realities on fictitious
and unrealistic percentages. And the government will use all means to justify its use
of the fund’s resources, as happened to the National Development Fund of Iran.
The requirements for achieving the goals of the National Development Fund are
as follows:
• Due to the lack of quantitative tables in the Fifth Development Plan (2011–2016),
the amount of annual oil consumption in the general budget of the country is
determined and the surplus of oil resources deposited into the reserve account
after deducting the share of the National Development Fund, and the use of the
public budget. As a result, there is always the possibility of economic instability
due to the excessive injection of oil into the country’s economy.
• Following the positive oil shock, it has been the government’s national policy
to maximize oil revenues. To alleviate the negative effects of this policy, it is
necessary for the National Development Fund Trustees to calculate the capacity
of private sector to invest domestically, to the extent of the absorb capacity of the
national economy in order to inject the resources of the Development Fund into
the country’s economy, and invest its surplus in international financial markets.
• Adding out-of-budget mechanisms to a non-transparent and inefficient financial
system can remove oil funds from the public eye and provide a platform for a small
group of decision-makers to prioritize. Experience in other countries shows that
transparency and accountability are one of the essential foundations for the success
of these funds (Karimifard 2011). Although, it should be taken into account that

8 Shirkhani et al. (2010).

Public Wealth Management and Distribution in Iran 125

the issue of transparency of oil revenues, which can be made more precise by the
creation of financial rules such as the oil fund, may be reversed and reduced in
the absence of the necessary institutional conditions (Pile-Foroush et al. 2018).
• The success of the National Development Fund requires understanding the
complexities and difficulties of getting rid of the structure of a rentier polit-
ical economy. Governmental financial discipline is one of the basic conditions
to achieve this.

References

Abbasi, E. (2008). Review of foreign exchange account performance during third development plan.
Biannual Program and Budget, 106, 101–127.
Arab-mazar, A., & Noormohammadi, K. (2016). A critical analysis of the economic goals of devel-
opment plans in Iran (before and after the Islamic revolution). Social Studies and Research in
Iran, 5(17), 19–42.
Hadi-zonooz, B. (2009). Iran’s economy, comments and critics. Tose’e Publication.
Hadi-zonooz, B. (2010). Investigation of economic planning system in Iran (before the Islamic
revolution). Research Center of Parliament.
Hadi-zonooz, B., & Pileh-foroush, M. (2013). Foreign exchange reserve account and national
development fund in Iran; Differences, functions and legal principles. Development Strategy,
40, 75–107.
Haji-Mirzaee, M. (2006). The necessity of establishing an oil fund in Iran. Economic Research and
Policy, 15(44), 1–46.
Karimifard, H. (2011). Assessment of the National Revenue Fund from the sale of non-renewable
natural resources, with emphasis on the Islamic Republic of Iran Development Fund. Parliament
and Strategy, 18(68), 147–184.
Khalesi, A., & Farhadikia, A. (2009). The pathology of first to fourth development plans after the
Islamic revolution. Vice President of Strategic Planning and Supervision’s Publication.
Kianpour, S. (2010). Analysis of Iran’s foreign exchange accounts compared to the experiences of
other countries’ oil funds. Journal of Business Reviews, 43, 78–95.
Mahdavian, M. H. (2007). The review on function and structure of foreign exchange deposit account.
Strategic Research Center, Second Bulletin.
Mardoukhi, B. (2005). Oil wealth management and foreign exchange reserve accounts in the third
plan. Economy and Society, 1(5), 1–8.
NDFI. (2018). National Development Fund performance report. Published by National Develop-
ment Fund of Iran.
Pile-Foroush, M., Pasbani, A., & Chashmi, A. (2018). Impact of financial rules on the performance
of oil funds: A comparison of Iranian and Norwegian Funds. Parliament and Strategy Magazine,
25(93), 237–280.
PRC. (2001). A look into foreign exchange deposit account. Parliament Research Centre, Report
No. 15.
Sadatrasoul, M., Gholamian, M., & Shahanaghi, K. (2015). Investigating the effect of selected
sustainable development indicators on credit allocation: The case of National Development Fund
of Iran. Iranian Journal of Management Studies (IJMS), 8(3), 453–477.
Shirkhani, M., Barari, A., & Pouzesh-Shirazi, H. (2010). The curse theory or how to manage oil
revenues; Case study: A comparison of Norway and Iran. Journal of the Faculty of Law and
Political Science, 40(2), 115–134.
The Experiences of Managing
the Heritage and Stabilisation Fund
in Trinidad and Tobago
and the Sovereign Wealth Fund Guyana

Alicia Elias-Roberts and Indira Rampaul-Cheddie

Abstract This chapter provides an analysis of the legal and regulatory framework
of both Trinidad and Tobago and Guyana’s sovereign wealth funds. It discusses the
legal regime of ownership of the mineral estate in Trinidad and Tobago. It discusses
the procedure to obtain the Exploration and Production (Public Petroleum Rights)
Licence and the Exploration and Production (Private Petroleum Rights) Licence, as
well as the system of private petroleum leases in Trinidad and Tobago. The estab-
lishment and management of the Heritage and Stabilisation fund in Trinidad and
Tobago is examined. In the second part of the paper the ownership of the petroleum
resources in Guyana is discussed and some of the main features of Guyana’s Natural
Resource Fund Act 2019 is evaluated. Also, a critical analysis of the legal framework
in Guyana is undertaken and lessons from Trinidad and Tobago which can be useful
to Guyana are outlined.

Keywords Sovereign wealth fund · Stabilisation fund · Natural resource fund · Oil
and gas law · Trinidad and Tobago · Guyana

1 See Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries

(2015); See also Trinidad and Tobago Extractive Industries Transparency Initiative Report (2016).
2 The country is 1841 sq. miles and the population of Trinidad and Tobago is about 1.4 million

according to the Government of Trinidad and Tobago, Central Statistical Office’s Population, Social
and Vital Statistics Division, https://cso.gov.tt/news/tt-population-reaches-1-4-million/, accessed 31
August 2019.
3 Heritage and Stabilisation Fund Act, no. 6 of 2007, Law of Trinidad and Tobago.
4 Ghany (2016).

A. Elias-Roberts (B)
Faculty of Law, University of the West Indies, St. Augustine, Trinidad and Tobago
e-mail: [email protected]
I. Rampaul-Cheddie
Ministry of Energy and Energy Industries, Port of Spain, Trinidad and Tobago

© The Editor(s) (if applicable) and The Author(s), under exclusive license 127
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_7
128 A. Elias-Roberts and I. Rampaul-Cheddie

1 Introduction

Trinidad and Tobago has over 100 years of experience in oil and gas exploration.1
This small twin island State often experiences changes in political leadership, which
results in varied priorities within the government and different application and inter-
pretation of laws and policies.2 The current Heritage and Stabilisation Fund of
Trinidad and Tobago (hereinafter “HSF”) is a sovereign wealth fund, which was
established by the Heritage and Stabilisation Fund Act,3 No. 6 of 2007 with effect
from March 15, 2007. It was previously known as the Interim Revenue Stabilisa-
tion Fund (IRSF), which was set up in 2000. All of the proceeds in the IRSF were,
in fact, transferred to the Fund in 2007. According to one academic,4 this brief
history demonstrates that the concern for the protection of the economy of Trinidad
and Tobago has been shared on a bipartisan basis, where one administration had
launched the IRSF in 2000 and after general elections and a change of government
another administration had established the current Fund in 2007 as the replacement
for the IRSF and transferred the proceeds from one account to the other.
In contrast to Trinidad and Tobago, the 2015 oil discoveries in the offshore areas in
Guyana position the country as an emerging frontier oil and gas producer.5 Guyana
is set to be one of the few countries to have a Sovereign Wealth Fund (SWF) in
place before “First Oil.”6 Since commencing exploratory drilling in Guyana, oil
major ExxonMobil has discovered an estimated 10 billion barrels of oil equivalent
of recoverable oil in the Stabroek deep water exploration block about 120 miles
offshore.7
This chapter will provide an analysis of the legal and regulatory framework of
both Trinidad and Tobago and Guyana’s sovereign wealth funds. It will begin by
explaining ownership of the mineral estate in Trinidad and Tobago. It will explain
the hybrid system of public and private petroleum rights, which currently exists
in Trinidad and Tobago and a brief history of the system. This chapter will also
discuss the procedure to obtain the Exploration and Production (Public Petroleum
Rights) Licence and the Exploration and Production (Private Petroleum Rights)
Licence, as well as the system of private petroleum leases. The establishment of the
Heritage and Stabilisation fund in Trinidad and Tobago will be examined and the
management and distribution of the fund will be analysed. Next, ownership of the
petroleum resources in Guyana will be discussed and some of the main features of
Guyana’s Natural Resource Fund Act 20198 will be evaluated. Before concluding
with a critical analysis of the management of the sovereign wealth fund, the fiscal
regime in Trinidad and Tobago will be evaluated and lessons from Trinidad will be
outlined which can be useful to Guyana.

5 Krauss (2017).
6 Government of the Cooperative Republic of Guyana (2019).
7 Myers (2018).
8 Natural Resource Fund Act (no. 12 of 2019), Laws of Guyana.
The Experiences of Managing the Heritage and Stabilisation … 129

2 Ownership of the Mineral Estate and the Extractive

Resources in Trinidad and Tobago

Ownership of the mineral estate with regard to oil and gas is provided for under
the Petroleum Act and Regulations.9 This is the main statute governing petroleum
operations in Trinidad and Tobago. Under the Petroleum Act, public petroleum rights
are vested in the State and are exercisable by the President, while private petroleum
rights are exercisable by the owner thereof, subject to the Act and Regulations, and
any Rules and Orders made thereunder. Prior to the commencement of the Petroleum
Act, exploration and production operations were regulated by oil mining leases.
Historically, persons were not required to obtain licences to conduct certain petroleum
operations. Other operations were conducted by virtue of a licence, grant or oil mining
lease. The Petroleum Act introduced a system of licencing for petroleum operations.
Note that the first types of licences under the Act, which we shall refer to as the older
model licences, were issued until 2005 and thereafter a newer model of licences were
issued.
One unique feature of the ownership of the mineral estate or petroleum resources
in Trinidad and Tobago is that the country has a hybrid system of public and private
petroleum rights. The Petroleum Act, section 2 provides a definition for private
petroleum rights and public petroleum rights. It defines “private petroleum rights”
as rights to petroleum that are not public petroleum rights and “public petroleum
rights” as rights to petroleum in its natural condition in strata existing in State Lands
and submarine areas.10 Sub-section (3) of section 2 provides a cut-off date and states
that all mineral rights are possessed by the State in grants of land after 30th Jan
1902. It states as follows: “(3) In this Act a reference to State Lands shall be read
and construed as including a reference to the mineral rights in all lands by whomso-
ever possessed, the subject of a grant by the State after 30th January 1902.”11 The
historical explanation for this hybrid system and the cutoff date is explained in the
following excerpt from the speech of Mr. Bhoolai, Member of Parliament, in the
Hansard Debate on the Petroleum Bill in 1969 where he states as follows:
After 1902 surface land in this country was sold without mineral rights. Lands that were sold
up to the year 1901… I am speaking with authority because I own them; my father bought
them and I own them in the oil area too; and I think the Minister is fully aware of it himself,
because he comes from that oil area and he owned plenty land there once. These lands that
were sold after 1902 they have absolutely no oil rights and no mineral rights. And according
to this bill the Government are treating these lands that are already sold and are owned by
the public, with Houses and good roads and lots and villages established; with good cocoa
cultivation, as Crown Lands of this country according to the rights and privileges given to
the petroleum company whosoever might come.12

9 Petroleum Act (no. 46 of 1969), Cap. 62:01, Laws of Trinidad and Tobago; see also the Petroleum
Regulations (Legal notice 5 of 1970), made pursuant to section 29 of the Petroleum Act, Laws of
Trinidad and Tobago.
10 Ibid., Petroleum Act, section 2.
11 Ibid.
12 “Hansard Debate on the Petroleum Bill, No. 34 of 1969”, Debates of the Senate, Volume 9, (1969)

Hansard Parliamentary Report, Trinidad and Tobago.

130 A. Elias-Roberts and I. Rampaul-Cheddie

Section 6 of the Petroleum Act proscribes any person from engaging in petroleum
operations on land or in a submarine area, unless he first obtains a licence as
provided for in the Act or the Regulations.13 The interpretation section of this
Act defines “petroleum operations” as the operations relating to the various phases
of the petroleum industry, including, inter alia, “…exploring for and producing…
petroleum.” Section 3 of the Petroleum Regulations provides for the issue of two
licences to govern exploration and production activities in Trinidad and Tobago: (i)
the Exploration and Production (Public Petroleum Rights) Licence and (ii) the Explo-
ration and Production (Private Petroleum Rights) Licence. The Private Petroleum
Rights Licence is granted by the Government over lands in which the petroleum
and mining rights are owned by private individuals. Trinidad is one of less than ten
countries in the world in which there exists such private ownership. To date, only two
of this type of Exploration and Production (Private Petroleum Rights) Licence have
been issued in Trinidad. One such licence has been granted to Trinidad Exploration
and Development Limited (TED).14
Petroleum activities over areas that are subject to public petroleum rights are
carried out either under the authority of an Exploration and Production (Public
Petroleum Rights) Licences (“Public E&P Licences”) granted by the Minister, or
by the Minister entering into a Production Sharing Contract (“PSC”) with the
contractor.15 Another unique feature of the Petroleum laws in Trinidad and Tobago is
that the Act provides that production sharing contracts shall prevail over the Act where
there is a conflict. Whether this provision is constitutional has not been challenged.
Section 6(4) provides as follows:
Where a production sharing contract is entered into under subsection (3), so much only of
this Act and the Regulations as are not excluded by the contract shall apply to any person
carrying on petroleum operations under such contract, and where any provision of this Act
or the Regulations is modified by the contract for the purposes of such contract, this Act and
the Regulations shall be read and construed accordingly, and where there is any conflict or
variance with reference to any matter between the provisions of the contract and this
Act or the Regulations, the provisions of the contract shall prevail. (bold for emphasis).

Additionally, it should be noted that the regulations expand on the operation of

public and private petroleum rights and the licenses. The Minister is charged with the
general administration of the Act, and in the exercise of his powers and the perfor-
mance of his duties, he is required to confirm with any general or special directions
given to him by the Cabinet. Any decision made or action taken by the Minister in

13 Section 6 of the Petroleum Act stipulates as follows:

(1) No person shall engage in petroleum operations on land or in a submarine area, unless he first
obtains a licence as provided for in this Act or the Regulations.
(2) A person who contravenes this section is liable on summary conviction to a fine of thirty
thousand dollars and in the case of a continuing offence, to a further fine of one thousand, five
hundred dollars for every day during which the offence continues.

14 Lynch (1997).
15 See, Petroleum Act Chap. 62:01, section 6(3).
The Experiences of Managing the Heritage and Stabilisation … 131

the exercise of his powers and the performance of duties in accordance with the Act
and the regulations shall be deemed to be made or taken by the Government and is
binding thereon. The Minister may also delegate by written instrument to any public
officer or agency of the government any of his powers or functions under the Act, as
specified in the instrument. Such delegation does not prevent the exercise of the said
functions by the Minister. Every delegation is revocable at will.
The procedure to acquire a licence requires the applicant to determine whether the
petroleum rights attached to a particular piece of land are private or public. In order
to conduct petroleum operations involving private petroleum rights, the company
would need to obtain two documents: a private oil mining lease and a licence. The
owner of the Private Petroleum Right must transfer their right.16 Minerals rights in an
oil and gas lease differ from surface rights. In the event that one concludes that one
is dealing with private petroleum rights, the next step would be to determine who the
owner of the right is. The Petroleum Regulations provides that “the term for which
an Exploration and Production (Private Petroleum Rights) Licence may be granted
shall be twenty years, subject to renewals for successive periods of twenty years.”17
Unlike with private petroleum rights, a person interested in exploring areas that
are subject to public petroleum rights need only deal with Ministry of Energy and
Energy Industries as these rights are vested in the State to obtain the Exploration and
Production (Public Petroleum Rights) Licences or a Production Sharing Contracts
(PSC). The Public E&P Licences is a type of concession agreement and is the direct
descendent, in the international arena, of the original Drake Lease in Pennsylvania.18
It is the first type of contract used internationally and still persists today. However,
this system lost popularity as nationalism grew or countries sought to take charge of
their natural resources.19
An Exploration and Production (Public Petroleum Rights) Licence is a permission
granted by a government to explore for and produce petroleum on lands in which
the petroleum and mining rights are owned by the government or in a submarine
area. Section 38 of the Act allows a person carrying out exploration and produc-
tion operations a grace period of twelve months in which to become licenced under
the Act. However, time period was not strictly enforced and existing oil mining
leases continued in effect even after this twelve-month period. This was an unac-
ceptable situation, as the two regimes could not reasonably subsist side by side

16 For a detailed discussion on the procedures to obtain a private petroleum rights licence see

Rampaul (2003).
17 Regulations section 13 (2). Note that more details about the regulations of the Exploration and

Production (Private Petroleum Rights) Licence are included in a Cabinet Minute headed “Guide-
lines for Use in assessing Applications for Exploration and Production (Private Petroleum Rights)
Licences”. The Guidelines state that the Ministry of Energy and Energy Industries shall negotiate
each licence on a case-by-case basis in accordance with the Petroleum Act and the guidelines laid
out in the said minute. The Guidelines specify that the “minimum acreage to be covered by such a
licence be no less than 500 acres.” The reason for this is to avoid inefficient and unsafe operations
on small holdings.
18 Yergin (1991).
19 Ibid., 165–541.
132 A. Elias-Roberts and I. Rampaul-Cheddie

without conflict. This situation caused particular difficulties especially with regard
to issues such as transparency, unitisation of blocks, and requests by holders of oil
mining leases to expand their licenced areas.
In 1990, section 38 of the Petroleum Act was amended in an attempt to more
effectively administer the conduct of exploration and production activities by phasing
out the oil-mining leases. Section 38 provided that persons conducting petroleum
operations under oil-mining leases would be deemed to be licensees in respect of
those petroleum operations until licenced as such under the Act. It was the intention
behind this amendment that new licences would be issued to replace oil-mining
leases and these new licences would be more in conformity with the new licencing
regime despite the fact that they would have been issued on terms and conditions
appropriate to and as reasonably close as possible to the oil-mining leases that they
were replacing. This process was not fully undertaken at the time, and so the oil-
mining leases, now deemed licences by virtue of Section 38 of the Act, continued
in full force and effect. These oil-mining leases have been slowly replaced over the
years in an ad hoc fashion until recently when most of the oil-mining leases held by
the Petroleum Company of Trinidad and Tobago were surrendered and replaced by
new model licences.
The provisions of the oil-mining leases and older model licences were well drafted
and very comprehensive but were found in the early 2000s to be archaic in some ways.
For instance, they contained an obligation to properly abandon and decommission at
the end but did not include for any mechanism such as places funds into an escrow
account to provide finances for the abandonment of wells and decommissioning of
facilities on cessation of operations or for the remediation of pollution. Thus, the oil-
mining leases did not always meet the government’s modern aims and objectives in an
ever-evolving industry. Accordingly, the new model licences have been formulated
to do so.
The oil-mining leases contributed to a heritage of pollution and poorly abandoned
wells that Trinidad now must deal with. The older model licences and the new model
licences place an obligation on the licensee to establish an escrow account in the name
of the Minister to accumulate cash reserves for use as a contingency fund for the
eventual abandonment of wells in the Licenced Area and decommissioning of facil-
ities used for petroleum operations under licence.20 The new model licence expands
the escrow account to include remediation of pollution arising from petroleum oper-
ations carried out under the licence during the term of the licence. The Minister
may at his sole discretion access funds from the escrow account if the Licensee fails
to effect environmental clean-up, in light of an accident to the satisfaction of the
Minister.
The Licensee is obligated to pay twenty-five cents in the currency of the United
States of America per barrel of oil equivalent produced into the escrow account. In
computing the relevant production, Natural Gas Production is added to Crude Oil
Production after converting to barrels of crude oil on an Energy Equivalent Basis,

20 See Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries

(2019a).
The Experiences of Managing the Heritage and Stabilisation … 133

which is defined as the equivalent of Natural Gas in barrels of Crude Oil with 5,800
standard cubic feet of Natural Gas being equivalent to one barrel of crude oil. The
Licensee is obligated to maintain this account at a level considered adequate by the
Minister to fulfil its purpose at any time.21
The oil mining leases and old model licences do not contain clauses regarding
the use of local goods and services in their operations. The more recent licences
require that the licensee comply with the provisions of the Local Content and Local
Participation Policy and Framework.22 The licensee is required to keep records of
their use of local goods and services for the purpose of inspection and audit by the
Minister and to submit reports on local content to the Minister on a quarterly basis.
This change is in keeping with the government’s policy to develop local participation
in the energy sector thereby fostering the development of local expertise in the
petroleum industry and ensuring a wider distribution of the revenue accruing to
the country from the energy sector. In the new model licences, the government has
given recognition and significance to the necessity for the development of local
human resources. Accordingly, the new licences have clauses requiring contributions
towards training and research and development and the provision of scholarships.
The oil-mining leases had no such provisions and older model licences did not have
such comprehensive clauses in these areas.
The oil-mining leases and old model licences did not contain many bonuses
to be paid to the government. The new model licences contain a signature bonus,
production bonuses, and a technical equipment bonus. The signature bonus is usually
payable within ten days of execution of the licence, it represents a reasonable sum
based on the project as a whole. The production bonuses are payable on first attain-
ment of a sixty-consecutive day average at or in excess of certain production levels.
This is a mechanism employed to ensure an equitable distribution of supernormal
profits. The technical equipment bonus is payable either in cash, technical assistance,
or technical equipment.
The older licences tended to treat with environmental issues very scantily. As
mentioned earlier, this has led to a heritage of pollution. As part of the approach to
dealing with the existing pollution, licensees are required to pay an environmental
bonus within ten days of the effective date of the licence; this money is to be used
by the government in the remediation of existing sites of pollution. Also, certain
licensees are required to conduct a review of the well files and other related and
available documents, as well as physical site inspection of the existing wells with a
view to determining, to the extent reasonably possible, the abandonment and envi-
ronmental status of the existing wells and the licensed area within eighteen months of
the effective date of the licence. Further, the licensee is required each year to imple-
ment a programme of environmental remediation of identifiable sites of chronic oil
pollution in the licensed area. This programme is to be approved by the Minister.

21 Ibid.
22 Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries
(2004).
134 A. Elias-Roberts and I. Rampaul-Cheddie

The new licences have more stringent relinquishment provisions than the oil-
mining leases and older model licences. This is in keeping with the objective of
encouraging exploration activity and avoiding acreage lying idle for long periods of
time. The oil-mining leases provided for an initial thirty-year term with an option to
renew for a further term not exceeding thirty years from the expiration of the initial
subject to the same covenants, provisions, and agreements as were therein contained
with the exception of the covenant for renewal. They traditionally contained no
relinquishment provisions. Both the new and the older model licences provide that
all acreage that does not form part of a field must be surrendered by the end of the
sixth year of the licence. Additionally, in the new licences, the licensee is required
to surrender fifty per cent of the licensed area by the end of the fourth year of the
license.

3 Establishment of a Dedicated Fund for Extractive

Industries

As illustrated above, Trinidad and Tobago has a long history of managing oil and
gas exploration. Over the years, the laws were amended several times to make
accommodation for new circumstances and the model contracts and licences used
in the industry welcomed new iterations over the years, which included changes to
update the legal, regulatory, and contractual relationship between the government
and contractors. With regard to the Heritage and Stabilisation Fund of Trinidad and
Tobago, as mentioned above, this Fund in its current form was established in 2007
but was previously known as the Interim Revenue Stabilisation Fund, which was set
up in 2000. This fund was introduced after over 80 years of petroleum operations
in Trinidad and Tobago.23 The primary objectives of the fund are to save and invest
surplus petroleum revenues derived from production business and to support and
sustain public expenditures during periods of revenue downturn and to provide a
heritage for future generations of the nation. According to Section 3(1) of the Act,
the purposes of the fund are to:
(a) Cushion the impact on or sustain public expenditure capacity during periods of revenue
downturn whether caused by a fall in prices of crude oil or natural gas;
(b) Generate an alternate stream of income so as to support public expenditure capacity as
a result of revenue downturn caused by the depletion of non-renewal petroleum resources;
and
(c) Provide a heritage for future generations of citizens of Trinidad and Tobago from savings
and investment income derived from the excess petroleum revenues.24

The resources of the fund consist of moneys transferred from the Interim Revenue
Stabilisation Fund, petroleum revenues deposited into the fund in accordance with

23 See Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries

(2019b).
24 Heritage and Stabilisation Fund Act, supra n. 3, section 3(1).
The Experiences of Managing the Heritage and Stabilisation … 135

section 13 of the Act, and assets acquired and earned from investments. Section 13
of the Act provides that where petroleum revenues collected in each quarter of any
financial year exceed the estimated petroleum revenues for that quarter of the financial
year by more than ten per cent, the currency of the United States of America equivalent
of the excess revenue shall be withdrawn from the consolidated fund and deposited
to the fund in accordance with section 14(1) of the Act. It further provides that
where petroleum revenues collected in each quarter of any financial year exceed the
estimated petroleum revenues for that quarter of a financial year but do not exceed
such estimated revenues by at least ten per cent, the Minister may direct that the
currency of the United States of America equivalent of all or part of the excess
revenue shall be withdrawn from the consolidated fund and deposited to the fund in
accordance with section 14(1) of the Act.

4 Management of the Heritage and Stabilisation Fund

in Trinidad and Tobago

The International Working Group of Sovereign Wealth Funds, which was established
in 2008 created a set of Generally Accepted Principles and Practices known as the
Santiago Principles.25 These principles are aimed at ensuring good governance,
accountability, and prudence by Sovereign Wealth Funds. The Trinidad and Tobago
Fund was built on the principles thereby created. This group subsequently became
the International Forum for SWFs (IFSWF) and lends assistance to members in
implementing the Santiago Principles.
The President, on the advice of the Minister of Finance appoints a Board of
Governors for the fund. The Board comprises five members with expertise in matters
of finance, investment, economics, business management, or law. The Board must
always include an officer of the Central Bank; and the Ministry of Finance. Members
of the Board are to be appointed for a term of three years and are eligible for reappoint-
ment. The Board has the responsibility to determine by resolution, the governance
structure and the operational and investment guidelines of the fund based on pruden-
tial standards used by the Central Bank for investments of a similar nature. It is also
responsible for the management of the fund and must review the performance of the
fund from time to time.26
Section 10 of the Heritage and Stabilisation Fund Act, 2007, however, provides for
the Board to delegate its management responsibility to the Central Bank of Trinidad
and Tobago. As Manager of the fund, the Central Bank is responsible for the manage-
ment of the assets and other resources of the fund in accordance with the Act and the
prudent investor standard of an investment manager, engaged in the asset manage-
ment profession.27 It also oversees the investment of the assets and other resources

25 International Working Group of Sovereign Wealth Funds (2008).

26 Heritage and Stabilisation Fund Act, supra n. 3.
27 Ibid.
136 A. Elias-Roberts and I. Rampaul-Cheddie

of the fund in accordance with the Heritage and Stabilisation Fund Act, 2007 and
the operational and investment guidelines developed by the Board. It manages the
selection and retention on behalf of the fund appropriate third-party service providers,
such as, attorneys-at-law, auditors, and advisors in order to carry out competently, the
mandate specified in the instrument of delegation and the selection of an appropriate
global custodian for the fund. Its duties include the maintenance of records and docu-
mentary support for all investments, receipts, disbursements, and other transactions
relating to the management of the fund in accordance with prevailing accounting
practice. It must ensure the submission of quarterly reports to the Board on the hold-
ings, performance, and risk of the fund no later than one month after the end of
each quarter and an annual report of the fund to the Board no later than two months
after the end of the financial year which must contain audited financial statements
and an investment report on the performance of the fund. The Board decides on the
investment objectives and approves the manner in which the funds are to be invested
by the Central Bank.
The management of the fund’s portfolio is done by skilled asset managers engaged
by the Central Bank, with the approval of the Board of Governors. Additionally, the
Central Bank hired a global custodian to perform the role of safe keeping assets,
trade settlement and reporting. In February 2008, the Central Bank commenced a
rigorous external manager selection process which resulted in the engagement of
eight managers to manage the four investment mandates.28
It should be noted that there is an Operational and Investment Policy guideline
for the management of the fund, which was developed by the Central Bank with
the assistance of the World Bank and approved by the Board of Governors on July
30, 2009. It provides the framework for the management of the fund by the Central
Bank. The Board is required to review the operational and investment policy at least
every three years.29
The parliament of Trinidad and Tobago has ultimate oversight of the fund through
the review of annual reports and audited financial statements. The Act stipulates that
the Board shall submit a quarterly investment report and an annual investment report
to the Minister on the operation and performance by the fund. It also provides that the
Minister may request such a report, and it must be submitted to the Minister within
one month of a request made. Further, within four months of the end of the financial
year, the Minister is obliged to cause the audited financial statements in respect of the
fund to be laid in Parliament. These financial statements are prepared in accordance
with generally accepted accounting practices and international accounting standards
adopted by the Institute of Chartered Accountants of Trinidad and Tobago. It must
be highlighted that because the fund is a public account, it is audited annually by the
Auditor General.

28 HSF Annual Investment Report for the Period ended September 30, 2017, https://www.finance.
gov.tt/wp-content/uploads/2019/08/HSF-Annual-Report-2017.pdf, accessed August 29, 2019.
29 Ibid.
The Experiences of Managing the Heritage and Stabilisation … 137

5 Distribution of the Heritage and Stabilisation Fund

Across Different Regions and State Entities

The Minister is responsible for approving deposits and withdrawals from the HSF in
accordance with the legislation and reports annually to the parliament. The circum-
stances in which withdrawals may be made are clearly laid out in the Act. Section 15
states that where the petroleum revenues collected in any financial year fall below
the estimated petroleum revenues for that financial year by at least ten per cent, with-
drawals may be made from the fund. Withdrawal may be the lesser of either sixty per
cent of the amount of the shortfall of petroleum revenues for that year or twenty-five
per cent of the balance standing to the credit of the fund at the beginning of that year.
It further states that the amount withdrawn from the fund must be deposited into
the consolidated fund within forty-eight hours of such withdrawal. It is stipulated
however that no withdrawal may be made from the fund in any financial year, where
the balance standing to the credit of the fund would fall below one billion dollars in
the currency of the United States of America, if such withdrawal were to be made.
To date, the Government has made 14 contributions to the fund amounting to
US$2,554.6 million. For the first seven years of the fund’s existence, with the excep-
tion of financial year 2009, the Government made deposits into the fund. Since the
decline in energy prices in 2014, the conditions necessary for the Government to
make deposits to the fund were not met and as a result, no further contributions were
made.30 The first drawdown occurred in May 2016 while the second occurred in
March 2017 with the two withdrawals totalling US$627.6 million.31
On 13 May 2016 the Government of Trinidad and Tobago made its first drawdown
of US$375.05 million from the fund. At that time, the balance in the fund was
US$5.796 Billion, and, after the withdrawal, the balance was US$5.420 Billion. It
was stated in the 2016 mid-year budget review, that any budget deficit would be
financed through a combination of borrowing and a drawdown from the HSF. On 16
March 2017, Cabinet approved a drawdown from the fund in the amount of the US
equivalent of TT$1,712,200,000.00 (US$251 million). This drawdown was used for
the financing of the 2017 budget, in particular, the Development Programme, also
known as the Public Sector Investment Programme (PSIP).32
Further, in the 2017 Budget Statement, it was stated that “in 2017, core revenue,
defined essentially as revenue from taxation, royalties and customs duties is only
projected to be of the order of $37 billion, $20 billion less than just two years ago
[2015]. This leaves a fiscal gap in 2017 of over $16 billion, which must be financed
by a combination of borrowings, and drawdowns from the Heritage and Stabilisation
Fund, and one-off sources of income, such as the sale of assets, dividends from state

30 HSF Annual Investment Report for the Period ended September 30, 2017, https://www.finance.

gov.tt/wp-content/uploads/2019/08/HSF-Annual-Report-2017.pdf, accessed August 29, 2019.

31 Ibid.
32 See Government of the Republic of Trinidad and Tobago Ministry of Finance Press Release

(2017).
138 A. Elias-Roberts and I. Rampaul-Cheddie

enterprises, repayment of past lending and so on”. In a press release33 on 16 March,

2017 the government of the Republic of Trinidad and Tobago stated that “As the
country continues to experience severe revenue shortfalls as a result of depressed
petroleum prices, the HSF will be carefully used by the Government to ensure the
country’s financial stability”.

6 Fiscal Regime in Trinidad and Tobago

The fiscal regime in Trinidad and Tobago is governed by various pieces of legislation
as well as contracts and licences. The key legislation through which revenues are
derived from the upstream petroleum sector is the Petroleum Act and Regulations.34
This legislation governs the conduct of petroleum operations. Under the Act, compa-
nies are required among other things to pay a royalty that is stipulated in the licence as
well as contribute to the Petroleum Impost, which is used to cover the administrative
costs of the Ministry of Energy.
Royalty rates vary based on policies in existence at the time of the execution of
the licence. For crude oil, the rate ranges from 10 to 12.5% of the Field Storage
Values. According to the website of the Ministry of Energy and Energy Industries35
“up until 1989, the Field Storage Value was based on the Royalty Lease Evaluation 1
Method (RLE1). This method provides for a price for crude oil that was determined
by the values of the crude oil fractions (light oils, diesel and fuel oil) less a percentage
for refining and handling charges. For licences signed from 1989, the Field Storage
Values are determined using international market prices of reference crudes. In the
case of natural gas, the royalty rate ranges from 0 to 15% of the value of natural gas.
Exploration and Production Licences were the main contractual arrangements
used during the period 1900–early 1970s. However, given the rapid development
of the sector, better administration of the contractual arrangements was necessary.
Therefore, in 1974, the first two Production Sharing Contracts (PSCs), for acreage
off the east coast of Trinidad, were signed. These earlier PSCs did not provide for
cost recovery, they allowed government a share of production based on production
levels and were also ring-fenced.
In 1995, with the adoption of the World Bank PSC Model by Government, the PSC
was extensively expanded with enhanced contractual terms and conditions. These
included provisions for cost recovery, relinquishment, abandonment, shares of Profit
Petroleum to the government that were based on both price and production levels,
minimum work obligations during the exploration period, procedure to encourage the
development of natural gas markets and financial obligations such as signature bonus,
research and development, training of nationals and technical equipment bonus. Like

33 Ibid.
34 Petroleum Act supra n. 9.
35 See Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries

(2019c).
The Experiences of Managing the Heritage and Stabilisation … 139

the earlier PSCs, these continued to be ring-fenced and assured the Government of a
steady revenue stream. In addition, under these PSCs the Contractor’s tax liabilities
were paid by the Government out of its share of profit petroleum. Simultaneously,
similar type provisions were slowly being introduced in the E&P licences.
A review of the petroleum fiscal regime undertaken in 2005, and this led to the
introduction of a new styled PSC, referred to as a “taxable PSC” that comprised
three major features. Firstly, Government received a Share of Profit Petroleum in
lieu of some taxes viz Supplemental Petroleum Tax, Royalty, Petroleum Impost and
Petroleum Levy. Contractors were therefore exempt from payment of the afore-
mentioned taxes but were required to pay all other taxes namely, Petroleum Profits
Tax, Unemployment Levy, Green Fund Levy and Withholding Tax directly to the
Ministry of Finance; this represented a departure from the earlier models in which the
government paid these taxes on behalf of the Contractor. Secondly a windfall profits
feature was introduced to capture higher shares of profit petroleum as petroleum
prices increased. Thirdly, consolidation of the new PSCs, by type either deep water
or land/shallow marine was permitted. This was to promote multi-block develop-
ment and facilitate investment by consortia and in so doing minimise their exposure
to risks.
Also included were provisions for re-openers, accessibility of natural gas supplies
for both the domestic and export markets, improved funding procedures for abandon-
ment, and assignments and transfers. A special incentive that provides for an uplift
of 40% on the drilling of exploration wells in the deep water was also introduced. In
2010, the legislation regarding the “taxable PSC” was repealed and the 1995 model
PSC reintroduced with the following changes: cost recovery levels fixed at 50, 55
and 80% for shallow, average and deep-water areas respectively; financial obliga-
tions are also fixed and the only two biddable items are the Government’s profit share
and minimum work program; and signature bonus is no longer compulsory.”36
The Petroleum Production Levy and Subsidy Act,37 was passed in 1974 with the
objective of buffering large increases in petroleum product prices and provide a
general level of market stability. This Act established a Petroleum Products Subsidy
Fund to be managed by the Minister of Finance. Subject to the Act and to any
Regulations and Orders made thereunder, the Minister of Finance, acting upon the
advice of the Minister is authorised to cause advances to be made from the fund for
the purpose of subsidising the prices at which petroleum products are sold by persons
carrying on marketing business in accordance with price-fixing orders made by the
Minister under section 31 of the Petroleum Act. In 1992, the Act was amended to
place a ceiling on each company’s gross levy payments of not more than 3% (later
increased to 4%) of its value of its gross income derived from the sale of crude.38
An inclusion was also made of those companies, previously exempt with production

36 See ibid., Tax Laws https://www.energy.gov.tt/for-investors/fiscal-regime/tax-laws/, accessed 29

August 2019.
37 Petroleum Production Levy and Subsidy Act Chap. 62:02, Laws of Trinidad and Tobago.
38 See Petroleum Profits Tax (Part 1 of the Act), Chap. 75:04, Laws of Trinidad and Tobago; and

Supplemental Petroleum Tax (Part 11), Introduced by Act 5 of 1981, Laws of Trinidad and Tobago.
140 A. Elias-Roberts and I. Rampaul-Cheddie

level of less than 3500 barrels of oil per day. Any excess levy payments above the
cap are to be made by the Government.
Taxation of Petroleum companies is governed by the provisions of the Petroleum
Taxes Act,39 Chap. 75:04, which applies to and is applicable to all companies engaged
in petroleum operations. This is defined as hydrocarbon compounds; “petroleum
operations” means the operations related to the various phases of the petroleum
industry and includes natural gas processing, exploring for, producing, refining,
transporting and marketing petroleum or petroleum products or both, and manu-
facturing and marketing of petrochemicals; but does not include mining operations
involving the extraction of petroleum from bituminous shales, tar sands, asphalt or
other like deposits.
Under the Act, two main taxes are paid by petroleum companies. These are
Petroleum Profits Tax (Part 1 of the Act) and Supplemental Petroleum Tax (Part 11).
The Petroleum Profits Tax (PPT) is applicable to all oil and gas producers as well as
refinery operators and is applied to the net profits (chargeable income) from opera-
tions. The calculation for the net profit is derived by deducting from the gross income
all operating expenses, capital allowances and other allowable deductions. According
to the Ministry of Energy and Energy Industries, deductions for oil and gas producers
include royalties, Supplemental Petroleum Tax, Petroleum Levy/Impost, decommis-
sioning/abandonment costs and management fees paid to non-resident companies
(limited to 2% of expenditure). Other special allowances are granted for signature
and production bonuses, dry holes, work-overs, qualifying sidetracks, heavy oil and
exploration costs (the latter available for the years 2014–2017). The current appli-
cable tax rate charged on producers as well as refinery operators is 50% (reduced
to 35% from income year 2011 for deep water operations only). Over the years,
amendments have been made to the PPT as market conditions changed. According
to the Ministry of Energy and Energy Industries, the last change was in 2014, when
increased allowances were granted on capital expenditure.40
The Supplemental Petroleum Tax (SPT) was introduced by Act 5 of 1981 and has
been amended on several occasions. The SPT is imposed on income generated from
production of crude oil net of royalty and over-riding royalty. Prior to 2005, SPT was
levied on the gross income from the disposals of crude oil (not natural gas income)
less certain allowances based on expenditure incurred in specified exploration and
development activities. Although the tax was imposed on crude oil sales, companies
involved in both oil and gas activities benefitted from the allowances since they were
broadly applied to exploration and development field activities. This significantly
contributed to the development of the natural gas industry in Trinidad and Tobago.
Over the years, the SPT rates varied for marine and land operations and for licences
or contracts that were agreed prior or post 1988. In 2006, SPT rates for deep-water
operations were fixed as those for land operations post 1988. SPT rates were also
based on a sliding scale for prices ranging from US$15.00 to $49.50 per barrel,
thereafter the rate remained fixed. As time progressed and as economic and industry

39 See Ibid., Supplemental Petroleum Tax.

40 See Tax Laws, supra n. 35.
The Experiences of Managing the Heritage and Stabilisation … 141

related factors warranted, several amendments were made to this tax. During the
period 2011–2013 incentives in the form of discounts/tax credits were introduced to
further stimulate the production of crude oil.
According to the Ministry of Energy and Energy Industries, companies also pay
5% of the chargeable income before loss relief plus any exempt income under the
Unemployment Levy Act,41 and the monies obtained are applied to assist in the
Government’s social programmes. The Green Fund Levy equates to 0.3% of the
gross sales or receipts and is paid under the Miscellaneous Taxes Act.42 The purpose
of this levy is the restoration and preservation of the environment.

7 Ownership of the Petroleum Resources in Guyana

Guyana is the only English-speaking country in South America. It is a former British

colony and has a common law legal system. Property in petroleum and the mineral
estate in Guyana is vested in the State, which has the exclusive right of searching
for petroleum.43 The Petroleum (Exploration and Production) Act (1986)44 and
Petroleum (Exploration and Production) Regulations (1986)45 govern and regulate
exploration, exploitation, conservation, and management of petroleum existing in its
natural condition in land in Guyana, including the territorial sea, continental shelf
and exclusive economic zone in Guyana. The Act sets out the procedures for the
application and grant of a petroleum prospecting licence and a petroleum production
licence and for matters connected therewith.46 The Act also sets out the conditions
concerning the duration, renewal, cancellation, and other functions relevant to the
petroleum licences as well as procedures for notification of a commercial discovery
of oil.
A petroleum prospecting licence usually lasts for ten years. It consists of an
initial period of four years with provisions for two further periods, which is at the
option of the licensee. Relinquishment is mandatory and the licensee is required to
relinquish blocks or a percentage of the licenced area at given intervals during the
terms of the licence. These mandatory relinquishments exclude the discovery areas.
Regarding the petroleum production licence, this licence is issued if a commercial

41 Unemployment Levy Act, Chap. 75:03, Law of Trinidad and Tobago.

42 Miscellaneous Taxes Act, Chapter 77:01, Laws of Trinidad and Tobago.
43 Petroleum (Production) Act, Cap. 65:05, Laws of Guyana, section 2.
44 Petroleum (Exploration and Production) Act (no. 3 of 1986), Cap. 65:10, Laws of Guyana

available at https://parliament.gov.gy/documents/acts/8170-act_no._3_of_1986_petroleum_(exp
loration_and_production)_act_1986.pdf accessed 28 October 2019.
45 The Petroleum Regulations (Legal notice 5 of 1986), made pursuant to section 70 of the Petroleum

(Exploration and Production) Act, (no. 3 of 1986), Cap. 65:10, Laws of Guyana.
46 Supra (n 4) Petroleum (Exploration and Production) Act, section 20: Application for a prospecting

licence; section 21: Grant of prospecting licence; section 30: Notification of discovery of oil;
section 31: Notification of discovery of oil in commercial quantities; section 34: Application for a
petroleum production licence; and section 35: Grant of petroleum production licence.
142 A. Elias-Roberts and I. Rampaul-Cheddie

petroleum discovery is made. This licence has an initial period of twenty years,
with a single renewal period not exceeding ten years, which can be applied for,
if necessary.47 Production sharing agreements between the Government of Guyana
and oil companies for licences granted to and held by oil companies are provided
for under the Act. The terms and conditions of the petroleum prospecting licence
are usually established through negotiations. The Act envisages that a production
sharing agreement not inconsistent with the Act, will document any such settled
terms and conditions to be included in licences granted under the Act. The Minister
Responsible for Petroleum is authorised by the Act to conclude such agreements.
The Minister responsible for finance may apply for an order to modify the tax laws in
respect of a license as follows: “The Minister assigned responsibility for finance may,
by order, which shall be subject to affirmative resolution of the National Assembly,
direct that any or all of the written laws mentioned in subsection (2) shall not apply to,
or in relation to, a licensee where the licensee has entered into a production sharing
agreement with the Government of Guyana”.48

8 Main Features of Guyana’s Natural Resource Fund

While the HSF in Trinidad and Tobago is managed by a five-member Board of

Governors as well as skilled asset managers engaged by the Central Bank, with the
approval of the Board of Governors, Guyana’s Natural Resource Fund Act 2019
mandates the establishment of several committees including a twenty-two member
Public Accountability and Oversight Committee (POC), an Investment Committee
and a Macro-Investment Committee.49 Membership of the POC does not require
expertise in financial investments and financial portfolio management. Members for
the POC includes a nominee from the Private Sector Commission, a nominee from
each of the 10 Regional Democratic Councils, a nominee from the consortium of civil
society organisations and community-based organisations, which represent youth,
etc.50 The functions of this committee include monitoring and evaluating whether
the fund has been managed in accordance with the principles of transparency, good
governance and international best practices including the Santiago principles.51
The Minister of finance is responsible for the management of this fund and shall be
assisted by a Senior Investment Advisor and Analyst.52 There is also to be established
a six-member Investment Committee to be appointed by the Minister. The nominees
shall include a nominee of the Minister of Finance, a nominee of the Leader of the
Opposition, a nominee of the Minister with responsibility for the administration of the

47 Ibid., sections 39 and 40.

48 Ibid., section 51(1).
49 Natural Resource Fund Act, supra n. 8.
50 Ibid., section 7(1).
51 Ibid., section 6(2).
52 Ibid., section 11.
The Experiences of Managing the Heritage and Stabilisation … 143

petroleum sector, etc. It should be pointed out that the Minister of Natural Resources
previously had responsibility for the administration of the petroleum sector, but the
administration of the sector is now under the Office of the President and there is no
ministry responsible for the administration of the petroleum sector. Section 13(1)(b)
of the Act is therefore unclear where it states that the Committee will include “a
nominee of the Minister with responsibility for the administration of the petroleum
sector”. Note that unlike the POC, the members of this Committee must have at least
10 years’ experience and expertise in financial investments and financial portfolio
management.53
Under section 20(1) of the Act a Macroeconomic Committee shall also be estab-
lished, which shall be responsible for advising the Minister on the “Economically
Sustainable Amount”. This committee shall consist of five members appointed by
the Minister. Members include a representative of the Ministry of Finance, who shall
be Chairperson of the Committee, a nominee by the Leader of the Opposition, a
representative of the Bank nominated by the Governor of the Bank, a nominee of the
Private Sector Commission, and a leading international expert in macroeconomics
identified and approved by Cabinet.
Section 21 of the Act indicates the various streams of revenues, which shall be paid
into the fund. Deposits into the fund shall come from a range of petroleum revenue
sources. Interestingly, deposits are not limited to petroleum revenues, but the Minister
may deposit excess mining and forestry revenues into the fund. This fact might
explain the name of the fund, which is wider than petroleum and refers to natural
resources. With regard to withdrawals from the fund, section 22(1) stipulates that the
maximum amount that may be withdrawn from the fund in a fiscal year shall be a
portion of the fund and shall not exceed the total withdrawal from the fund approved
by the National Assembly for that fiscal year in accordance with Section 28. The Act
includes several technical and vague terms regarding the concept of “economically
and fiscally sustainable”. What this means is ambiguous and this might be deliberate
to create room for flexibility. Section 24 provides that the economically and fiscally
sustainable amount for a fiscal year shall be the lesser of the following amounts: (a) the
economically sustainable amount for the fiscal year; and (b) the fiscally sustainable
among for that fiscal year.
Section 25 of the Act goes on to provide that the economically sustainable amount
is the maximum amount that can, in the opinion of the Minister after taking into
account the recommendations of the Macroeconomic Committee established under
section 20, be withdrawn from the fund for the next ensuing fiscal year without
diminishing the competitiveness of the Guyana’s economy. It must be pointed out
that the use of the “economically and fiscally sustainable” concept is subject to
varying interpretations and can lead to uncertainty.

53 Ibid., section 13.

144 A. Elias-Roberts and I. Rampaul-Cheddie

9 Conclusion and Critical Analysis of the Legal

Framework and Management of the Sovereign Wealth
Funds in Trinidad and Tobago and Guyana

According to an International Monetary Fund Report, which was submitted in 2012,

before the first withdrawal was done from the HSF in Trinidad and Tobago, it was
noted that in light of the likely changes to the HSF, consideration should be given to
the proportion of the HSF that would be set aside for stabilisation purposes versus
that for the future generation, determining new deposit and withdrawal rules and
amending the reporting timeframe to allow for improved operational efficiency.54
The International Monetary Fund Report also made the recommendation for the
Government of Trinidad and Tobago to decide whether the HSF should continue in
its present form or whether it should be split. According to the 2014 report of the HSF
board of directors under the chairmanship of Dr Ralph Henry, there is an interesting
sentence in the chairman’s foreword which states: “After careful consideration, the
board recommended that the fund should not be split formally into two funds at this
time–i.e. a Heritage Fund and a Stabilisation Fund”.55 This comment is at odds with
the Prime Minister’s statement in 2015 that the Government intends to separate the
Heritage from the Stabilisation in order to create two funds.56 This is an important
issue in the current HSF management, which needs to be clarified.
Another important development regarding management of the fund, which must
be highlighted concerns the way the first withdrawal was made. It was widely reported
in the local media in Trinidad and Tobago that the Government had “dipped” into the
Heritage and Stabilisation Fund and no official announcement was made when the
withdrawal was done. The manner in which the information about the withdrawal
from the fund was made public generated controversy. It was reported that an inves-
tigative reporter was able to “blow the cover on what would have been an otherwise
secret withdrawal” and after the first story, the media followed the report and it was
publicised widely.57 Another reportedly troubling aspect of the whole scenario is
that the amount withdrawn had allegedly far exceeded what the Prime Minister had
told the nation would have been withdrawn.58
From Trinidad and Tobago’s short history and management of the HSF, there
are a few important unanswered questions. First, what was the thinking of the HSF
board in 2014 for not delinking Heritage from Stabilisation? Second, what is the
Government’s current position regarding this issue? Third, why was there no public
announcement from the Ministry of Finance regarding the withdrawal of the funds?
The need for more transparent discussion and scrutiny of the HSF after the first

54 See International Monetary Fund (2012); and Williams (2008).

55 Trinidad and Tobago HSF Annual Report 2014, at p. 4, available at https://www.finance.gov.tt/
wp-content/uploads/2015/07/HSF-2014-Annual-Report.pdf, accessed 29 August 2019.
56 Singh (2015).
57 See Dr. Hamid Ghany, supra n. 4.
58 Ibid.
The Experiences of Managing the Heritage and Stabilisation … 145

withdrawal has been made and the issue regarding the separation of the fund need to
be critically discussed. It is also recommended that clear rules for public notification
regarding withdrawal from the funds must be established and enforced, which would
help to improve the overall operational efficiency of the fund.
Turning to the Natural Resource Fund in Guyana, when compared to Trinidad and
Tobago’s HSF, there is more involvement of public interest groups in the monitoring
of the fund. This appears to be an attempt to include the principles of transparency,
good governance, and international best practices including the Santiago principles
in the monitoring of the fund. Many of the Committees established and their func-
tions outlined under the Natural Resource Fund Act in Guyana are similar to the
bodies established under more recent sovereign wealth management legislation in
developing countries, like Ghana’s Petroleum and Revenue Management Act 2011.59
One will have to wait and see whether having several committees and not requiring
expertise in financial investments and financial portfolio management for member-
ship in some committees will affect how they achieve the overall goals of the funds.
Since this is a newly assented Act in Guyana, you will have to wait and assess how
the POC committee functions to determine whether this is a good model to adopt.
On another note, turning to the main function of the Macroeconomic Committee,
it must be emphasised that the use of the “economically and fiscally sustainable”
concept in the Act is subject to varying interpretations and can lead to uncertainty.
Concerns with the Natural Resource Fund in Guyana were highlighted by the
Natural Resource Governance Institute (NRGI). NRGI released a report in which
they urged the government of Guyana to address significant underlying problems with
the proposed fund design. The main problems identified included rules governing
how much money enters the fund and how much the government can withdraw for
budgetary spending. “Guyana could end up in a situation where it is saving money
and earning low interest while it borrows at a higher interest rate”, a NRGI official
said. “And in this way, the country ends up losing money”.60 The caution from NRGI
that “Borrowing on the back of future natural resource revenues is a big risk for new
oil producers like Guyana”, should be taken seriously so that the country will avoid
the “presource curse”, which leads to accumulation of unsustainable debt followed
by economic crises.61

References

Ghany, H. (2016, June 12). Heritage and Stabilization Fund usage. Trinidad and Tobago Guardian.
https://www.guardian.co.tt/article-6.2.355013.4cf60100a3. Accessed August 31, 2019.
Government of the Cooperative Republic of Guyana. (2019, March 29). Department of Public
Information ‘Sovereign Wealth Fund assented to—Ministry of Finance. https://dpi.gov.gy/sov
ereign-wealth-fund-assented-to/. Accessed October 28, 2019.

59 Petroleum and Revenue Management Act (2011), Act 218, Laws of Ghana.
60 Natural Resource Governance Institute (2018).
61 Ibid.
146 A. Elias-Roberts and I. Rampaul-Cheddie

Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2004). Local content and local participation policy and framework’. https://www.energy.gov.tt/
wp-content/uploads/2013/12/Local-Content-and-Local-Participation-Framework.pdf. Accessed
August 31, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2015, June). White Paper on National Minerals Policy. https://www.energy.gov.tt/wp-content/upl
oads/2014/01/White-Paper-on-National-Minerals-Policy-June-2015.pdf. Accessed July 4, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2019a). Model production sharing contract. Available at https://www.energy.gov.tt/wp-content/
uploads/2013/12/The-Model-Production-Sharing-Contract-May-2019.pdf. Accessed August 28,
2019; and Model JOA Trinidad Shallow Water Bid Round (2018). Available at https://www.energy.
gov.tt/wp-content/uploads/2013/12/Model-Joint-Operating-Agreement.pdf. Accessed August
31, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2019b). Historical facts on the petroleum industry of Trinidad and Tobago. https://www.energy.
gov.tt/historical-facts-petroleum/. Accessed August 28, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2019c). Tax Laws. https://www.energy.gov.tt/for-investors/fiscal-regime/tax-laws/. Accessed
August 29, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Finance Press Release. (2017,
March 17). Drawdown from the Heritage and Stabilisation Fund. https://news.gov.tt/content/dra
wdown-heritage-and-stabilisation-fund#.XWgKj0xFxjo. Accessed August 29, 2019.
International Monetary Fund. (2012, June). Trinidad and Tobago: Selected issues. IMF Country
Report No. 12/128 (June 2012) at 12
International Working Group of Sovereign Wealth Funds. (2008, October). Sovereign Wealth Funds:
Generally accepted principles and practices “Santiago Principles”. https://www.ifswf.org/san
tiago-principles-landing/santiago-principles. Accessed August 23, 2019.
Krauss, C. (2017, January 13). With a major oil discovery, Guyana is poised to become a top
producer. The New York Times. https://www.nytimes.com/2017/01/13/business/energy-enviro
nment/major-oil-find-guyana-exxon-mobile-hess.html. Accessed June 14, 2019.
Lynch, J. (1997). Private rights to the subsoil in Trinidad and Tobago—A review of the grant of
an exploration and production (Private Petroleum Rights) license to Trinidad Exploration and
Development Company Ltd. AIPN Advisor Newsletter.
Myers, K. (2018, September 5). Westwood Global Energy Group, Westwood Insight ‘Latest Guyana
discovery opens the way to a new 10 billion barrel oil province and transformation for one of
South America’s smallest countries. https://www.westwoodenergy.com/news/westwood-insight/
latest-guyana-discovery-opens-the-way/. Accessed June 14, 2019.
Natural Resource Governance Institute. (2018, November 13). Analysts suggests improvements to
Guyana’s proposed Sovereign Wealth Fund. https://resourcegovernance.org/news/analysts-sug
gest-improvements-guyana-proposed-sovereign-wealth-fund. Accessed October 28, 2019.
Rampaul, I. N. (2003). Privately owned petroleum rights in Trinidad and Tobago. OGEL, 1(2).
Singh, R. (2015, June 2015). Kamla slams Rowley recovery plans. Trinidad and
Tobago Guardian. https://50tt.guardian.co.tt/news/2015-12-31/kamla-slams-rowley-recovery-
plans. Accessed August 29, 2019.
Trinidad and Tobago Extractive Industries Transparency Initiative Report 2016 https://www.tteiti.
org.tt/wp-content/uploads/TTEITI-Report-2016.pdf. Accessed July 4, 2019.
Williams, E. S. (2008, February 11–12). The challenge of abundance: Benefits from establishing a
Sovereign Wealth Fund. Presentation by Governor, Central Bank of Trinidad and Tobago, at the
Sovereign Funds Roundtable, Miami, Florida, USA.
Yergin, D. (1991). The prize—The epic quest for oil, money, & power (pp. 26–34). New York:
Simon & Schuster.
Russian Sovereign Wealth Fund

Svetlana B. Globa

Abstract This contribution considers the experience of creating and operating

sovereign wealth funds in Russia, analyses the basic principles of the functioning of
funds, the sources of their formation, as well as the processes of managing funds. The
experience of reforming the Stabilization Fund in Russia and its transformation into
the Reserve Fund and the National Welfare Fund (NWF) is considered. Finally, the
contribution explores the problems of increasing the significance and effectiveness
of involving the resources of sovereign wealth funds in solving the most significant
issues of the structural development of the national economy of Russia.

Keywords Russia · Sovereign wealth funds (SWF) · Russian national wealth fund
(NWF) · Petroleum fund

1 Introduction

At present, the basic law determining the procedure for using the Russian subsoil
is the Law of the Russian Federation “On Subsoil” dated 02.21.1992 (as amended
on 02.08.2019) No. 2395–1. According to Article 1.2 of this law, subsoil within the
borders of the territory of the Russian Federation, including underground space and
minerals, energy and other resources contained in the subsoil, are State property.
Issues of ownership, use and disposal of subsoil are jointly administered by the
Russian Federation and its subjects.
Subsoil plots may not be subject to purchase, sale, donation, inheritance, contribu-
tion, pledge or alienated in any other form. Due to the fact that the subsoil is in State
ownership, they can be provided only on the basis of the right to use. In accordance
with the legislation of the Russian Federation, a subsurface user may be a legal entity,
an entrepreneur, or a foreign citizen, if this is not prohibited by the legislation of the

S. B. Globa (B)
School of Business Management and Economics, Siberian Federal University (SFU),
Krasnoyarsk, Russia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 147
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_8
148 S. B. Globa

Russian Federation. Exploration and mining of minerals is carried out on the basis
of a license issued on a competitive basis, according to which users of the subsoil
have the exclusive right to extract and develop minerals in accordance with the legis-
lation of the Russian Federation. Minerals and other resources extracted from the
subsoil under the terms of a license may be in federal State ownership, property
of the subjects of the Russian Federation, municipal, private and in other forms of
ownership.
In the Russian Federation, the use of subsurface resources is made on a paid basis,
there are three types of payments by the subsoil user to the State budget—one-time
payments for the use of minerals, regular payments, a fee for participation in the
auction, and the law also allows the establishment of additional types of fees for
the use of natural resources of the Russian Federation. Thus, at present, the Russian
Federation has a two-tier system for regulating the use of the country’s subsoil. The
first level is federal, the second level is the level of subjects of the Russian Federation.
Such a system makes it possible to achieve holistic economic regulation of the use
of mineral resources taking into account the interests of the regions of the Russian
Federation, while also making it possible to replenish both the federal budget and
the budget of the subject of the Russian Federation on whose territory minerals are
located.
Russia’s natural resource potential is over 20% of world reserves. This provides
Russia with a special place among industrialised countries. Russia ranks first in the
world in gas reserves; second place in oil production; third place in coal reserves,
first place in explored iron ore reserves, second in tin, and third in lead. In addi-
tion, metal ores are mined in the country: iron, nickel, copper, aluminium, poly-
metals, chromium, tungsten, gold, silver. Non-metallic ores are also diverse: phos-
phatites, apatites, talc, asbestos, mica, potassium and common salts, diamonds,
amber, precious and semiprecious stones. Building materials are also widespread:
sand, clay, limestone, marble, granite, cement raw materials and more.
As one of the world’s largest oil-producing and gas-producing countries, Russia
receives significant income from the use of its resources. Some of the oil and gas
revenues are withdrawn in the budget system of the country in the form of taxes and
fees. Currently, in Russia, tax legislation in the oil and gas sector is mainly fiscal.
More than 40% of tax revenues are made up of special taxes paid by oil and gas
companies—a tax on mining operations, on hydrocarbons (oil, combustible natural
gas, gas condensate) and export customs duty on crude oil, natural gas, oil products.
According to Article 96.6 of the Budget Code of the Russian Federation, oil
and gas revenues of the federal budget include federal budget revenues from tax on
the extraction of minerals in the form of hydrocarbons (oil, natural combustible gas
from all types of hydrocarbon deposits, gas condensate from all types of hydrocarbon
deposits); export customs duties on crude oil; export customs duties on natural gas
and export customs duties on goods derived from oil.
The Russian Tax on mining operations is a special form of financial relations
between users of the subsoil and the State in the form of paying a tax depending on
the type of resource extracted and geographic location.
Russian Sovereign Wealth Fund 149

The tax on mining operations was introduced on 1 January 2002 by including

the 26th chapter in the Tax Code of the Russian Federation. The object of taxation
is minerals. Payers of tax on mining operations are recognised organisations and
individual entrepreneurs who are users of the subsoil. Tax on mining operations is
distributed between budgets of various levels. Moreover, at present, over 98% of all
taxes on the use of natural resources and 100% of all income from foreign economic
activity (including export duties on oil, oil products, etc.) go to the federal budget,
and not to the regional ones.
Reserve funds are created in those States whose budgets are highly dependent
on market factors, as a rule, world commodity prices. In addition, some countries
accumulate assets in such funds for the period when the subsoil is depleted. The
Reserve Fund performs two functions. First, the Fund can be used to cover the State
budget deficit at the time of unfavourable conditions. Second, during a period of
high raw material prices, the Fund allows accumulating excess export earnings and
preventing the development of “Dutch disease” of the economy.
The thesis of excess export earnings may seem paradoxical. The growth of export
earnings leads, as a rule, to the rapid strengthening of the national currency. In itself,
such a strengthening is not a threat to the economy, however, constant fluctuations
in exchange rates following fluctuations in price conditions create macroeconomic
instability and do not allow companies to choose a specific strategy—to adapt to
low or high exchange rates. In addition, in conditions of high administrative barriers
and strong monopoly (which is typical for most resource exporting countries), an
increase in export earnings leads to an increase in inflation.
In addition to purely economic tasks, the Reserve Fund fulfils the political task
of preventing the rapid growth of government spending. Government spending, as a
rule, cannot be quickly reduced following a fall in revenue. As a result, during periods
of unfavourable conditions, this can lead to large State budget deficits, failure to fulfil
the promised social obligations and default on public debts. Such consequences are
much more destructive for the economy than fluctuations in the volume of the State
budget per se.
One of the key elements of macroeconomic policy in Russia since 2004 is the
management of oil and gas revenues using various budget rule designs aimed at
saving part of the income in sovereign funds. The savings mechanism, budget rules
and the system of sovereign funds have changed many times over the past 15 years.

2 Stabilization Fund

The Stabilization Fund in Russia was established in 2004. State revenues from oil
and gas production and export (in terms of export duties and mineral extraction tax)
were directed to it when the world oil price exceeded a specially defined “cut-off
price”. That is, the State budget receives funds as if the oil price was equal to the
“cut-off price”, and this goes to the Stabilization Fund. Initially, the cut-off price was
set at $20USD per barrel, then was raised to $27USD [1].
150 S. B. Globa

The Stabilization Fund’s assets were directly controlled by the government repre-
sented by the Ministry of Finance, not the Federal Assembly through the federal
budget and performed the following functions:
• was a built-in stabiliser;
• provided additional sustainability to public finances;
• could serve as a source of financing investment programs that ensure a reduction
in budget expenditures for future periods.
When creating the Stabilization Fund in Russia, there was a situation where the
yield of the Fund was significantly lower than the cost of servicing the country’s
external debt. At first glance, this paradoxical situation is explained by the following.
First, it was not possible to agree on early repayment of external debt with all coun-
tries (for example, Germany could not technically do this, since bonds with many
owners were issued on the external debt of the Russian Federation). Second, if the
Stabilization Fund is spent on debt repayments, then there will remain a risk of a
budget deficit in a period of low commodity conditions. Losses when placing funds
in low-yield instruments are, in fact, an “insurance premium” when “insuring” the
State budget against a deficit.
Since 1 February 2008, the Stabilization Fund has been divided into two parts:
the Reserve Fund (3069 billion rubles) and the National Welfare Fund (782.8 billion
rubles) [2].

3 Reserve Fund

Since 2008, oil and gas revenues are accounted for separately from other federal
budget revenues. Oil and gas revenues of the federal budget are formed from:
• a tax on the extraction of minerals in the form of hydrocarbon raw materials (oil,
natural combustible gas from all types of hydrocarbon deposits, gas condensate
from all types of hydrocarbon deposits);
• export customs duties on crude oil;
• export customs duties on natural gas;
• export customs duties on goods derived from oil.
A certain part of these oil and gas revenues in the form of an oil and gas transfer
is annually allocated to finance federal budget expenditures. The value of the oil and
gas transfer is approved by the federal law on the federal budget for the next financial
year and planning period.
The volume of oil and gas transfer is set as a percentage of the forecasted gross
domestic product (GDP) for the corresponding year [3]:
• in 2008—6.1%;
• in 2009—5.5%;
• in 2010—4.5%;
Russian Sovereign Wealth Fund 151

• from 2011 onwards—3.7%.

After the formation of the oil and gas transfer in full, oil and gas revenues went
to the Reserve Fund. The normative value of the Reserve Fund is approved by the
federal law on the federal budget for the next fiscal year and the planning period in
the absolute amount, determined on the basis of 10% of the GDP projected for the
corresponding year. After filling the Reserve Fund to the specified size, oil and gas
revenues are sent to the National Welfare Fund [1].
As of 1 October 2008, the Reserve Fund amounted to 3555.19 billion rubles [3].
The Reserve Fund was formed from:
• oil and gas revenues of the federal budget in an amount exceeding the amount of
oil and gas transfer approved for the corresponding financial year, provided that
the accumulated volume of the Reserve Fund does not exceed its normative value;
and
• income from the management of the Reserve Fund.
The Reserve Fund of the Russian Federation, in which a significant part of oil and
gas revenues was accumulated, ended with the beginning of 2018.
It represented that part of the proceeds from the export of oil, oil products, gas
and condensate, which exceeds the approved oil and gas transfer for the new fiscal
year (now it is defined as 3.7% of the GDP forecast by the authorities of the Russian
Federation) [3]. If the normative value of the Reserve Fund is exceeded, the remaining
income was credited to another national fund—the NWF. The normative (maximum)
value was initially determined as 10% of the GDP of the Russian Federation projected
for the next fiscal year. In addition to oil and gas revenues, another source of funds
was income from the management of fund reserves.
The amount of funds deduction increased as the price of oil increased: from 2004
to 2006, revenues were transferred to the unified Stabilization Fund at a price of a
barrel above $20USD, from 2006—over $27USD per barrel. According to the plan
of the authorities, the existence of the Reserve Fund contributed to the fulfilment
of government expenditure obligations and stabilisation of the economy (covering
the budget deficit), reducing its dependence on fluctuations in oil and gas revenues.
NWF was planned primarily to balance the Pension Fund of the Russian Federation.
According to the amendments to the Budget Code adopted on 30 September
2010 (Law No. 245-FZ) from 1 January 2010 to1 January 2015, the maximum
amount of the Reserve Fund was not established, and oil and gas revenues were
allocated to the federal budget for expenses. Replenishment of the Fund after a 3-
year break occurred only in 2012. Also, from 1 January 2010, the Reserve Fund of
the Russian Federation ceased to be replenished with income from the management
of its funds—until February 2016, and these revenues were directed to the Federal
Treasury.
The management of the Reserve Fund was vested in the Ministry of Finance, but
part of these powers was allowed to delegate to the Central Bank. According to the
government decree dated 29 December 2007 No. 955, funds should be managed in
order to ensure:
152 S. B. Globa

• their safety; and

• long-term extraction of stable income from the allocation of reserves.
In the short term, it was allowed to obtain negative financial results in the process
of managing funds. The order established by the government obliged to allocate
funds:
• in a foreign currency;
• in assets nominated in foreign currency with a long-term credit rating not lower
than “Aa3” according to Moody’s classification;
• in assets nominated in foreign currency with a rating not lower than “AA−”
according to Fitch-Ratings and Standard & Poor’s.
The Reserve Fund was part of the gold and foreign exchange reserves of Russia,
which was administered by the Ministry of Finance, and not the Central Bank. The
order of the Ministry approved the currency structure of stocks [3]:
• Euro—45%;
• US dollar—45%;
• pound sterling—10%.
Foreign currency was credited to the accounts of the Bank of Russia, which paid
interest equivalent to the return on the assets mentioned. Due to the high conservatism
of investments (possibly caused by the financial crisis of 2008, which happened only
a few months after the beginning of the independent existence of the Reserve Fund),
the return on investments was approximately at the level of currency inflation. A
balanced portfolio of stocks and bonds would allow the Bank to receive many times
more income.
On 1 February 2018, the Reserve Fund of the Russian Federation ceased to exist,
merging with the NWF. Thus, the Reserve Fund lasted exactly 10 years with an
accuracy of a day.
On 1 December 2017, the proceeds from finding the funds in the Central Bank of
the Russian Federation over the past year in the amount of 652 million rubles were
transferred to the treasury, the remainder of foreign currency from accounts in the
Central Bank—$7.62 billion, e6.71 billion and £1.10 billion—exchanged by 1.042
trillion rubles and used to cover the budget deficit [3].
In fact, the Reserve Fund today exists under the name of the National Welfare
Fund of Russia, the volume of which on 1 January 2018, according to official data
from the Ministry of Finance, amounted to $65.15 billion USD, or 3.75 trillion rubles.

4 National Welfare Fund of Russia (NWF)

The National Welfare Fund of Russia (NWF) was formed on 1 February 2008, after
the separation of the Stabilization Fund. On 1 October 2008, the amount of the NWF
was 1,228.88 billion rubles [4]. According to Article 96.10 of the Budget Code of
Russian Sovereign Wealth Fund 153

the Russian Federation, “The National Welfare Fund is a part of the federal budget
funds that are subject to separate accounting and management in order to ensure co-
financing of voluntary pension savings of citizens of the Russian Federation, as well
as to ensure the balance (deficit) of the budget of the Pension Fund of the Russian
Federation”. At the same time, “the objectives of the management of the Reserve
Fund and the National Welfare Fund are to ensure the safety of these funds and a
stable level of income from their placement in the long term” (Article 96.11 of the
Budget Code of the Russian Federation).
The National Welfare Fund is formed by:
• oil and gas revenues of the federal budget in an amount exceeding the amount of oil
and gas transfer approved for the corresponding financial year, if the accumulated
amount of the funds of the Reserve Fund reaches (exceeds) its standard value;
and
• income from managing the funds of the National Wealth Fund.
– On 14 October 2008, a package of laws on stabilising the Russian financial
market began to operate, according to which the funds of the National Wealth
Fund can be placed with Vnesheconombank for deposits up to 31 December
2019 inclusive, for a total amount of not more than 450 billion rubles at a rate
of 7% per annum [1].

5 NWF Management

The management objectives of the National Wealth Fund are to ensure the safety of the
Fund and a stable level of income from its placement in the long term. The manage-
ment of its funds for these purposes allows the possibility of obtaining negative
financial results in the short term [2].
The National Welfare Fund is managed by the Ministry of Finance of the Russian
Federation in the manner established by the Government of the Russian Federation.
Separate powers to manage the National Wealth Fund may be exercised by the Central
Bank of the Russian Federation. The National Welfare Fund can be managed in the
following ways (both individually and simultaneously):
(1) by acquiring foreign currency and placing it on accounts of the Central Bank
of the Russian Federation. For the use of funds in these accounts, the Central
Bank of the Russian Federation pays interest established by the bank account
agreement; and
(2) by placing funds in foreign currency and financial assets denominated in foreign
currency, the list of which is determined by the legislation of the Russian
Federation.
Currently, the Ministry of Finance of the Russian Federation manages the National
Wealth Fund according to the second method, that is, by placing funds in foreign
currency accounts of the Central Bank of the Russian Federation. At the same time,
154 S. B. Globa

Table 1 Allowed financial assets defined by the Budget Code of the Russian Federation
Allowed financial assets Limit shares established by the Regulatory shares approved by
defined by the Budget Code Government of the Russian the Ministry of Finance of
of the Russian Federation Federation (%) Russia (%)
Debt obligations of foreign 50–100 80
states
Debt obligations of foreign 0–30 15
state agencies and central
banks
Debt obligations of 0–15 5
international financial
organizations, including those
executed by securities
Deposits in foreign banks and 0–30 0
credit organizations
Debt obligations of legal not defined not approved
entities
Shares of legal entities not defined not approved
Shares (stakes) of investment not defined not approved
funds
Source NWF [4]

the Bank of Russia pays interest on balances on these accounts equivalent to the yield
of indices formed from debt obligations of foreign states, foreign state agencies and
central banks, debt obligations of international financial organisations (Table 1).
The Government of the Russian Federation has determined that at present, the
National Wealth Fund may be placed in the same financial assets as the Reserve
Fund and has established the following requirements for these financial assets [2]:
1. The National Wealth Fund may be placed in debt instruments in the form of
securities of foreign states, foreign state agencies and central banks of fourteen
countries: Austria, Belgium, Great Britain, Germany, Denmark, Ireland, Spain,
Canada, Luxembourg, the Netherlands, the USA, Finland, France and Sweden.
2. Debt obligations must comply with the following requirements:
• the debt issuer must have a long-term credit rating not lower than “AA−”
according to the classification of rating agencies “Fitch-Ratings” or “Stan-
dard & Purs’s” or not lower than “Aa3” according to the rating classification
Moody’s Investors Service agency. If these agencies assigned different long-
term credit ratings to the issuer of debt obligations, then the lowest assigned
rating is taken as the long-term credit rating;
• the maturity dates of the debt issues are fixed, the terms of the issue and
circulation do not provide for the issuer’s right to redeem (repay) ahead of
schedule and the right of the debt holder to present them early for redemption
(repayment) by the issuer;
Russian Sovereign Wealth Fund 155

• the minimum and maximum maturity standards for debt issues established by
the Ministry of Finance of the Russian Federation are mandatory;
• the rate of coupon income paid on coupon debt obligations, as well as the face
values of debt obligations are fixed;
• the denomination of debt instruments is expressed in US dollars, euros and
pounds sterling, payments on debt instruments are made in the face value
currency;
• the volume of the issue of debt instruments in circulation is not less than 1
billion US dollars for debt instruments denominated in US dollars, not less
than 1 billion euro—for debt instruments denominated in euros, and not less
than 0.5 billion pounds sterling—for bonds denominated in pounds sterling;
• Debt issues are not issues intended for private (non-public) placement.
3. The nominal volume of purchased debt obligations of one issue shall not exceed
15% of the nominal volume of this issue.
4. international financial organizations in whose debt obligations the National
Wealth Fund may be placed include:
• Asian Development Bank, ABD;
• Council of Europe Development Bank, CEB;
• European Bank for Reconstruction and Development, EBRD;
• European Investment Bank, EIB;
• Inter-American Development Bank, IADB;
• International Finance Corporation, IFC;
• International Bank for Reconstruction and Development, IBRD;
• Nordic Investment Bank, NIB.
5. when placing the NWF on deposits with foreign banks and credit organisations,
the total amount of the NWF placed on deposits with one foreign bank or credit
institution shall not exceed 25% of the total amount of the NWF placed on
deposits with foreign banks and credit organisations.
6. The Ministry of Finance of the Russian Federation has the right to establish
additional requirements for debt obligations and deposits with foreign banks
and credit organisations within the limits established by the Government of the
Russian Federation.
The Ministry of Finance of the Russian Federation approved [4]:
1. The regulatory currency structure of the National Welfare Fund funds as follows
(Table 2):

Table 2 Regulatory currency

US dollar − 45%;
structure of the National
Welfare Fund Euro − 45%;
Pound sterling − 10%.
Source NWF [4]
156 S. B. Globa

Table 3 Current terms to

Minimum maturity − 3 months
repayment of issues of debt
instruments of foreign states, maximum maturity − 3 years
debt instruments permitted Source NWF
for placement of the National
Wealth Fund for debt
denominated in US dollars
and euros

Table 4 Current terms to

Minimum maturity − 3 months
repayment of issues of debt
instruments of foreign states, maximum maturity − 5 years
debt instruments permitted Source NWF [4]
for placement of the National
Wealth Fund for debt
denominated in pounds

2. current terms to repayment of issues of debt instruments of foreign states, debt

instruments permitted for placement of the NWF:
• for debt denominated in US dollars and euros (Table 3):
• for debt denominated in pounds (Table 4).

The terms indicated above are valid at the time of acquisition of debt instruments at the
expense of the NWF or at the time of formation of indices from debt instruments used
to calculate interest accrued on cash balances on accounts of the NWF in authorised
foreign currencies.
3. The list of foreign state agencies in which the NWF can be placed (as agreed
with the Central Bank of the Russian Federation):
• State Credit Agency, Spain (Instituto de Credito Oficial, ICO);
• Motorway Financing Agency, Austria (Autobahnen-und Schnellstrassen-
Finanzierungs-Aktiengesellschaft, ASFINAG);
• Group of banks for reconstruction and development, Germany (Kreditanstalt
fur Wiederaufbau Bankengruppe);
• Canadian Agency for Export Development (Export Development Canada,
EDC);
• Municipal Bank of the Netherlands (Bank Nederlandse Gemeenten, BNG);
• Medium-Term Railway Network Financing Society, United Kingdom
(Network Rail MTN Finance CLG (Plc));
• Agricultural rental bank, Germany (Landwirtschaftliche Rentenbank);
• The Federal Home Loan Mortgage Corporation, USA (Federal Home Loan
Mortgage Corporation, Freddie Mac);
• Federal National Mortgage Association, USA (Federal National Mortgage
Assosiation, Fannie Mae);
Russian Sovereign Wealth Fund 157

• Federal banks lending to housing, USA (Federal Home Loan Banks,

FHLBanks);
• Federal Farm Credit Banks, USA (Federal Farm Credit Banks, FFCB);
• Municipal Credit Fund, France (Dexia Group);
• Social Security Debt Services Fund, France (Caisse d’Amortissement de la
Dette Sociale, CADES);
• French Mortgage Fund (Credit Foncier de France, CFF);
• Austrian Export-Import Bank (Oesterreichische Kontrollbank Aktienge-
sellschaft, OKB).
4. The nominal volume of purchased debt obligations of one issue shall not exceed
5% of the nominal volume of this issue.
The NWF can only be used to co-finance voluntary pension savings of Russian
citizens and to ensure the balance (deficit) of the budget of the Pension Fund of
the Russian Federation. The volume of the NWF allocated for these purposes is
established by the federal law on the federal budget for the next year and planning
period.
According to the calculations of the authorities, 2018 should be the last year when
the budget deficit will be covered from the NWF. In the future, they promise to turn it
into a real welfare fund, which will be replenished with the currency purchased by the
Ministry of Finance according to the budget rule, and be spent only on co-financing
pension savings of Russian citizens.

6 National Welfare Fund Objectives

According to the budget code of the Russian Federation, the completion and
augmentation of the means of the NWF is a triple goal:
• co-financing of pension savings of Russians;
• covering the federal budget deficit;
• ensuring a balanced budget of the Russian Pension Fund.
The most acute today are the issues of the NWF management strategy.
The law assigns the management of the NWF funds to the Ministry of Finance of
the Russian Federation. He also allows the exercise of certain powers to manage the
fund’s assets by the Bank of Russia.
According to official figures from the Russian Ministry of Finance, in 2017 the
NWF contracted to 3.753 trillion rubles, or $65.15 billion, which amounted to 14%
in the national currency and 9.3% in the US currency. In general, the Fund adheres to
currency diversification and has four currencies—about a third of the assets in dollars
and euros, a quarter in rubles and a balance (less than 10%) in pounds sterling.
As of January 1, 2018, the Fund’s money (liquid part, approximately 60% of the
volume) was placed [4]:
158 S. B. Globa

• on separate accounts of the Central Bank of the Russian Federation—$15.65

billion;
• on deposits of Vnesheconombank—222.47 billion rubles and $6.25 billion;
• on deposits of VTB and Gazprombank, intended to finance self-sustaining
investment projects approved by the Cabinet of Ministers—164.43 billion rubles;
• in the securities of Russian issuers relating to the implementation of “self-
sustaining infrastructure projects”—112.63 billion rubles. and $4.11 billion;
• in preferred shares of banking organisations—278.99 billion Russian rubles.
Big questions were raised by the decision to invest the Fund in infrastructure
projects. Experts say that investing in the high-speed Moscow-Kazan road, the new
ring bypass road in the Moscow Region (TsKAD), as well as the reconstruction of the
railroads—the Trans-Siberian Railway and the Baikal-Amur Railway—will not pay
for itself. The management of the Fund definitely needs to be improved, reducing
raw material dependence and the share of risky projects, since the liquid part of
deposits only restrains, but does not overtake, inflation. According to the budget rule
in force since 2017, the NWF forwards revenues from oil sales in excess of the price
of $40USD per barrel (with an annual indexation of the cut-off price by 2%) [1].
Available funds of the NWF are placed in accounts with the Central Bank and
form part of the international reserves managed by the Central Bank. According to
the Central Bank’s annual report for 2018, 18% of all reserves were invested in gold
in Russia, 14% of assets were placed in France (presumably in French government
bonds), 14% in Germany, about 10% in the USA (in US government securities
Treasuries), 7.5% in Japan, 6.6% in the UK. The volume of the NWF as of September
1 is 8.2 trillion rubles, which is equivalent to $123 billion USD. The liquid part of the
NWF (funds in the accounts of the Central Bank) is $98 billion USD, or 6% of the
forecast GDP of 2019. The rest has already been invested mainly in infrastructure
projects. It is expected that in 2020 the liquid part of the NWF will overcome the
legislative threshold of 7%, which will allow the government to start investing the
accumulated funds. The question of how to use the accumulated oil and gas revenues
is currently being discussed in the government. One of the options—the “Norwegian
model”—involves investing part of the Fund in a wider range of assets [4].
The NWF investment strategy is conservative, focused on investments in the most
reliable assets, especially sovereign bonds. This scheme is significantly different
from the investment policy of the sovereign fund of Norway, which actively invests
in shares of foreign companies and bonds of developing countries. Application of the
“Norwegian model” can increase the return on investment of the NWF. The average
annual yield of the NWF in recent years has been about 1.5 compared to 5.9% per
year on average since 1998 for the Norwegian fund. Further conservation of the
National Wealth Fund will not ensure the stability of the Russian economy, but will
only contribute to its sliding into a recession. Other possible options for using NWF
funds include issuing export loans to foreign buyers of Russian non-oil products and
investing in infrastructure projects in Russia.
Earlier, the International Monetary Fund recommended that Russia stop extrabud-
getary investments from the NWF in the domestic economy, which in the past were
Russian Sovereign Wealth Fund 159

aimed at capitalising banks, infrastructure projects and subsidising loans to small-

sized and medium-sized businesses. The IMF also advised the Russian government
to continue investing NWF funds in high-quality foreign assets—government bonds
of Western countries (France, Germany, the USA, etc.) with a high credit rating. The
discussion about the possibility of using the funds of the National Welfare Fund esca-
lates as its volumes approach the level of 7% of GDP. Exceeding this level gives the
government the opportunity to use savings in various investment projects. The liquid
part of the NWF with a volume of 7% of GDP is only a guarantee of relatively stable
fulfilment of budgetary obligations in a crisis; a fund of this size cannot be considered
a sustainable tool for maintaining and transferring income from exhausted resources
to future generations. Opponents of the NWF spending argue the insufficiency of
this level for insurance of budgetary obligations, as well as the danger of inflationary
pressures as a result of increased costs.
A strict budget rule and active accumulation of reserves were at the centre of
macroeconomic policy in recent years and allowed to significantly increase the funda-
mental stability of the Russian economy to external shocks, return investment ratings
and reduce the dependence of the Russian currency on the oil market. The transi-
tion to less active savings means a departure from the mechanisms that have been
successfully operating in recent years. Details of the use of additional oil and gas
revenues (the form of their use, the composition of the projects, the share of funds
allocated for their financing, the mechanism for converting the Fund’s currency into
rubles) are still unknown. Their discussion will be at the centre of the macroeconomic
agenda in 2020. Despite the fact that additional infrastructure costs can accelerate
the Russian economy, we see significant risks from a modification of the approach
to using SWF funds.
The threshold of 7% of GDP, above which additional options for using the NWF
funds arise, is established by law, but in fact there is no fundamental reasoned justi-
fication for the adequacy of a fund of this size. As the experience of the crises of
2008–2009 and 2014 showed, a fund of approximately this size was sufficient to
make up for budget revenues, which had fallen due to falling oil prices for 3 years.
A similar conclusion follows from the stress testing of the federal budget prepared
by the Ministry of Finance. According to the agency, while maintaining the price
of Urals oil at $25USD per barrel within three years, budget shortfalls will amount
to 7.6% of GDP. Thus, the NWF of 7% of GDP is only a guarantee of the stable
fulfilment of budgetary obligations in the conditions of one next crisis. A fund of
this size cannot be considered a sustainable tool for the conservation and transfer
of income from depleted resources to future generations. If we assume that in the
next 10 years the price of oil will correspond to the current trajectory of the futures
curve, that is, it will remain close to $60USD per barrel, then maintaining the current
savings strategy would allow us to increase the size of the National Wealth Fund to
$400 billion USD by 2028 (17.6% GDP). This size of the Fund allows us to talk
about maintaining a very impressive airbag even in the event of a prolonged decline
in oil prices. Halving the pace of savings doubles the size of the Fund to $290 billion
USD (12.5% of GDP) by 2028, while maintaining a stable oil environment [1].
160 S. B. Globa

Naturally, a stable oil market is far from guaranteed; therefore, the actual growth
rate of the NWF may be lower. In addition to the risks of deteriorating oil conditions,
there are internal risks associated with the depletion of developed reserves. In the
budget forecast until 2036, the Ministry of Finance indicates a likely decrease in
the effective tax rate for the oil and gas sector due to the expected increase in the
share of production at new fields to which preferential tax rates are applied. In such
a scenario, the choice in favour of spending rather than saving resource incomes can
negate the possibility of actively increasing the size of the Fund.
The official goal of the NWF, defined by the Budget Code of the Russian Federa-
tion, is to co-finance voluntary pension savings of citizens and to ensure a balanced
budget for the Pension Fund. In our opinion, in order to achieve this goal, given
the country’s dependence on oil exports, the model of the Fund should perform a
saving, and not just a stabilising function. One of the most common approaches to
managing resource income is to save it in accordance with the concept of permanent
income. According to this concept, it is necessary to appeal to the total present value
of the country’s natural wealth and to distribute these wealth between current and
future generations. That is why the State should save part of the income so that future
generations can use the savings accumulated in the past when resources are depleted
or structural changes occur that would not allow to benefit from ownership of these
resources. Many sovereign funds in other countries (Norway, Saudi Arabia, Kuwait,
etc.) follow the same concept, where their size exceeds or approaches 100% of GDP.
One of the advantages of this approach is also that as the Fund grows, the absolute
size of investment income increases, which can be used while keeping the body of
the Fund unchanged. Thus, the use of the NWF is a necessary and even inevitable
condition for maintaining economic growth. First of all, fund resources should be
directed to infrastructure projects. Further, it is necessary to expand investments in
the production of machinery and equipment—such investments are least dependent
on inflation, since they involve the purchase of investment goods abroad.
But it is necessary to strictly define the criteria for “self-sufficiency of infrastruc-
ture projects” and use estimates of direct return to investors. Indirect evaluations of
project performance, such as aggregate additional budget revenues, the creation of
additional jobs, and ultimately the multiplier effect on economic growth, are also
important. Today, it is obvious that we have a balance between stability and growth
that is significantly biased towards stability. Tight monetary policy and extremely
tight fiscal policy determine the attenuation of growth, even in favourable external
conditions. Further conservation of the NWF will not ensure stability, since in itself
it only contributes to the sliding of the Russian economy into a recession, within
which the use of accumulated funds is supposed.
It is important to note that the current system provides immunity of funds from
foreclosure or seizure by judicial claims of foreign organizations to the Russian
Federation. Information on the use of funds by the Central Bank of the Russian
Federation is not in the public domain, which makes it impossible to determine
the real effectiveness of managing these funds. It is also necessary to increase the
transparency of the management mechanism and try to avoid an indirect strategy
for managing funds, which exists because financial assets with a high level of risk
Russian Sovereign Wealth Fund 161

(debt instruments and shares of legal entities and units of investment funds) are not
included in the list of assets allowed to be held with them operations by the Bank of
Russia.

7 NWF Management Strategy

It seems that the objective of the NWF is not to cover the Pension Fund of the Russian
Federation (PFR) budget deficit in the coming years (currently this is being done at
the expense of other current federal budget revenues), but to achieve a significant
amount in order to ensure the financial stability of the PFR in the future. An ideal
option would be to create such a volume of NWF funds, in which in order to cover
the PFR budget deficit in the future, income from managing the NWF funds would
be sufficient.
Factors ensuring the safety of the NWF include:
• elimination of the use of Sovereign Wealth Funds (SWFs) without urgent need
until the desired amount of SWFs is achieved. Co-financing of additional insurance
contributions of citizens for the funded part of the retirement pension and covering
the budget deficit of the Pension Fund should be carried out exclusively from the
income from the management of the NWF;
• ensuring high reliability of investments.
Factors providing an increase in the assets of the NWF:
• transfer of part of the oil and gas revenues of the federal budget;
• maximization of income from the management of the NWF (in this case, the
strategy of the NWF cannot be very conservative, since the income of the NWF
should be at least comparable to inflation in the long run).
In addition, it seems appropriate to provide for the management of the NWF
the possibility of investing part of the funds in reliable financial instruments in the
Russian financial market, such as debt instruments and shares of legal entities, as well
as shares (stakes) of investment funds. Investing the Fund in these instruments will
ensure the influx of long-term investment resources into the economy of the Russian
Federation (in contrast to bank deposits and bank balances with Russian banks and
credit organizations, which are sources of short-term and medium-term resources).
The unfolding discussion will have to answer two questions—where to invest (in
Russia or abroad) and in which assets, so as not to interfere with the fulfilment of
the three key tasks of the NWF, which at the same time serves as an airbag for the
budget, a cure for the “Dutch disease” and foundation for future generations.
The crises of 2008 and 2014 clearly demonstrated that in order to protect the
Russian budget system from falling oil prices, the NWF needs to invest exclusively
in highly liquid foreign assets. The only question is whether there is enough “pillow”
in this 7% of GDP. In 2013, when the budget was balanced only at a price of more than
$100USD per barrel, the answer was obviously negative. However, the transition to a
162 S. B. Globa

floating ruble exchange rate, coupled with a fiscal rule binding to the average annual
oil price, made such a threshold fiscally acceptable. Despite the volatility of oil prices,
the probability of their long-term decline below the cut-off price under the budget
rule ($41.6USD per barrel) is not high. The main driver of the oil supply today—
the American shale oil and gas sector—is experiencing financial and infrastructural
constraints. The oil market is unlikely to be able to balance with a sharp, for example
twofold, fall in prices. Therefore, it is not worth increasing the threshold for investing
in the NWF, for example, up to 10% of GDP. It is better to think about investing the
fund in assets whose interest will be higher than those of the same American treasury
securities.
Domestic investment will exacerbate the “Dutch disease”: rising budget spending
will accelerate inflation, the Central Bank will tighten credit conditions in response,
and real ruble appreciation will weaken the competitiveness of non-oil sectors. Of
course, it is not worth exaggerating macroeconomic risks, but even a slight increase
can erase the benefits of investing in Russia. As a compromise, the government
could invest the Fund’s resources in export projects, whether it be the construction
of nuclear power plants abroad or the construction of toll roads. The key condition is
the return on investment, coupled with the predominance of private investment over
government, including the assets of the NWF.
True, the use of such an approach can enhance the raw material bias of the Russian
economy, as can be seen in projects that received NWF funds under individual govern-
ment decisions—before a threshold of 7% of GDP was set. In particular, it is the
world’s first Arctic liquefied natural gas (LNG) plant Yamal LNG and the largest
petrochemical complex in Russia, Zapsibneftekhim, whose construction assistance
was issued in 2015 as a purchase of bonds. To date, three of the four planned lines
have been commissioned at Yamal LNG, from which gas is completely shipped
abroad. Most of the products of Zapsibneftekhim, the launch of which is scheduled
for the end of 2019, will also be exported.
Support for these projects in practice was an export subsidy, indicative of the ratio
of private and public investments: in the structure of costs for Zapsibneftekhim ($9.5
billion USD), the share of NWF funds amounted to 19%, and for Yamal LNG ($27
billion USD)—amounted to 9%. However, despite the return on investment and the
predominance of private investment, support for these projects only strengthens the
raw material specialisation of the Russian economy, making the “Dutch disease”
chronic [4].
Overcoming it, as well as taking care of future generations, is possible through
diversification of the economy, which is easier to achieve not by supporting envi-
ronmental business, but by cutting taxes. The best option is to reduce insurance
premiums while compensating for the lost profits of the PFR from the NWF, which
would fully comply with the mandate of the Fund, as enshrined in the Budget Code.
This option is also relevant given that, according to PwC, Russia is among the ten
countries with the highest share of labour taxes in the gross profit of a model company
(36.4% in 2017), significantly lower than neighbouring Kazakhstan in this indicator
(11.3%) [5]. Reducing this share will help primarily non-resource sectors of the
Russian Sovereign Wealth Fund 163

economy, and therefore its diversification and avoiding oil dependence, which is one
of the tasks of the NWF.
It is clear that due to the exhaustion of the NWF, a reduction in insurance premiums
can be planned only for a certain period—for example, five years, during which the
total transfer from the NWF will reach 2% of GDP. And by 2024, thanks to the
completion of national projects, the government will be able to free up funds to
make this option permanent. Moreover, it will suit both the Ministry of Finance,
which will receive additional non-oil and gas revenues due to the acceleration of
economic growth, and the Central Bank, since a transfer of less than 0.5% of GDP
will not affect inflation in any way, and the remaining NWF assets will be invested
in highly liquid foreign assets.
Finally, another decision well known to economists is to invest in stocks and
bonds in proportion to their capitalisation, as the Norwegian sovereign fund does,
whose income is used to pay pensions. A time-tested idea, the implementation of
which would insure against the mistakes of “effective” managers, whose investments
over the long-term horizon almost always lose to a simple investment in the stock
index. True, this measure has limitations—in the form of a relatively small volume of
SWFs, due to which the increase in pension will reach only several thousand rubles
a year and a low share of Russia in the global financial market, because of which
only a small part of the Fund will be invested in Russian valuable paper.

8 Benefits and Costs

Investing NWF assets in projects within the country, of course, is able to give addi-
tional acceleration to economic growth. The magnitude of the stimulus, however,
does not look impressive. If the price of oil remains near $60USD per barrel, and
the government saves only half of the oil and gas revenues generated when the price
of oil is above the cut-off price ($40USD per barrel in 2017 and already $50USD
per barrel in 2028), and the rest should be invested in infrastructure projects, then
additional investments will average $12.5 billion USD per year, which is less than
1% of GDP.
At the same time, the rejection of an active savings strategy may lead to the fact
that in the situation of a new crisis, the entire NWF airbag will be used up. There are
more short-term negative consequences:
1. The Bank of Russia considers the possible use of NWF funds within the country
as an inflationary risk, which is fraught with a slower rate of decline in the key
rate. At the same time, only companies associated with this project receive the
impetus for growth from financing investment projects, while the stimulating
effect of lower rates extends to the economy as a whole.
2. Continuation of the active accumulation of reserves under the budget rule could
lead to a further sustainable decrease in the Russian country risk premium, which
would reduce the cost of both sovereign and corporate borrowing in foreign
164 S. B. Globa

currency. With a slowdown in the rate of accumulation, the likelihood of such a

scenario decreases.
Relatively high oil prices in 2018 allowed Russia to replenish the NWF up to 4
trillion rubles. This is a huge amount—about a third of all planned revenues of the
country. In 2019, the volume of the NWF promises to grow by another 3 trillion and
make up 7% of GDP [4]. Significant amounts were also received by other producing
powers, which, like Russia, are putting oil dollars into similar reserve funds. Unlike
our country, which so far is only accumulating reserves, most of them have long
outlined promising projects that will allow not only to preserve, but also to increase
the acquired capital. Russia is in no hurry to take advantage of the investment expe-
rience of other producing countries, preferring to save money to cover the federal
budget deficit in difficult times for the economy.

9 Conclusion

The need for reserve funds is controversial. A number of economists and politicians
believe that it is more efficient not to keep money in reserve, but to use it for import
purchases working for the future of the country: for example, to buy patents and
equipment, to pay for students to study abroad, etc. Such tactics can avoid the negative
consequences of favourable conditions, without resorting to the actual freezing of
funds in the Reserve Fund.
Until 2008, there was a single Stabilization Fund in Russia, which was subse-
quently divided into the Reserve Fund and the National Welfare Fund, each of which
had an independent goal. The Reserve Fund was designed to ensure the implementa-
tion of budget expenditures in the event of a decrease in oil and gas revenues. In other
words, the Fund served as an airbag in a crisis situation. The National Welfare Fund
was conceived as part of a sustainable long-term pension mechanism. In 2008–2010
and 2014–2016, the Reserve Fund was actively spending amid falling oil prices. By
the end of 2017, the Fund was completely used up and since February 2018 has
ceased to exist. From this moment, the savings of oil and gas revenues are accu-
mulated in the NWF. A rather conservative fiscal rule in force since 2017 (saving
oil and gas revenues from oil prices in excess of $ 40USD per barrel, followed by
annual indexation of this level by 2%), made it possible to ensure a fairly rapid rate
of accumulation of funds in the NWF. On 1 August 2019, the Fund exceeded 7%
of GDP ($124 billion USD). It is expected that in 2020 the 7% threshold will also
exceed the liquid part of the NWF (that is, funds excluding those that were allocated
in 2014 to finance infrastructure projects) [1].
Russia is a country rich in gas and oil resources that it successfully exports, and
part of the federal budget revenues from the sale of hydrocarbons goes to the National
Welfare Fund of Russia. Sovereign wealth funds may in the near future become a
leading force in the global economy. Sovereign funds are the newest leading force in
the global financial market, which is replacing hedge funds and private investment
Russian Sovereign Wealth Fund 165

funds. They also replaced central banks as the largest borrower. Thus, the goal set
by the Stabilization Fund—increasing fiscal sustainability—was generally achieved.
During the period of the Fund’s existence, it was not used to make up for the loss of
oil revenues, but it was actively used to pay off Russia’s external debt.
The Reserve Fund was also used to ensure fiscal sustainability: financing the
federal budget deficit during the crisis in 2009 and 2010. In fact, the Fund was used
to compensate for the shortfall in non-oil and gas budget revenues, as well as to
finance additional costs to support the economy. The crisis showed that the negative
impact of falling oil prices is not limited to a decrease in oil and gas budget revenues.
Indirect effects of falling prices and foreign economic instability cause an economic
recession, which, in turn, causes a fall in non-oil and gas budget revenues. That is
why, due to the Reserve Fund, it was necessary to compensate for the shortfall of
non-oil and gas revenues.
During the decline in oil prices and the crisis, the National Wealth Fund has
become one of the main sources of ensuring quasi-fiscal measures to support the
financial system. Thus, the NWF was actually used to maintain macroeconomic
stability and served as an additional reserve for the federal budget. In general, it
can be argued that Russia’s budget reserves are really necessary, since the degree of
dependence of the Russian economy on the external economic situation is still high.

References

1. Official website of the Ministry of Finance of the Russian Federation. Available at: http://www.
minfin.ru
2. National Welfare Fund. Available at: https://web.archive.org/web/20081221234448/http:/
www1.minfin.ru/ru/nationalwealthfund/
3. Reserve Fund. Available at: http://minfn.ru/ru/perfomance/reservefund/statistics/volume/
4. National Welfare Fund. Statistics. Available at: http://minfin.ru/ru/perfomance/nationalwealthf
und/statistics/
5. PwC outlook : Sovereign Investors 2020. A growing force, 2016. Available at: http://www.pwc.
com/sovereignwealthfunds
Alaska’s Petroleum Industry, Institutions
and Sovereign Wealth Fund

Douglas B. Reynolds

I hold it true, whate’er befall; I feel it, when I sorrow most;

‘Tis better to have loved and lost; than never to have loved at all.
—Lord Tennyson In Memoriam: 27
It is better to have loaned and lost; than never to have loaned at
all
—The Economist
It is better to have explored and produced oil and lost;
than never to have explored and produced oil at all.
—Logic

Abstract Alaska is a unique petroleum-producing region in that it is a state within

the USA and therefore both an independent oil-producing and gas-producing region
with an independent State government as well as a region dependant on, and inter-
twined with, a more powerful developed U.S. economy and its U.S. Federal Govern-
ment. As such, it is possible to better observe political characteristics in the forma-
tion of petroleum policies and how they relate to the larger governmental institutions
since some policies are based on State government policies and therefore the State’s
citizens’ desires. Moreover, some policies are driven by the more powerful U.S.
Federal Government policies and its American citizens’ desires. The chapter looks
at Alaska’s oil and gas fiscal system, the State’s petroleum industry, its petroleum
institutions and its sovereign wealth fund and how all those items work together
within the broader government functioning.

D. B. Reynolds (B)
Petroleum and Energy Economics, Department of Economics, School of Management, University
of Alaska Fairbanks, Fairbanks, USA
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 167
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_9
168 D. B. Reynolds

1 Introduction

Every petroleum region in the world from Kazakhstan to Saudi Arabia to Venezuela to
Alaska has its own petroleum industry with its own set of institutions for petroleum
extraction and, more often than not, its own sovereign wealth fund to help save
money for the ups and downs of the petroleum industry. One way in which these
institutions work is to define which property rights the industry enjoys and which
responsibilities the government undertakes in order to maximize the benefits the oil
province citizens receive from the industry. The institutions include how oil taxes and
other fiscal systems are setup, how the industry is regulated, and how the government
and industry try to influence each other. The purpose of such institutions is for the oil
province to gain as much value as possible from its petroleum resources, including
reducing pollution, developing the local economy and providing social welfare to its
citizens.
Theoretically though, these institutions can vary from complete government
ownership and control to having totally free markets. When government control
is complete, the producing companies and mineral rights are government run. Under
totally free markets, producing companies and mineral rights are privately run (other
than a court system to adjudicate property rights). For example, a country can theoret-
ically benefit from a resource industry by simply allowing the value of the petroleum
resources to be earned directly by privately owned, international oil companies
(IOCs) or smaller independent oil companies and their workers, who then indi-
rectly, through the so-called trickle down effect of secondary spending, help the
local economy; a small tax on infrastructure might be imposed.
Alternatively, by having the government own, control and produce all the
petroleum with its own State-owned company then, theoretically, all of the oil
profits can be captured and used to provide roads, schools, subsidies and other social
welfare to the general population, and where a high level of government services
can enhance other businesses either ancillary to the petroleum industry or alterna-
tive to the petroleum industry within the country or region. The downside of total
government control though is that there is normally a lack of incentives to find and
produce more oil or to reduce the costs of production so that government revenues
are enhanced. Totally free markets tend to enhance income inequality. Therefore,
most provinces have a mixed system with at least some government control and
taxation and at least some private industry and free-market competition. Alaska is
no different.
The way in which Alaska’s institutions work for petroleum extraction, also called
crude oil and natural gas production, is that the State of Alaska or the U.S. Federal
Government owns all underground mineral rights within the region of Alaska, but
where the mineral rights are leased out to major IOCs or minor independent oil and gas
companies who in turn explore for, develop and produce the oil and gas resources for
a profit. The State and Federal governments, then, tax those profits using a complex
set of taxes and royalties. Each mineral lease is for a specific underground area and
for a specific mineral, such as oil and gas, and where the lease lasts as long as the
Alaska’s Petroleum Industry, Institutions … 169

company that owns the lease is able to develop and produce that particular mineral
resource. Therefore, Alaska has an institutional set up that is somewhere between a
wholly government directed and controlled system and a totally free market, privately
owned system, but which is closer to the free-market side of the spectrum.
Another aspect of oil and natural resource production is that most oil-producing
countries have what Ross (2013) calls The Oil Curse, which is how a regional
economy can be adversely affected by having a dominant petroleum industry and
where the petroleum-producing government is a rentiér state, i.e. where the govern-
ment gets most if not all of its revenues from the rent of petroleum mineral rights
and where the country often only has that one single petroleum industry to carry
its economy. Indeed, many oil producers similar to Alaska are unable to develop a
large robust set of alternative industries inside their regions. One interesting aspect
of the Oil Curse is where a local economy bubbles up high during periods of high
oil prices or high oil production levels and then collapses during periods of low oil
prices or low oil production levels and where such cyclical ups and downs are severe
and create social distress.
The way to mitigate such economic cycles of commodity price, or production
level, increases and decreases is to have a sovereign wealth fund, i.e. a savings
account, which the government can tap into during low cycle busts and build up
during high cycle booms. Running such a fund appropriately can act like a modern,
Keynesian economic fiscal or monetary policy, which is designed to reduce recessions
during low cycle troughs and inhibit booms during high cycle expansions. However,
most governments, and Alaska in particular, are ineffective in being able to run such
spending and taxing policies effectively because it is so hard to forecast those ups
and downs and therefore there is political resistance to operating any such counter-
cyclical policies properly. Indeed, since it is the Alaska State Legislature that controls
the State’s Sovereign Wealth Fund, and not a set of independent economists similar
to how the U.S. Federal Reserve runs, then it is no wonder that the Oil Curse occurs
in Alaska.
Interestingly, the Oil Curse cycles and the institutions of petroleum-producing
regions often work in tandem with each other to enhance the curse rather than
diminish it. According to new institutional economic theory, it is even possible that
oil prices themselves can affect how institutions change. For example, Acemoglu
et al. (2001) suggest that institutions are endogenous and as much caused by general
market factors as they are able to shape those markets. However, Alaska is complex.
For example, Alaska is driven by U.S. Federal Government institutions and tradi-
tions that are distinctly American, such as using free markets, having less government
control of its mineral industry and only using privately owned companies to produce
oil. In Alaska, those traditions and institutions are not easily changed. Furthermore,
the State of Alaska depends on U.S. Federal Government direction and the U.S.
economy in a way that most oil-producing countries cannot, such as U.S. provided
health care, U.S. welfare programs and the U.S. constitution and court system. Never-
theless, Alaska has managed to tweak its institutions in a uniquely alternative way as
a result of changes in oil market factors, particularly the price and production level
of oil. Unfortunately, Alaska’s government policies are shaped by oil market forces,
170 D. B. Reynolds

more so than being able to effectively counteract them. That is, Alaska does show
signs of the Oil Curse characteristics of a boom and bust economy even though there
is a larger U.S. Federal Government to backstop the Alaskan economy, and even
though Alaska does have policies to help stabilize its economy.
In this chapter, we will look at the fiscal system of Alaska, i.e. its oil and gas
taxes, which have changed over the years. We will consider Alaska’s version of
the Oil Curse and its Permanent Fund, which is Alaska’s sovereign wealth fund,
and how that fund has interacted with the Alaska economy. And we will look at
the way in which Alaska has been able to assuage its own Oil Curse by being able
to leverage the wider U.S. economy to help diversify its own economy. Note, in
American English the word “petroleum” is separated into the terms “oil”, which
includes hydrocarbons from ethane (C2) and upwards to as high as (C55) in carbon
content and “gas”, which includes natural gas based on methane (C1) and where
the low-weight liquids like propane (C3), butane (C4) and sometimes pentane (C5)
are often called liquid petroleum gas (LPG). These distinctions are important for
American tax law practices when considering (petroleum) oil and gas extraction,
and they are important in Alaska where vast reserves of northern natural gas have
yet to be developed due to a lack of a northern natural gas pipeline.

2 Alaska’s Petroleum Fiscal System

A fiscal system of a petroleum government can be taxes or other forms of government

revenue from its oil and gas industry, which is often called the “Government Take”
by the industry. On both U.S. Federal Government land (which includes 220 million
acres [90 million hectares] within the State of Alaska or about 60% of the State) and
State of Alaska land (which includes a little more than 100 million acres [40 million
hectares] or about 30% of the State), oil production by producing companies, often
called “producers”, is subject to a royalty which is defined as the presiding govern-
ment usually recovering 12.5%, or one-eighth, of all oil and gas produced irrespective
of costs or quantities. The royalty is a guaranteed income for the government owner.
On top of the royalty, both the U.S. Federal Government and the State of Alaska
have corporate income taxes that take a per cent of all oil company’s net positive
income. Interestingly, though, for Alaska, if the oil company is based outside of the
state, then the income tax is based on a prorated income according to how much of
that income was derived from within the State of Alaska.
Crucially, the State of Alaska has one more tax in addition to royalties and the
income tax, and that the U.S. Federal Government often does not have, which is a
production tax (also known as a severance tax or a profits tax) and which is based on
the actual amount of oil produced and other factors. It is this production tax that over
the years has changed due to either concerns for government revenues or concerns
for new oil and gas exploration and development investments. Often oil-producing
and gas-producing governments around the world raise government taxes or other
forms of “government take” when oil prices rise and they lower the “government
Alaska’s Petroleum Industry, Institutions … 171

take” when oil prices decline; the “lower tax during lower oil price eras” strategy is
meant to lead to added oil production and therefore added oil and gas tax revenue
later. These kinds of cyclical petroleum government fiscal systems are what Reynolds
(2016) refers to as the Wal-Mart (low oil price) and the Neiman Marcus (high oil
price) strategies, and Alaska is no exception. What this means is that government
taxes or other forms of “government take” change in reaction to the price of oil, but
more to the point, the government institutions change, even if only slightly, parallel
and along with the tax changes. High oil prices induce a higher “government take”
and often a change in institutions so that the government has more control over
the petroleum industry, whereas low oil prices induce a lower government take and
typically less control over the petroleum industry. For example, in the 1970s and early
1980s, Alaska was raising its production taxes and some regulations when the price
of oil and also Alaska’s oil production was rising in order to increase government
revenues, but at other times when oil production or oil prices were declining, Alaska
actually lowered taxes and even some regulation in order to induce more investment
so that production could increase.
However, on top of those tax changes, the State has one more complicating factor
which is the tariffs on the Trans-Alaska Pipeline System (TAPS), which includes the
800-mile-long oil pipeline (but not natural gas) that delivers the North Slope oil to
the southern ice-free port of Valdez, Alaska. TAPS also includes the oil-processing
facilities on the North Slope and the oil tanker port on the Southern Coast in Valdez.
When TAPS tariffs are high, the wellhead value of oil is low and consequently the
State’s government tax revenues are low. Therefore, a TAPS tariff law suit was started
in 1977, just as oil prices were rising, and lasted until an out-of-court settlement
was reached in 1985. The settlement occurred as oil prices were heading down
from $38USD per barrel to $26USD per barrel and soon to plunge to $11USD. The
settlement then was a State compromise towards the petroleum producers’ favour,
ostensibly to try to induce more oil production, and to this day some Alaskan oil
observers feel the settlement went too much towards the producer’s favour. But the
declining oil prices may have induced a quicker settlement.
One interesting aspect of the early Alaska tax system was the Economic Limit
Factor (ELF), which was actually an ingenious method to help account for the costs
of oil production. One of the problems in oil tax accounting is to be able to declare
that a specific cost is a legitimate cost for one or another oil field or alternatively a cost
that is associated with exploration for new oil and gas resources or a cost associated
with other industrial endeavours, such as downstream development in oil refineries.
Therefore, in order to simplify the accounting and force producers to reduce costs
and keep taxable profits higher, the State used ELF to tie a simple cost per oil well to
its tax system. The State tweaked the ELF system to the benefit of the State in order to
raise taxes in 1989 when the price of oil was just starting to gyrate up again, although
some see the Exxon Valdez incident, where a large oil tanker accident occurred on
Alaska’s coast line near Valdez that released about one quarter of a million barrels
of oil off the coast of Alaska into coastal fishing waters, as a call to push the oil
producers to be more responsible and, in addition, to pay their fair share of taxes. At
another low point in oil prices in 2002 and 2003, the State of Alaska gave additional
172 D. B. Reynolds

tax credits that were in essence monetary incentives to explore for and produce more
oil.
Eventually, the price of oil went up again starting in 2004, and so in 2005, a
new rule was put into place to aggregate exploration and production into higher tax
categories within the ELF system in order for the State to increase its revenues,
although the actual State’s oil and gas tax rates remained unchanged. However, in
2006, with ever-higher oil prices, and with costs of oil wells declining over the years
due to better technology, the ELF taxation method allowed too little taxes to the State
and it had to be changed. Therefore, a mechanism of a profits tax whereby all of the
costs and revenues were explicitly measured and taxed was passed in addition to the
normal corporate profits tax. So, the old tax system that gave high deductions to the
detriment of tax revenues, including the old ELF tax cost deductions, was changed
to a new petroleum production tax that was put in place, although it was changed
again in 2007 as oil prices rose even more to give even higher tax revenues to the
State, although the 2007 change did give some tax credits to help spur production.
In 2013, with oil production in Alaska falling, a new tax rate and tax deduction
regime called SB 21 (for Senate Bill #21), and also called MAPA (for More Alaskan
Production Act), was put in place to help spur development, in particular development
by smaller independent oil producers rather than the major IOCs. One impetus that
drove this change was that oil in Alaska has to go through the 800-mile TAPS pipeline,
which is in essence a monopoly pipeline and where the two major oil producers on the
North Slope own a majority of TAPS and where smaller new producers in Alaska’s
competitive market are forced to pay high fees and the high tariffs in order to use
TAPS. The end result is the high TAPS fees and tariffs often caused independents
to sell out and transfer ownership of their new found oil fields to the IOCs, which
then gives greater control of the North Slope oil to the two major IOCs, which at
that time were BP and Conoco Philips. MAPA was meant to induce new independent
producers to start searching for oil more aggressively than what the majors had done.
Most of the pipeline is above ground due to permafrost and seismic issues, and
therefore, if the oil throughput within the Trans-Alaska Pipeline were to become too
low, the pace of pumping the oil would slow down enough that the oil inside the
pipe could freeze-up and gel, especially due to the very cold ambient temperature
surrounding the pipeline. Such a freeze could catastrophically reduce Alaskan oil
production to near zero for months and cause irreparable damage to TAPS as well
as the North Slope oil fields, which is why Alaska wanted to incentivize more oil to
go through TAPS.
While some believe the new SB 21 tax law was meant to help increase TAPS
throughput, others thought it to be a giveaway by Alaska to the producers and so a
vote on the 2013 tax by Alaskan residents occurred in November of 2014. The vote
occurred right when oil prices were just in decline, which may have scared people
enough to vote for keeping the lower tax in place in order to get more oil flowing,
although shrewd marketing may also have changed the vote. What this shows is that
the State has typically reacted to oil prices and production levels with either a low oil
price Wal-Mart strategy during petroleum downturns (less “government take” during
eras of low oil prices in order to increase production and therefore future revenue
Alaska’s Petroleum Industry, Institutions … 173

streams) or a high oil price Neman Marcus strategy during petroleum upturns (more
“government take” during eras of high prices in order to increase current revenue
streams). The end result is Alaska’s oil-based economy is highly volatile.

3 The Oil Curse and Government Spending

According to Ross (2012), petroleum-dominant economies have neither above

average long-run growth rates nor below average long-run growth rates, even though
their economic growth per person should be higher than average owing to the early
intense resource extraction and economic stimulus when there is an early oil boom.
Nevertheless, there is still the possibility for an Oil Curse due to the volatile nature
of a petroleum-based economy. For example, when a region first discovers oil there
is an early boom in the petroleum sector that can easily crowd out other business
sectors such that when the petroleum industry finally goes into decline, those other
business sectors are not available to take the slack. Such an economy is characterized
by a much more severe business cycle where the economy cycles acutely high during
periods of high oil prices and high production levels and cycles uncommonly low
during periods of low oil prices or low production levels and Alaska is no excep-
tion. In general, those oil-based business cycles can cause extreme volatility within
an economy and wreak havoc on normal long-run business and governmental plan-
ning, and oil cycles can be much more severe than the average developed economy
economic cycle.
In Alaska’s case, when oil production and oil prices are high, the democratically
elected State government is inundated with revenue, so much so, that its legislators
are politically pressured by public opinion to do three things: (1) They are pressured
to spend money on infrastructure and government programs whether such spending
is needed or not, (2) they are pressured to reduce Alaska’s separate State corporate
income tax, State individual income tax and other State taxes to nothing in order
to further stimulate the local economy, where the tax reduction is outside of the
petroleum sector and is intended to stimulate non-oil related industries but which ends
up being a government giveaway to citizens and therefore causes a further stimulus
to an already booming economy, and (3) they are pressured to use the earnings on
the State’s savings account, its sovereign wealth fund (Alaska’s Permanent Fund), to
give money directly to citizens, i.e. the fund gives money directly to Alaskan citizens,
which is meant to subsidize the high cost of living in Alaska.
For example, in 1980, when oil prices were high and rising, the Alaska State legis-
lature voted to rescind the individual income tax as there were plenty of oil revenues
at that time. Then in 1986, Alaska had a major recession owing to the collapse of oil
prices, but it was thought that during such a recession, that that was not the time to
increase taxes since keeping such taxes low would help spur new businesses. Such
programs as the Alaska ferry system, the University of Alaska system and a project
to create a huge hydroelectric dam expanded during the oil boom, but during the oil
recession in 1986, those programs received less State money or were cut entirely.
174 D. B. Reynolds

Later in the early 2000s, State revenues went up again and programs expanded again.
Then when revenues declined in 2015, Alaska cut government spending again and
many agencies were cut, university funding was cut, funding for infrastructure was
cut, and funding for schools in expensive per student rural districts was cut. However,
during the government contraction, no new non-oil taxes were implemented, and no
new Statewide taxes, such as a State personal income tax, were implemented, the
idea being that keeping taxes low would induce new businesses to come to Alaska.
This exasperated the economic decline.
Still, in order to understand better how the government was ineffective in reducing
the Oil Curse in terms of the volatile oil cycles, consider what would have happened
if Alaska were to have tried to develop alternative industries simultaneously during
the first oil boom. During those days of the early oil boom, if Alaska had tried to
help develop alternative industries to oil, it would have taken a lot of government
support to do that, just when there was an oil boom, an impossible practicality.
During the oil boom, the government already had its hands full with taking care
of the existing economic expansion, with regulating the new petroleum industry,
with revenue collection from that industry, and with setting up health and welfare
safety nets and other programs for the many new people who arrived daily during the
boom. There was no time, no ability, nor available government employees to focus
simultaneously on the chaotic oil industry let alone on developing an alternative
industry.
More problematic during the oil boom years were the costs for labour, housing
and transportation services, which were very high due to the influx of many people
moving into the distant remote U.S. State. So, even if the State government had
wanted to try to develop additional industries on top of the oil industry, it would have
meant that those alternative industries would experience very high costs of labour,
capital and transportation, and therefore, those industries would not have been able to
compete against similar companies located in the Lower 48 states. It is a comparative
advantage question. Alaska has a comparative advantage in oil and California has
a comparative advantage in the high tech industry while Michigan and Ohio have
comparative advantages in manufacturing that Alaska could not compete with. So,
ideally, the strategy should be to develop the oil when the oil industry is booming
and then wait until there is an oil bust to start developing alternative industries as
they would be more cost competitive during an era with an oil bust. Unfortunately,
during an oil bust, there is no money to help develop alternative industries as the
State has a deficit maintaining existing services.
This raises another aspect of the Oil Curse, which is that during the oil industry’s
decline in 2015 to 2019 when State revenue declined, suddenly it was thought that
the size of government was too big and inefficient. Many Alaskan citizens wanted to
cut government spending and did not want to impose any new general taxes, again,
because it was thought that new general taxes would discourage developing new
alternative industries, just when the oil industry was in decline. So not only did the
oil industry rise during the oil booms and decline during oil busts but so did State
government spending rise and fall in tandem, exacerbating the boom-bust cycles.
Rather than the State government trying to use a Keynesian strategy of smoothing
Alaska’s Petroleum Industry, Institutions … 175

the cycles, the State strategy resulted in amplifying the cycles. However, there was
always one possibility of at least some mitigation of the Oil Curse in Alaska and that
was through developing a sovereign wealth fund, which Alaska did manage to do.

4 The Sovereign Wealth Fund

Governments worldwide want a smooth, reliable, steady source of government

revenue from which the government can plan its programs of education, develop-
ment and other services. Likewise, a government wants smooth and reliable personal
or corporate tax rates so that industry and labour can make long term plans for
investment and business. In addition, if a government has extractive industries where
the price of the commodity of that natural resource can vary substantially, then the
government normally wants to give that industry a reliable fiscal system, or system of
“government take”, that the extraction industry can plan around to do its investment
with. In this way, governments following the macroeconomic prescriptions of John
Maynard Keynes try to smooth variances in an economy by actively intervening to
mitigate booms and reduce busts such that the economy can be made smoother in
order to have less volatility in the lives of residents. Although since Alaska has the
prerogative to depend on U.S. Federal Government programs for individual welfare
help, the State can therefore afford more readily not to embrace Keynesian economic
principles.
Still, Alaska’s economy has been at times very volatile owing to a lack of State
government intervention. Since State government revenues from extractive industries
can vary substantially, and since government programs and a desire to stabilize
the economy means that government spending should theoretically vary counter-
cyclically to petroleum booms and busts (i.e. the government should spend more
during a recession and spend less during a boom), then it follows that a government
needs a sovereign wealth fund. Such a fund can be used to fill in the gaps between
spending and revenues whereby government programs can remain steady in the face
of declines in petroleum extraction taxes and revenues. This would further allow
non-petroleum companies’ taxes or individual taxes to remain steady during booms
and busts and to allow government services to remain steady during booms and busts
or even allow for the government to spend money counter-cyclically compared to the
petroleum industry. This is where Alaska’s own sovereign wealth fund comes into
play.
Over the years, the State of Alaska has reaped huge benefits from its oil industry.
However, due to the concern that oil prices could decline or that Alaska’s oil resources
could run out, causing the State government to encounter an Oil Curse where the
State would be left with no available industry from which to obtain tax revenue
from in order to continue to run State government with, and where the U.S. Federal
Government does not fund local and State government functions, then the State
needed a sovereign wealth fund. The State of Alaska established a savings account,
which is its own sovereign wealth fund, affectionately called the Permanent Fund
176 D. B. Reynolds

(PF) in 1976. The fund was set up to use only a small portion of the government’s
petroleum take, typically 10% of the total State government’s petroleum revenue
from oil production taxes and royalties based on a set formula, to put into the fund.
The Permanent Fund has since become a separate entity within the State government
with a separate board of directors and a separate functioning.
The Alaska Sovereign Wealth Fund, the Permanent Fund, is coded in Alaska’s
Constitution and cannot be withdrawn, and so it is, therefore, “permanent”. However,
the earnings from the fund can be withdrawn, and usually, some of the earnings are
returned back to the Permanent Fund for what is called inflation proofing, i.e. to
keep increasing the size of the fund in order to overcome inflation. Note, also a U.S.
Federal Government judge could conceivably if the State of Alaska were to default
on any of its bond or legal obligations, use federal law to take over the fund even if
Alaska’s Constitution does not allow for that. U.S. Federal debts or obligations may
trump any State laws or State constitutions should the Alaskan government debt be
deemed to be a federal obligation.
The interesting thing about the Permanent Fund, though, is that theoretically
the State of Alaska can invest in alternative economic growth-inducing industries
such as the high tech industry, manufacturing, real estate, and transportation. But
instead of developing those industries inside of Alaska, Alaska through its PF can
develop those industries outside of the State by investing in them in other State’s or
regions. Thus, Alaska gets to keep the earnings from the non-petroleum industries
but where those industries can develop outside of the State wherever it is best for
them to develop. It is as if Alaska developed new alternative industries for itself
where Alaska gets to keep the earnings from those industries without the hassle of
forcing them to be developed physically inside the State. This means Alaska did not
have to restructure its own State agencies, education system or its infrastructure in
order to attract those industries that may or may not have come to the State. Rather,
Alaska created alternative industrial diversification for itself indirectly, reduced the
boom and bust cycles of the petroleum industry indirectly and created a balanced
State funding source indirectly, all through the use of the Permanent Fund. This is
the power that a sovereign wealth fund can give.
Plus, the Permanent Fund has over the years increased in value, not so much
because of the oil royalties funding it, but rather because the money was invested in
stocks, bonds and real estate that have all increased in value over the years. Its value
has increased so much so that it is now the portfolio side of the fund, rather than
the government’s per cent of oil income side, which determines the fund’s size and
growth. The Alaska oil tax and royalty inputs into the fund are now a small drop in
the bucket compared to the portfolio earnings of the fund.

5 The People’s Petroleum Dividend: The PFD

The original purpose of the Permanent Fund was to have a rainy day savings account
for the State’s government in order to effectively carry out a Keynesian economic
Alaska’s Petroleum Industry, Institutions … 177

policy. However, it took a sizeable political effort just to create the fund. This raises
another peculiar circumstance of Alaska, which is that it has a very small population
and a relatively transparent political democracy where the people wanted the oil
money not just for schools, roads and infrastructure but also to reduce State and local
taxes and to subsidize energy costs. Once the Permanent Fund existed, though, many
thought it would too easily be spent and be drained to nothing. Therefore, in order
to have received enough political support and political will to keep the Permanent
Fund growing, and to have the fund permanently inscribed as part of the State’s
Constitution, it was decided that about one-third of the earnings of the fund per year,
based on a five-year averaging formula, would be given directly to every man, woman
and child in the State in the form of what every Alaskan euphemistically calls the
PFD (Permanent Fund Dividend) cheque, which is a cash give-a-way to its citizens.
That is, where most petroleum-producing governments give substantive subsidies for
fuel, education, roads, food and housing, Alaska simply gives money directly to its
citizens and only subsidizes a few things like education, roads and some rural electric
power among other things. Although most Alaskans consider the PFD a return to
the people for the people’s oil, where most of the gas has yet to be developed, it was
really meant as a savings account for the government. Interestingly though, the PFD
can act as an incentive for having larger families.
The PFD is a cheque to every man, woman and child in Alaska who is a State
resident by legal definition. The PFD is designed to give Alaskans a stake in the oil
industry, but it is in fact completely divorced from that industry as 95% or more of
all the earnings are based on stock, bond and real estate value growth in the Lower
48 and the world and not on oil prices or oil production in Alaska. This is because
the fund is so big now, the fund’s internal growth dwarfs any miniscule amount of
oil royalty additions it receives nowadays. So while most Alaskans think of the fund
as their stake in the oil industry, it is in fact free money from the government’s stock
and bond Permanent Fund savings account.
Still, the earnings from the Permanent Fund can be used for funding State govern-
ment services in case the rest of the oil taxes decline in value such that the State
could no longer provide all of its obligations to build and maintain roads or create
industry or subsidize schooling. Such an emergency happened during the oil price
collapse of 2015 to 2019, as well as in 1986, where suddenly the State’s revenues and
other non-Permanent Fund alternative savings accounts declined even as the budget
could not be cut very easily. This resulted in a State fiscal crisis of deficit spending
requiring the use of the Permanent Fund’s earnings for State operations and thus a
PFD reduction to every citizen. Such reductions in PFD’s are not happily accepted
by the public though.
The interesting thing about the State’s recessions was that by reducing the PFD
cheque to each Alaskan, the State was being funded by a highly regressive effective
personal income tax rate. Normally, if a government needs money, it has a progressive
tax that in percentage terms, takes relatively more money from the rich and less from
the poor, but by reducing the PFD, Alaska’s State government became a highly
regressive revenue collector. The poor in Alaska paid more to the government, in
terms of reduced PFD cheques, than did rich Alaskans.
178 D. B. Reynolds

Consequently, what ends up happening with the Permanent Fund is that during
periods of natural resource industry growth, there is pressure on the state government
to allow earnings on the Fund to be given directly to the people since the government
does not need the earnings and everyone believes they should have a “piece of the
natural resource action”. Then, when resource revenues decline, there is also a general
recession with the State where both the resource industry and government programs
have to be cut. However, in that case, it only makes sense to give people money
during a recession and so again there is a policy to give each resident the PFD. But
then the Permanent Fund is not big enough to help both the State’s finances and give
money to the people at the same time. Plus, it is not allowed to spend the principle
of the fund so only the earnings of the PF were used to fund State government, i.e.
the PFDs were cut although State services were also cut. So, the end result is that
the State’s government programs rise during the resource booms and are cut during
the resource declines, and in addition, the PFD cheques end up rising during booms
and being cut during recessions. Thus, the State exacerbates the rises and falls of the
State’s economy, completely counter to Keynesian economics.
Also, the U.S. Federal Government does still give some welfare help to Alaska.
However, even with U.S. Federal Government spending as a backup for State govern-
ment services, nevertheless, the State was left with no available source to obtain tax
revenues to run the State government with and it had to cut both PFDs and State
services.

6 The Lower 48 Relationship

One interesting aspect of the State of Alaska is that it is under the U.S. Federal
Government, so when Alaska had an oil industry-induced recession in the 2015 to
2019 period, and in 1986, where both State government and private industry were
forced to cut back, many of the private industry and government workers left Alaska
and moved to the Lower 48 for jobs in other States in other government employment
or in other industries. Therefore, one of the ways that Alaska takes care of its own
Oil Curse of oil booms and busts is to have an overarching U.S. economy where
unemployed Alaskan workers can quickly move outside of Alaska but inside of the
USA in order to find other jobs in other states. That is, the labour mobility within the
U.S. as a whole keeps Alaska from having a full-blown Oil Curse that other countries
might encounter.
In fact, the U.S. Federal Government also provides social services to Alaskan
citizens that include subsidized health care, student loans, food and other federal
safety net programs. Accordingly, even if the State of Alaska falters in its responsi-
bility to take care of Alaskans while it reduces its State spending, the U.S. Federal
Government is still there to provide help, and Alaska’s representation in the U.S.
Federal Government is quite high owing to it having two U.S. senators for a State of
only 700,000 residents as compared to the State of California, which has 40 million
Alaska’s Petroleum Industry, Institutions … 179

residents and has only two U.S. Senators in Washington D.C. However, California
does have a large number of U.S. congressional house representatives.
Another interesting aspect of Alaska is that whenever a State worker or State legis-
lator or even an industry worker is in some way tempted to accept bribes, launder
money or embezzle funds, the U.S. Federal Government institutions are there to
find out about it and prosecute such activity as opposed to State institutions, which
are often too small or have too little funding or are too politically entrenched to be
able to do such an investigation. For example, in 2006 when the State legislature
was trying to determine an appropriate petroleum tax cut for a potential natural gas
industry, which included a large natural gas pipeline, a prominent business person in
Alaska, Bill Allen who headed VECO, an oil field service company, was convicted
of bribing legislators to have them pass the tax break. In that case, it was the U.S.
Federal Government not Alaska’s State government that discovered and prosecuted
the misdeed; otherwise, Alaska would have been under the thumb of corporate inter-
ests. Hence, by Alaska being under U.S. Federal institutions, this is another way in
which Alaska is able to ward off the Oil Curse. However, it cannot totally free itself
from the Oil Curse’s grip due to the pro-cyclical government spending.
Another aspect of the Oil Curse is the way local currencies can fluctuate. While
Alaska’s currency is stable due to the U.S. Federal Government’s control of the dollar
through the Federal Reserve, nevertheless, Alaska’s state fiscal policy rises and falls
as the State’s petroleum industry rises and falls. When the petroleum industry goes up
and down, even though the currency is stable, nevertheless, the State’s government
spending is still volatile and the State’s economy goes up and down. Still, the one
saving grace for Alaskan workers is that they can move down to the Lower 48 U.S.
States and find jobs there. Plus, Alaskan citizens can still receive U.S. government
health and welfare benefits including jobless benefits.
One last help for Alaska’s volatile petroleum industry though, is that there is
the mining industry of non-petroleum minerals such as gold, copper or coal to help
create jobs. While the mining industry has been developed to a degree, it is not
mature enough as an industry to effectively create a counter-cyclical alternative non-
oil industry. Therefore, whenever the oil industry has gone down, the entire State
has had all of its human capital, all of its State agencies and all of its infrastructure,
which was set up for oil and not for new major mining operations or for new high tech
industries or for manufacturing, decline. Hence, when the oil industry went down
in 2015 the first and only strategy by the State government, and for that matter, the
only policy advocated by public demand, was to build a large natural gas pipeline
in order to develop a natural gas industry that would mimic an oil industry. In other
words, even when the hydrocarbon industry goes down, the only strategy put forth
by politicians and embraced by the general public is to get the petroleum industry
to come back up again by using an alternative (natural gas) hydrocarbon industry to
create jobs, State government revenue and economic growth. Therefore, even when
a region such as Alaska is in the worst of the Oil Curse, it has very little opportunity
to escape the curse, even if it wants to.
180 D. B. Reynolds

7 Conclusion

The State of Alaska is a major oil-producing and gas-producing state with a large
developed economy, the USA, backing it. This situation has caused Alaska to have
a certain set of institutions in its petroleum industry, such as no Alaska State-owned
and operated petroleum company. Therefore, Alaska has tended to be a mostly free-
market system rather than a government-controlled system. Alaska did manage to
create a sovereign wealth fund to at least create some alternative industrial develop-
ment (outside of the state) and which could be used as a backup source of funding
for its government.
Alaska’s democratically elected government has tended to increase the Oil Curse
rather than to mitigate it by, for example, having more spending during oil booms
and decreases in government spending during oil busts, creating a larger boom and
bust cycle for its economy. When oil prices and production are rising, there is a polit-
ical push to increase government spending. Not only were government services and
infrastructure investment increased, but the Alaskan sovereign wealth fund earnings
were given away directly to the people. Once all this stimulus is going full blast,
then suddenly oil prices and oil production can decline, but (1) all the government
programs and infrastructure still need to be maintained, and continue to require
budgeting, (2) the legislature does not want to raise any taxes as it would cause a
further cost to new businesses and industry just when the State economy needs to
induce those industries, and (3) the State cannot easily retract the citizen give-away
programs just when citizens need extra money during a recession without tremendous
political turmoil.
The end result is that the State of Alaska’s spending and government fiscal system
is highly pro-cyclical in nature and in conjunction with the price of oil and to some
degree the State’s rate of production of oil. Thus, Alaska has the Oil Curse in spades,
although as stated at the beginning of the chapter, it is far better to have produced oil
and suffered an economic loss than to never have produced oil at all. The only saving
grace for Alaska is the wider U.S. Federal Government and the other States where
workers can flee to and where the U.S. Federal Government provides some backup
welfare to Alaskans and can effectively police and prosecute corruption inside of
Alaska. Thus, it is the U.S. Federal Government that looks into illegal activities by
public or private employees so that Alaska’s corruption is kept to a minimum and
where the currency is held steady. Therefore, even though Alaska exhibits the Oil
Curse, it is in some way muted by the U.S. Federal Government. And finally, when
there is a recession, many workers can migrate to other states for better opportunities.

References

Acemoglu, D., Johnson, S., & Robinson, J. (2001). The Colonial Origins of Comparative
Development: An Empirical Investigation. The American Economic Review, 95(5), 1369–1401.
Alaska’s Petroleum Industry, Institutions … 181

Thomas, C. S., Savatgy, l., Nakazawa, A. T., & Klimovich, K. (Eds.) (2016). Alaska politics
and public policy: The dynamics of beliefs, institutions, personalities and power. University
of Chicago Press and University of Alaska Press.
Ross, M. L. (2013). The oil curse: How petroleum wealth shapes the development of nations.
Princeton University Press.
Reynolds, D. B. (2016). Cold war energy: The rise and fall of the Soviet Union. Alaska Chena.
Non-renewable Natural Resource Wealth
Management and Distribution
in Canada: National, British Columbia,
Northwest Territories, Quebec

Andrew Bauer and Sarah Daitch

Abstract Canada possesses some of the world’s largest and most valuable non-
renewable resource deposits. As of 2017, Canada was the world’s fourth largest
natural gas producer, fifth largest crude oil producer and a significant producer of
gold, copper, coal, potash and iron ore. Management of these resources is complex,
but largely resides with subnational governments, whether provinces or territo-
ries. As such, fiscal regimes, environmental and social regulations, distribution of
resource revenues, and management of resource revenues vary across the country.
This chapter summarizes the management of oil, gas and mining resources and
revenues in Canada, with a focus on subnational sovereign wealth fund governance.
Among our conclusions, we highlight low average effective tax rates by global stan-
dards, limits to the benefits that can be captured by the territories and a tendency
towards discretionary use of sovereign wealth funds. We present three subnational
sovereign wealth fund case studies from British Columbia, the Northwest Territories
and Quebec, since these funds are explicitly meant to be financed in part by resource
revenues. The Alberta Heritage Savings Trust Fund is covered in a separate chapter,
and the Manitoba Stabilization Fund is not explicitly financed by natural resource
revenues nor resides in a resource-dependent province. While some funds, namely
the Quebec fund, have incorporated many good global practices in sovereign wealth
fund management, the case studies underscore the need for withdrawal rules that
help governments smooth fiscal expenditures and promote intergenerational equity,
along with a need for greater public oversight.

Keywords Canada · Fiscal terms · Sovereign wealth fund · British Columbia ·

Northwest Territories · Quebec · Natural resource · Revenue management · Oil ·
Mining

A. Bauer (B)
Public Finance Consultant, Montreal, Canada
e-mail: [email protected]
S. Daitch
Daitch & Associates, Montreal, Canada
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 183
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_10
184 A. Bauer and S. Daitch

1 Who Owns Extractive Resources in Canada?

Canada is a federal state with ten provincial and three territorial governments (North-
west Territories, Nunavut and the Yukon). Ownership of subsoil assets is complex
and rooted in a history of colonization. In brief, 89% of Canadian onshore terri-
tory is ‘Crown land’, owned by federal or provincial governments. Of this amount,
approximately 46% of Crown land is owned by the federal government—the three
territories as well as national parks, reserves and military bases—while 54% is owned
by the provincial governments. Offshore resources are fully owned by the federal
government (Government of Alberta 2019).
The remaining 11% of Canadian subsoil resources are owned by private entities.
‘Freehold land’ is a relic of the seventeenth century to the early twentieth century
when settlers, the Hudson’s Bay Company and the railroad companies were granted
rights to encourage colonization of the western provinces, develop the fur trade
and build the transcontinental railway (Martin 1973). While these companies have
retained some land, a portion has been sold to private individuals or corporations. In
the province of Manitoba, approximately 75% of mineral rights are privately owned
(Government of Alberta 2018b).
Subsoil ownership must be distinguished from rights to manage subsoil resources.
Under the Constitution Act (1867, amended 1982), minerals, oil, gas and other natural
resources are managed by the government of the province in which they are located.
The federal government manages resources on federal lands, in offshore waters, and
on the continental shelf (Government of Canada 2016). In order to mitigate any
conflict between different levels of government, offshore oil and gas production is
regulated by boards with representation from both federal and provincial govern-
ments, despite management being the legal responsibility of the federal government.
Each jurisdiction in Canada (province, territory and federal government) has its own
mining, petroleum, environmental and occupational health and safety legislation.
Direct federal involvement in the regulation of onshore oil and mining operations
in the provinces is limited. For example, it includes some responsibility for safe
handling of uranium, a nuclear fuel, and shares responsibilities for environmental
protection with the provinces. Provincial governments are responsible for mining,
oil and gas, including the exploration for, and the development and extraction of,
mineral resources, and the construction, management, reclamation and close-out of
mine sites within their respective jurisdictions. Provinces have the exclusive right to
levy royalties and mineral taxes, though the federal government may collect corpo-
rate income tax from extractive companies (Government of Canada 2016). The one
exception is on freehold land, where private landowners may lease mineral rights
and levy royalties and taxes (Government of Alberta 2018b).
The three territories do not enjoy independent constitutional status (Baldwin and
Fipke 2010). However, in recent years, lawmaking and regulatory responsibilities
in the mining, oil and gas sectors have been delegated to the territories through a
process called “devolution” (Irlbacher-Fox 2012). Prior to devolution, the federal
government, through the Department of Indian Affairs and Northern Development,
Non-renewable Natural Resource Wealth Management … 185

was directly responsible for extractive activities in the three territories North of
the 60th parallel, including mineral exploration and extraction, the development,
management and reclamation of mine sites, and the collection of resource revenues
and royalties in the Yukon and Northwest Territories (NWT). Through devolution, the
federal government has reduced its role by devolving provincial-type responsibilities
to the territorial governments.
The argument in favour of devolving these responsibilities is that it enhances
“made in the North decision-making” concerning the development of mineral
resources, allowing the territories to keep a portion of resource revenues (Govern-
ment of Canada 2016). However, there is a strong argument that some Devolution
Agreements have not been accompanied by adequate funds or administrative support
to guarantee that the territorial governments’ new administrative responsibilities are
effectively carried out, and that the share of resource revenues that can be retained
without other transfers from the federal government being clawed back is too low
to incentivize an equitable arrangement in the resource sector (Irlbacher-Fox 2012;
Irlbacher-Fox and Mills 2007).
Currently, the three territories have responsibilities in the areas of land-use plan-
ning, environmental assessment, water resources, and royalty and tax collection
(Government of Canada 2016). The resource sector is regulated by co-management
boards consisting of representatives from Indigenous groups, the federal government
and the territorial governments. In addition, Indigenous governments in Canada
have particular rights and title to lands, protected by the Constitution of Canada.
For Indigenous governments who have signed modern land claim agreements, these
agreements often include rights for the Indigenous government to manage a portion
of subsoil resources on their settlement lands. While the percentage of settlement
lands on which Indigenous governments have rights to subsoil resources varies by
agreement, in many cases this portion makes up about 15% of the Indigenous govern-
ments’ total settlement land (Baldwin and Fipke 2010). Additionally, under Cana-
dian law, the Government of Canada has a duty to consult Indigenous nations and
governments regarding extractive and other natural resource developments on their
traditional lands (Baldwin and Fipke 2010).

2 What Are the Main Extractive Resources in Canada?

Although it has a diversified economy—the extractive sector generates approximately

8% of GDP on average—crude oil, natural gas and raw minerals represented more
than 30% of exports in 2017 (MIT Observatory of Economic Complexity 2019).
While most Canadian governments do not depend on natural resource revenues to
finance their budgets, the governments of the provinces of Alberta, Newfoundland
and Labrador and Saskatchewan are resource-dependent; around 20% of their fiscal
revenues in recent years have been collected from oil, gas or mining companies.
The Northwest Territories and Nunavut, both territories rather than provinces, are
186 A. Bauer and S. Daitch

resource-dependent as measured by GDP, though not in terms of fiscal revenues

(Statistics Canada 2019b).
Canada produces more than 60 types of minerals. Natural Resources Canada,
the federal ministry mandated to promote the natural resource sector, valued Cana-
dian non-oil mineral production at $43.9 billion in 2017, an increase of 11.3% from
the 2016 total of $39.4 billion (Government of Canada 2016). Canada’s top five
mineral products by value in 2017 were gold ($8.7 billion), coal ($6.2 billion), copper
($4.7 billion), potash ($4.6 billion) and iron ore ($3.8 billion). British Columbia,
Ontario, Saskatchewan and Quebec were the largest producers. All commodity
groups recorded gains in value, but results for individual commodities varied, with
coal recording the largest year-on-year increase at 55.6% or $2.2 billion, a notable
development in light of Canada’s commitment to the Paris Agreement and striving
towards climate change targets.
Canada’s oil and gas sector is even larger than the mining sector, generating
CAD 118.5 billion in 2017 (Statistics Canada 2018a). In the same year, Canada was
the world’s 5th largest crude oil producer and the world’s 4th largest natural gas
producer (British Petroleum 2018). The country holds 10% of the world’s proven oil
reserves, more than any other country except Saudi Arabia and Venezuela (British
Petroleum 2018). Canada was also the largest foreign supplier of crude oil to the
USA, accounting for 43% of total US crude oil imports (Natural Resources Canada
2018b). 99% of all Canadian crude oil and equivalent exports go to the USA. The oil
sands of Alberta and Saskatchewan supply the vast majority of Canadian production.
In 2017, oil sands production was 2.7 million barrels per day compared to 1.5 million
barrels per day of conventional oil (Natural Resources Canada 2018b).
Given the capital-intensive nature of the industry, the oil, gas and mining sector
has generated approximately 8% of GDP on average in recent years but employed
fewer than 200,000 workers, or 1.2% of the labour force, in 2017. However, these jobs
offer some of the highest wages in the country; the average salary in the extractive
sector is more than CAD 100,000 per year (approximately USD 76,000) (Statistics
Canada 2019a).
Furthermore, economic multipliers are among the smallest of any economic sector
in terms of labour income, jobs and output.1 Studies from Alberta, British Columbia,
the Northwest Territories and the federal government have each shown that the non-
renewable resource sector produces the fewest jobs per million dollars in output (e.g.
1.3 jobs in the extractive sector relative to 23.4 jobs in forestry and logging in the
Northwest Territories) and wage multipliers are among the smallest of any industry
(Northwest Territories Bureau of Statistics 2012; Ryser et al. 2008; Statistics Canada
2019). The upstream petroleum sector has the smallest GDP multiplier of any industry
(Government of Alberta 2018a; Statistics Canada 2018c).

1 Multipliers are the change in one variable relative to the change in another variable. For example,
in this context, the wage multiplier is the percentage change in overall wages from a given increase
in extractive sector wages. Similarly, the GDP multiplier is the percentage change in overall GDP
from a given increase in the extractive sector domestic production.
Non-renewable Natural Resource Wealth Management … 187

In theory, additional benefits could be generated from secondary and tertiary

processing, for example petrochemicals, copper roofing or jewellery. However,
processing from the extractive sector represents less than 1% of provincial GDP in
each of the resource-dependent provinces. After all, producing raw materials usually
does not give a country a competitive advantage in downstream processing of those
materials (Toledano and Maennling 2018). Only Ontario has significant downstream
mineral activity representing approximately 2% of provincial GDP (Alexander et al.
2018; Statistics Canada 2019b).

3 What Is the Fiscal Regime in Canada?

Canada’s fiscal regime for oil, gas and minerals is complex by global standards.
The federal government collects taxes and fees from extractive companies, such as
federal corporate income tax. However, since natural resource governance is provin-
cial jurisdiction under the Canadian constitution, each of Canada’s ten provinces
has the right to set its own natural resource-specific taxes, royalties and fees. As
mentioned, the federal government has recently begun devolving responsibility over
natural resource management, including fiscal regimes, to its three territories as well.
In general, Canada’s tax environment can be described as favourable, even char-
itable, to oil, gas and mining companies. Among the most generous aspects of the
various fiscal regimes in Canada are: (1) relatively low income taxes; (2) no royalty
or royalty with cost deduction in most jurisdictions; (3) accelerated depreciation of
capital assets; (4) tax credits for intangible assets that can be carried forward up to
20 years; (5) operating loss carry forward for up to 20 years; and (6) generous with-
holding tax limits or exemptions through tax treaties (KPMG 2016). A single federal
tax incentive known as ‘flow-through shares’ that allows investors in exploration
companies to deduct their costs from their own income taxes on unrelated activi-
ties cost Canadian taxpayers CAD 440 million dollars a year on average between
2007 and 2012, without any proven impact on productive exploration activity (Jog
2016). Table 1 provides a simplified summary of Canadian fiscal regimes in selected
jurisdictions for mining for illustrative purposes.
The average effective tax rate, or ‘government take’, on a given mine depends on
many variables, including commodity prices, costs of exploration and production,
lifespan of the mine, and administrative capacity by governments to minimize tax
avoidance. Therefore, it is impossible to attribute a single figure to the portion of oil,
gas and mining rents being captured by the government. Ultimately, each field and
mine is subject to a different ‘government take’. That said, Canadian governments
collect among the smallest shares of oil, gas and mining profits anywhere in the
world. In 2012, Natural Resources Canada modelled an average-sized metallic mine
using cost and price assumptions consistent with that time period. The study found
that the average effective tax rate in Canada ranged from 20 to 30%, depending
on the province, compared to 35-80% in Australia, Indonesia, Peru and Tanzania
(Natural Resources Canada 2012). The one exception is Saskatchewan potash whose
188 A. Bauer and S. Daitch

Table 1 Simplified metallic mineral fiscal regime in Canadian jurisdictions (PwC 2016)
Jurisdiction Income Royalty Mining tax Notable Mineral
tax (%) incentives production
(CDN billion)
(Natural
Resources
Canada 2018a)
Canada 15 Generous 43.9
(federal) deductions;
investment tax
credits;
flow-through
shares
Alberta 12 Greater of 1% No cap on 2.44
gross revenue processing
or 12% of net allowance
revenue
British 11 2% of net Indefinite carry 8.84
Columbia “proceeds” forward on most
plus 13% of expenses; no cap
net revenue on processing
allowance
Manitoba 12 10–17% of Tax holiday until 1.66
net profits full costs are
recovered,
subject to govt
approval
New 12 2% of net 0.39
Brunswick revenue plus
16% of net
profits
Newfoundland 14 15% of net 2.93
and Labrador profit plus
20% of profit
minus mineral
tax paid
Northwest 11.5 0–14% minus Generous 2.07
Territories costs deductions from
royalties
Nova Scotia 16 Greater of 2% Accelerated 0.24
of net revenue depreciation
or 15% of net
income
(continued)
Non-renewable Natural Resource Wealth Management … 189

Table 1 (continued)
Jurisdiction Income Royalty Mining tax Notable Mineral
tax (%) incentives production
(CDN billion)
(Natural
Resources
Canada 2018a)
Nunavut 12 0–14% minus Generous 0.84
costs deductions from
royalties
Ontario 11.5 5–10% of net Generous 9.86
profits deductions;
36 month tax
exemption for
new mines or
expansions
Prince Edward 16 0.00
Island
Quebec 11.9 5% of net Generous 8.61
earnings plus deductions
16–22.9% of
profit,
depending on
profitability
Saskatchewan 12 Dependent on Various taxes 10-year tax 5.72
mineral (e.g., dependent on holiday; costs
2.1–4.5% on commodity are deducted
potash; 5–15% from royalties;
on uranium); accelerated
3% resource depreciation; no
surcharge cap on
charged on processing
sales allowance
Yukon 15 0–12% minus 0.30
some costs

‘government take’ on large, viable projects is aligned with international standards at

between 45 and 90% depending on prices (Keen et al. 2014).
‘Government take’ is largely in line with US rates, which are also among the
lowest in the world. These percentages do not take into account base erosion, profit
shifting and other tax avoidance measures, implying that the effective ‘government
take’ is lower in each country.
Currently, the mining industry is taxed more lightly than other industries in
Canada and provides significant benefits to investors. Depending on the province, the
marginal effective tax rate on metallic minerals ranges from −9 to 21%. In compar-
ison, the oil and gas sector’s marginal effective tax rate ranges from 13 to 40%, and
the rate for non-resource industries ranges from 2 to 25% (Chen and Mintz 2013).
190 A. Bauer and S. Daitch

The mining sector’s low, even negative, rates are mostly attributable to the generous
rules around expensing of assets and low royalty rates or mineral taxes.
The Canadian petroleum sector is also characterized by low ‘government take’ by
global standards. The IMF’s standard fiscal model demonstrates that, on paper, the
average effective tax rate for conventional oil in Alberta and Saskatchewan would be
approximately 55%, making a number of assumptions, including an oil price of USD
50 per barrel. The same field would garner an average effective tax rate above 60%
in the UK, North Dakota, Oklahoma and Texas, and more than 80% in Algeria and
China. The gap between Canada and other countries is similar for shale oil (Daniel
et al. 2017).
The World Fiscal Rating of Oil Terms published by Van Meurs Energy provides
a more sophisticated assessment of ‘government take’ in the oil sector, though one
that is difficult to communicate. The rating is based on modelling of different field
size, cost and price scenarios. Canada’s overall rating, which is an average of ratings
across provinces and territories, ranks its fiscal regime in the 25th percentile globally,
meaning that ‘government take’ in the oil sector is lower than in 75% of countries
(Van Meurs Energy 2019).
It is more difficult to assess the fairness of fiscal terms on oil sands—which
represent approximately two-thirds of Canadian oil production—since few coun-
tries outside of Canada and the USA produce such high-cost unconventional oil.
However, one study by the Government of Alberta royalty review panel found that
the government collects 60–100% of the “super-rents” generated by oil sand compa-
nies (Royalty Review Advisory Panel 2016).2 The World Fiscal Rating of Oil Terms
confirms that the fiscal regime for Alberta oil sands provides a higher ‘government
take’ than for oil production in other Canadian jurisdictions. Still, if Alberta were
a country, ‘government take’ would be lower than in 62% of the world (Van Meurs
Energy 2019). On the other hand, the high cost of production on the oil sands and
high transport costs means that fields are only viable when oil prices are relatively
high, above USD 44 per barrel as of 2018 (CERI 2018).
Natural Resources Canada and the Canadian oil and mining industries view these
low rates as a virtue, encouraging investment in the extractive sector. However, this
perspective fails to recognize that, unlike automotive factories or software compa-
nies, oil fields and mines are location-specific, generate large economic rents and are
assets owned by governments. As such, the fiscal regime can be adjusted to maximize
rent collection without harming investment on viable fields and mines (Hogan and
Goldsworthy 2010; Mintz and Chen 2012). Moreover, governments have a respon-
sibility to their citizens to maximize revenue from sales of their assets, whether
physical buildings or minerals under the ground.
The Canadian extractive sector is already appealing to global investors due to
Canada’s comparative advantages. These include a skilled and experienced work-
force, well-established supplier networks, political and regulatory stability, relatively

2 “Super rent” figures are based on rents above a 10% ‘hurdle rate’.
Non-renewable Natural Resource Wealth Management … 191

low electricity and water costs, and good infrastructure, especially non-pipeline trans-
port. Fiscal incentives are therefore needed less in Canada than in most countries to
attract investment.
The IMF suggests that ‘government take’ in the oil sector can be as high as
90%—as has been the case in Angola, Kazakhstan and Norway in certain years—
without harming investment on major projects (Daniel et al. 2017; Goldsworthy and
Zakharova 2010). ‘Government take’ in the mining sector is generally lower than in
the oil sector; however, the average effective tax rate can be raised to between 60
and 80% without diminishing investment on viable mines, provided that the fiscal
regime is designed to be progressive and there is political and social stability, as is
the case in intermediate and high price scenarios on medium-sized copper mines in
Chile, Indonesia and Western Australia (Manley 2017; Keen et al. 2014).
The impacts of existing incentives are substantial exploration activity, develop-
ment of marginal mines and oil fields, and shifting significant economic rents from
Canadian governments to shareholders of large mining companies. Since the majority
of shares are held by foreigners—for example, oil sands production is approximately
70% owned by foreigners, even if the majority of operators and their staff are based
in Canada—the fiscal regime represents an enormous transfer of wealth to foreigners
at the expense of Canadian governments (Financial Post 2012). The loss to govern-
ments totals many billions of dollars annually. As a result, less money is available
for hospitals, schools, roads and other public services.

4 Revenue Collection and Distribution in Canada

As mentioned, the federal government collects corporate income tax from oil, gas
and mining companies. It also collects value added tax (the goods and services tax),
customs duties and withholding taxes, though these are largely offset by deductions
or exemptions. Approximately one-third of resource sector payments in Canada are
made to the federal government in an average year.
Provincial governments collect provincial corporate income tax, royalties and
mineral taxes (when they are levied), value added taxes and various fees. Since the
signing of Devolution Agreements with Canada’s three territories (the Northwest
Territories, Nunavut and the Yukon) between 2003 and 2016, royalties have been
collected by the territorial governments and transferred to the federal government.
Property taxes, fuel taxes, and fees for water, land and road use are collected and
retained by the territories. Corporate income taxes are collected and audited by the
Canada Revenue Agency on behalf of the territories and transferred to them.
Some Indigenous governments also levy taxes, royalties or fees, often negotiated
directly with companies. Payments are usually delineated in Impact Benefit Agree-
ments or in land claim agreements. For instance, the Dehcho First Nations are entitled
to 2.45–12.25% of royalties collected on mineral production in the Mackenzie Valley,
depending on the royalty amount (Deh Cho First Nations—Government of Canada
2003).
192 A. Bauer and S. Daitch

In 2017, Canadian governments collected at least USD 8.87 billion from publicly
traded oil, gas and mining companies, representing just under 6% of the gross value
of production (Natural Resources Canada 2012; Resource Projects 2019; Statistics
Canada 2018d). Of this amount, approximately USD 2.5 billion was allocated to the
federal government (Resource Projects 2019). In comparison, Norway’s government
collected approximately 20% of the gross value of oil and gas production in 2017,
though, in fairness, costs of production were lower in Norway than in Canada (EITI
2018; Norwegian Petroleum 2019).
The federal government makes transfers to the provinces and territories through
various channels. The two most important for this discussion are equalization
payments and the territorial formula financing (TFF), though the federal government
also makes large health and social transfers. Equalization transfers are calculated
based on as a standard amount each of Canada’s 10 provinces should need to cover
expenses (‘the standard’) minus the amount collected (‘fiscal capacity’). Importantly,
only half of natural resource revenues are included in the calculation, implying that
natural resource revenue generation is penalized to a smaller degree than revenue
generation from other sectors (Feehan 2014). The largest oil-producing provinces
have regularly sought to exclude all natural resource revenues from the formula since
they are the legal ‘owners’ of these resources and therefore feel they should retain all
fiscal revenues generated by them. On the other hand, the recipient provinces support
inclusion of all natural resource revenues since inclusion would increase the federal
government’s overall equalization payments pool (Béland et al. 2017).
Equalization payments totalled USD 14.3 billion in FY 2017–18, with Quebec
the largest recipient. The most natural resource-dependent provinces—Alberta,
Newfoundland and Labrador, and Saskatchewan—did not receive any payments
(Department of Finance Canada 2017).
Under Territorial Formula Financing (TFF), the formula that determines the
annual unconditional transfer from the Government of Canada to the territories, for
each dollar a territory raises itself in taxes, approximately 70 cents are removed from
the federal transfer. In other words, even if corporate income taxes from the resource
sector rose significantly, much of the revenue would be clawed back by the federal
government. Each territory is subject to its own Devolution Agreement, which sets
special rules around distribution of natural resource revenues. The Northwest Terri-
tories Devolution Agreement, for example, allows the territorial government to retain
the lesser of: 50% of mineral, oil, gas and water-related revenues (not including corpo-
rate income tax); or 5% of an amount called the ‘Gross Expenditure Base’, calculated
at between CAD 70–100 million per year over the coming decade.3 Therefore, for the
first CAD 100 million in resource revenues, which consist in largest part by royalties,
the Government of the Northwest Territories would retain a maximum of CAD 50
million (Bauer 2017).

3 Thedefinition of resource revenues can be found on p. 13–14 of the Devolution Agreement,

Government of the Northwest Territories (2013) available online at http://devolution.gov.nt.ca/wp-
content/uploads/2013/09/Final-Devolution-Agreement.pdf.
Non-renewable Natural Resource Wealth Management … 193

This provision generates a massive disincentive to raise additional revenue and

expand mineral production. As a result, the federal government loses out on the
corporate income tax, sales taxes and other sources of revenue it would collect from
the sector, not to mention any economic activity mining would generate in terms of
spillovers. The transfer system also reinforces the Northwest Territories’ dependence
on the federal government since it creates a disincentive for the territory to raise its
own fiscal revenues, further costing the Government of Canada in terms of fiscal
transfers.
Fiscal transfers are also made to some Indigenous governments. For example,
the Northwest Territories Devolution Agreement requires that 25% of the territory’s
resource revenues be transferred to the 9 of 12 Indigenous governments that have
signed the resource revenue sharing agreement.4 Once other Indigenous governments
sign the agreement, they too will be eligible for a share of the transfers. The money
flowing to Indigenous governments cannot be spent on operational expenditures;
they must be spent on capital investments or used for debt repayment.
In 2017, transfers to Indigenous governments in the NWT totalled CAD 10–15
million, distributed based on cost of living and population indicators. Despite not
hosting active mines, the Gwich’in Tribal Council, Inuvialuit Regional Corporation
and Sahtu Secretariat Incorporated receive approximately two-thirds of the transfers
due to high cost of living in their territories and the size of their populations (Bauer
2017).
At the federal level, resource revenues are pooled with general fiscal revenues and
spent according to legislation and annual budgetary allocations. At the provincial
and territorial level, several governments have established special funds to manage
a portion of their natural resource revenues or the fiscal surpluses engendered by
resource production. For example, the Alberta Heritage Savings Trust Fund was
established in 1976. The history and details of this fund are covered in Chap. 11
in this book. Quebec created the Generations Fund in 2006 and the Stabilization
Reserve Fund, which is an account rather than a sovereign wealth fund (SWF), in
2009. In 2012, the Northwest Territories Heritage Fund was established. In 2015, the
British Columbia Prosperity Fund was established, though it remains an embryonic
SWF and may be discontinued.

5 Sovereign Wealth Funds

According to the International Forum on Sovereign Wealth Funds, a sovereign wealth

fund is defined as a government-owned entity, established for a macroeconomic
purpose, which does not have liabilities and invests at least partly in foreign assets
(IFSWF 2019). As of 2019, there were approximately 60 SWFs financed by oil, gas or

4 At
present, there are nine signatories, including the Gwich’in Tribal Council, Inuvialuit Regional
Corporation, Northwest Territories Métis Nation, Sahtu Secretariat Incorporated and Tłîchô
Government. Three groups have not signed the agreement.
194 A. Bauer and S. Daitch

mineral revenues or by fiscal surpluses in countries dependent on natural resources.

Canada is host to at least four such funds, all at the subnational level.
There are several government-owned pension funds that meet the definition of a
SWF, as well as mineral-financed funds owned or co-owned by Indigenous govern-
ments, such as the Raglan Trust. Canadian governments have also created a panoply
of oil and mineral funds to finance resource exploration or promote the industry.
However, in this chapter, we will focus purely on the funds listed above. For each
case, we will discuss the fund’s: (1) history and objectives; (2) deposits and with-
drawals; (3) investments; (4) institutional structure; (5) transparency and oversight;
and (6) performance and political context.

5.1 British Columbia’s Prosperity Fund

The British Columbia (B.C.) Prosperity Fund was announced in 2013 with the aim
of channelling the province’s liquified natural gas revenues to: (1) debt reduction
(50% of the fund); (2) specific public investments (25%); and (3) savings for future
generations (25%) (Government of British Columbia 2016). There is no legislation
governing the fund, meaning all investments as well as transfers to and from the fund
are discretionary.
Notwithstanding the fact that large natural gas projects have been cancelled, the
government made two large deposits into the fund, a CAD 100 million deposit in FY
2015/16 and a CAD 400 million deposit in FY 2016/17 (see Fig. 1). As of February

Fig. 1 Canada’s mineral production by province and territory. Source Mining Association of
Canada (2017)
Non-renewable Natural Resource Wealth Management … 195

Fig. 2 B.C. Prosperity Fund 450 600

CAD (million) - deposits

deposits and balance. Source

CAD (million) - balance

400
500
Annual budget documents, 350
British Columbia Ministry of 300 400
Finance 250
300
200
150 200
100
100
50
0 0
2015/16 2016/17 2017/18 2018/19
(esƟmate)
Prosperity Fund balance Prosperity Fund deposits

2019, the fund is still operational, though the only deposits over the last two years
have consisted of interest earned on the existing balance.
The fund’s asset allocation has not been made public. Nevertheless, we can assume
a low-risk mandate; the fund earned a mere 1.4% return in FY 2017/18 and 2.1%
in FY 2018/19 (Government of British Columbia 2019). Given that the Government
of British Columbia 10-year bonds yielded 2.6% as of February 2019, should the
fund’s investment strategy remain unchanged, it would make financial sense for the
balance to be used to pay down public debt. The Prosperity Fund has not published
any annual reports or financial statements, nor is it subject to independent external
audits except by the British Columbia Auditor General (Fig. 2).

5.2 Northwest Territories Heritage Fund

5.2.1 History and Objectives

In preparation for new resource royalties flowing from Devolution, the Govern-
ment of the Northwest Territories (GNWT) passed legislation establishing a NWT
Heritage Fund in 2012 (GNWT 2013b). The Northwest Territories Heritage Fund
Act is vague on the fund’s objectives. According to the Act, the fund’s purpose
is “to ensure that future generations of people of the Northwest Territories benefit
from on-going economic development, including the development of non-renewable
resources” (2012: 3). Financial statements from 2016 to 2017 state the Heritage
Fund’s single objective is to “maximize long-term growth” of the money in the fund
while “avoiding undue risk” (Beers 2018). The fund’s balance sits at 17.1 million
Canadian dollars, which does not keep pace with current levels of inflation, as of
July 2018 (GNWT 2018).
196 A. Bauer and S. Daitch

5.2.2 Deposit and Withdrawal Rules

In the fall of 2013, the NWT’s Ministry of Finance undertook public consultations
on the budget in seven regional centres. At these public consultations, the NWT’s
Ministry of Finance proposed that 5% of resource revenues be placed into the fund, or
approximately 2.25 million Canadian dollars in 2013 (Wohlberg 2013). 95% would
be earmarked for infrastructure investment and servicing the GNWT debt (GNWT
2013a). This sparked a healthy public debate over the appropriate deposit amount
given perceived pressing spending needs (Wohlberg 2013).
In February 2014, Member of the Legislative Assembly Wendy Bisaro tabled
a public policy report in the NWT Legislative Assembly pressing the Minister of
Finance to commit more than 5% of revenues to the fund, and to introduce legislation
to administer it. Following the debate, the Minister of Finance announced that 25%
of GNWT extractive royalties would be allocated to the new Heritage Fund. The
remaining 75% of resource revenues would be allocated for two other expenditure
items proposed by the NWTs Ministry of Finance: debt repayment and infrastructure
(GNWT 2013c). As of January 2019, this deposit commitment from the Minister of
Finance, though on the public record, remains an informal policy statement (GNWT
2014, Personal communication, GNWT Ministry of Finance staff January 23, 2019).
Neither the fund’s purpose, nor many of the rules that generally govern sovereign
wealth funds, such as deposit amounts, have been clarified in legislation or regulation.
GNWT’s legislation introduced a 20-year period during which withdrawals from
the fund are not permitted. Once the legislated twenty-year term has ended, the
NWT faces a number of options for how much should be withdrawn from the fund
and on what the money should be spent. One approach is to withdraw a five-year
average of the interest earned (less inflation) while leaving the principal entirely in
the fund, thereby establishing a ‘permanent fund’, and spending the interest via the
annual budget process since territorial government spending through the budget is
independently audited (Daitch et al. 2014).

5.2.3 Investment Rules

The current approach to investing the NWT Heritage Fund is very conservative,
even compared to other funds that the NWT legislature oversees. Investing for the
Heritage Fund allows only low-risk investments, including in government and bank
bonds. In Fiscal Year 2016/17, the fund yielded a return of 1.05%, less than rate of
inflation (1.525%). As a result, the fund posted a real return of −0.45%, equivalent
to a loss of CAD 50,000 given the CAD 10.6 million balance in that year (Beers
2018). The mandate of the GNWTs 18th Legislative Assembly laid out that a review
of the Heritage Fund Act was to take place, but this has not occurred to date. The
fund continues to lose money against inflation and does not have a defined revenue
stream (GNWT 2019).
The fund is currently administered by the Financial Management Board’s Secre-
tary, who is appointed by the Minister of Finance. The Financial Management Board
Non-renewable Natural Resource Wealth Management … 197

overseeing the fund is made up of a committee of cabinet members. An independent

assessment suggested that the fund’s low returns are the product of investment rules
poorly suited to the NWT context as well as inadequate asset management capacity
(Daitch et al. 2014). In February 2018, during a Legislative Assembly debate on this
topic, government representatives indicated that there would be recommendations put
forward to the Minister of Finance to allow for external fund management, proposing
that the additional cost of external management would be offset by better fund perfor-
mance. Subsequently, steps have been taken to secure external fund management,
though it is not yet confirmed to be in place as of January 2019 (GNWT 2018;
Personal Communication, GNWT Department of Finance, January 23, 2019).

5.2.4 Institutional Structure

The NWT Heritage Fund is currently managed by the GNWT Department of Finance.
GNWT Legislation states that the Financial Management Board is authorized to act
as trustee of the Fund (GNWT 2012). The Financial Management Board, composed
of Cabinet Ministers and Chaired by the Minister of Finance, is responsible for moni-
toring the performance of the Heritage Fund and, on an annual basis, for directing
and supervising the Secretary of the Financial Management Board. The Secretary, a
member of the public service, is responsible for carrying the administration and main-
tenance of the Heritage Fund as directed by the Board. The fund does not currently
use external asset management services (Fig. 3).

Fig. 3 NWT’s current fund

governance model. Source
Daitch et al. (2014); GWNT
2012c
198 A. Bauer and S. Daitch

Fig. 4 NWT Heritage Fund: good governance and gaps in regulation. Source Daitch et al. (2014)

5.2.5 Transparency and Oversight

The balances of the Heritage Fund are summarized in a separate notes section of
the GNWT budget. The GNWT budget is audited by the Auditor General of the
GNWT. A separate report on the fund’s assets and activities is not made publicly
available. To comply with global best practice on transparency, both internal and
independent external audits would need to be provided to the Ministry of Finance
and the Legislative Assembly and released publicly on a government website (Natural
Resource Governance Institute 2017; IFSWF 2008).
There is currently no mechanism in place that allows for independent external
oversight of fund operations, such as a special civil society committee, as in Ghana
and Timor-Leste, or a legislative committee tasked with overseeing the fund, as in
Alberta or Norway (Bauer 2013). While developing a stronger role for the public in
fund oversight was one of the mandates for the NWT’s 18th Legislative Assembly,
there has been no action taken on this aspect of the mandate to date (GNWT 2018).
Non-renewable Natural Resource Wealth Management … 199

5.2.6 Performance and Political Considerations

As non-renewable resources are discovered and developed in the territory, one of

the government’s priorities will continue to be to foster the well-being of future
generations. Yet, despite large scale extractive projects operating in the territory since
1933, high poverty rates persist in the NWT’s Indigenous communities (Irlbacher
Fox 2012). Quality education, healthcare and nutritious foods remain inaccessible
to many citizens.
On April 1, 2014, through devolution, NWT citizens gained greater control over
their lands and resources for the first time since Canada’s confederation. A Heritage
Fund is a relatively new concept to most residents of the NWT that could, in theory,
support the territory’s devolution process as well as economic development over the
long-run. Although the GNWT has held public consultations on the Heritage Fund in
2013, public education and engagement will be important in order to promote public
awareness and help better define the fund’s mandate, and further action has not been
taken to develop this critical element (GNWT 2013e; GNWT 2018; GNWT 2019).
In addition, the fund’s overall potential is stymied by very low resource royalties.
NWT Member of the Legislative Assembly, Kevin O’Reilly, pointed out in a 2019
Legislative debate that the NWT will raise as much money from tobacco taxes and
liquor revenues (about $40 million) as the projected $47 million in resource revenues
for 2019–2020. A review of resource royalties, through re-examining the territorial
formula financing and other aspects, has been pushed to the next legislative assembly;
however, there is no guarantee this review will be done publicly (GNWT 2019).
Meanwhile, extractive revenues flow out of the territory (Bauer 2018).
Future efforts to engage the public in a stronger role can help equip residents with
the skills and knowledge to act as independent overseers to benefit the fund and its
future. The more the public understands and supports the long-term objectives of the
fund, the more it will hold current and future governments to account to protect the
integrity of its original purpose. For example, Norway’s fund enjoys broad public
support as a point of national pride (MacKinnon 2013). If governance improves, the
Heritage Fund could become a similar symbol of good resource stewardship.

5.3 Quebec’s Generations Fund and Stabilization Reserve

‘Fund’

5.3.1 History and Objectives

Quebec has one sovereign wealth fund and an account that serves as a budget
balancing mechanism: The Generations Fund and the Stabilization Reserve Fund.
The Generations Fund was established as a long-term savings fund in 2006 to address
high and rising public sector indebtedness in the context of an ageing population. In
that year, the share of net debt to provincial GDP was approximately 40% and rising
200 A. Bauer and S. Daitch

quickly; today it stands at 42%. The consequence was an annual interest rate of 4.7%
for 10 year bonds and more than 12.5% of budget expenditure being allocated to
debt servicing annually (Government of Quebec 2007).
In response, the major political parties agreed to establish a fund to reduce the
province’s debt burden. The Generations Fund would accumulate money, which
would be invested in financial markets, earning a higher rate of return than the interest
paid on public debt. In this way, public assets would increase so that net debt figures
would improve. The book value of the Generations Fund was CAD 13.8 billion as
of the end of 2017 (Caisse de dépôt et placement du Québec 2018). However, its
balance was expected to drop to CAD 7.7 billion in 2019 as funds will be used to
pay down the public debt (Finances Québec 2018a).
The Stabilization Reserve Fund was established in 2009 to capture a portion of
fiscal surpluses in order to balance the budget during economic downturns. However,
the fund is not actually a fund but rather an account used to comply with the govern-
ment’s balanced budget rule. Its balances therefore represent the fiscal space available
to the government to meet its medium-term balanced budget target. As of March 2018,
the Stabilization Reserve Fund ‘balance’ was CAD 7.2 billion (Finances Québec
2018b).

5.3.2 Deposits and Withdrawals

Under the Balanced Budget Act (1996, amended), the Quebec government may not
run a budget deficit except in moments of economic or social crisis. Any surplus
collected above expected revenue is used to repay short-medium to medium-term
public debt. At the same time, the surplus is credited to the Stabilization Reserve
Fund. The fund’s balance therefore represents the fiscal deficit that is permissible
in subsequent years without breaking the balanced budget rule. As such, the Stabi-
lization Reserve Fund ‘balances’ are considered a part of revenues in budget calcu-
lations. In practice, Stabilization Reserve Fund ‘balances’ have been used to cover
fiscal deficits even in boom years without circumventing the balanced budget rule.
The fund’s long-run average ‘balance’ for precautionary purposes is expected to be
CAD 2.4 billion.
The Act to Reduce the Debt and Establish the Generations Fund (2006, amended)
sets debt reduction objectives, which are elaborated in budget documents. By FY
2025–26, the gross debt must not exceed 45% of GDP and the “debt representing
accumulated deficits” must not exceed 17% of GDP (Government of Quebec 2018a).
The Generations Fund is meant to help achieve these objectives.
The Generations Fund was originally financed by hydropower royalties, earn-
ings on hydropower outside of Quebec, sales of government assets, and earnings on
fund investments. Later, two new sources of financing were introduced: All mining
revenues and CAD 500 million annually from taxes on alcoholic beverages. In the
four years since mining revenues have been added to the list of the fund’s revenue
streams, CAD 602 million in mining proceeds have been added. Mining revenues
Non-renewable Natural Resource Wealth Management … 201

5000

4000

3000
CAD millions

2000

1000

-1000

-2000

GeneraƟons Fund StabilizaƟon Reserve Fund

Fig. 5 Annual deposits and withdrawals from Quebec funds. Source Quebec Ministry of Finance
budget documents. Note A Stabilization Reserve Fund deposit implies repaying public debt, while
a withdrawal implies short-term to medium-term borrowing

have never represented more than 14% of new deposits into the fund (Government
of Quebec 2017).
The government may also transfer money from the Stabilization Reserve Fund to
the Generations Fund and has done so twice since the fund’s inception. In practice,
this ‘transfer’ implies borrowing money to transfer to the Generations Fund. The
government may draw any sum from the Generations Fund at any time, but only to
repay the gross debt (Figs. 5, 6).

5.3.3 Investments

The Generations Fund investment policy is determined by the Ministry of Finance

in collaboration with the fund’s day-to-day operational manager, the Caisse de dépôt
et placement du Québec (the ‘Caisse’). The Caisse is a publicly owned institutional
investor that manages Quebec’s more than CAD 300 billion in public pensions and
insurance plans.
The Generations Fund is not subject to legislated investment rules. However, its
target asset allocation is printed in Government of Quebec budget documents and
risk management framework is disclosed on the Caisse website.
The Fund’s risk appetite is elevated relative to most SWFs—62.5% of the fund
is invested in equities and alternative assets—though it is invested in slightly less
risky assets than the Caisse’s pension holdings (see Fig. 4). The Fund is invested in
202 A. Bauer and S. Daitch

25000

20000
CAD millions

15000

10000

5000

GeneraƟons Fund balance StabilizaƟon Reserve Fund balance

Fig. 6 Quebec fund cumulative balances, based on deposits (not book value). Source Quebec
Ministry of Finance budget documents. Note Stabilization Reserve Fund balance represents fiscal
space while complying with the balanced budget rule

even the riskiest asset classes, including private equity, real estate, infrastructure and
derivatives for currency hedging purposes.
This risk-level has led to healthy returns; the average annual rate of return on the
fund has been 6.1% over the first 11 years of its existence. The Generations Fund’s
financial performance ranks it among the best performing SWFs in the world, similar
to the Alaska and Texas funds and with higher returns than in Chile, Norway, Trinidad
& Tobago or Wyoming (Bauer 2018). Returns remain strong due to a robust risk
management framework. This includes a list of eligible assets, performance targets,
benchmarks, risk limits, and independent oversight, including external audits and
Board reviews (Caisse de dépôt et placement du Québec 2019).
On the other hand, an elevated risk appetite has also led to significant volatility in
returns. In 2008, the fund lost more than 22% of its value, though balances were less
than USD 1 billion at the time. In contrast, returns were 12.3% in 2010. The fund has
earned CAD 3.4 billion in interest for Quebec citizens since inception (Government
of Quebec 2017).
Since the Stabilization Reserve Fund is only a balancing account, it does not
manage any assets (Fig. 7).
Non-renewable Natural Resource Wealth Management … 203

Fig. 7 Asset allocation for

Generations Fund
investments. Source
Government of Quebec
(2018b)

Fixed income Public equity Private equity

Real estate Infrastructure

5.3.4 Institutional Structure

The ultimate owner of the Generations Fund is the Government of Quebec; however,
the Fund is controlled and managed by the Quebec Ministry of Finance. The day-to-
day operational management has been outsourced to the Caisse. A small portion of
the Caisse’s holdings have been outsourced to external investment managers. While
deposits into the fund are subscribed in legislation, withdrawals to pay down public
debt must be approved by the National Assembly through the annual budget process.
As with the Generations Fund, the Stabilization Reserve Fund is controlled and
managed by the Ministry of Finance. While deposits into the Stabilization Reserve
Fund are determined by the size of the budget surplus, withdrawals are relatively
arbitrary. Therefore, the National Assembly has full power to determine both deposits
and withdrawals. In practice, since the government and the majority in the National
Assembly are usually one and the same under Quebec’s Westminster system of
government, cabinet decisions are often rubber stamped by the National Assembly.

5.3.5 Transparency and Oversight

According to legislation, the Minister of Finance must report to the National

Assembly, in the Budget Speech, on the evolution of both the debt representing
the accumulated deficits and the gross debt, on the sums credited to the Generations
Fund and on any sums used to repay the gross debt. Deposit and withdrawal amounts
for the Stabilization Reserve Fund are published in annual budget documents. Addi-
tionally, the Ministry of Finance has published extensive details on the Generations
Fund’s operations and finances on its website.
All funds placed at the Caisse are subject to an annual independent external audit
as well as oversight by the Board of Directors. In its annual report, the Caisse provides
details of its board and staff members, asset management strategy as well as every
asset it holds.
The National Assembly and the Auditor General of Quebec examine both funds’
finances as part of the annual budget process. Neither has performed a performance
audit or investigation since their inception dates.
204 A. Bauer and S. Daitch

5.3.6 Performance

The Stabilization Reserve Fund and the Generations Fund have come under criticism
from independent analysts and organizations along several lines: (1) The government
has yet to establish a transparent and evidence-based framework for the optimal size
of precautionary savings and appropriate use of the Stabilization Reserve Fund;
(2) The Ministry of Finance has not released the Generations Fund’s investment
management policy; and (3) The Generations Fund delays debt repayment (Ordre
des comptables professionnels agréés du Québec 2018; Laurin 2018).
As mentioned by others, the use of the Stabilization Reserve Fund is discretionary.
This is a weakness in legislation that allows for pro-cyclical fiscal policy as a result
of the balanced budget rule, an issue that could be addressed by replacing the existing
rule with a more formal structural balanced budget rule or an expenditure growth
rule (Bauer 2013).
We agree with others that Generations Fund governance could be improved if it
released more detail on its investment management policy, for instance target return
and volatility tolerance, as well as the specific assets held by the fund. However, given
the Caisse’s stellar performance history, we are less concerned about this issue.
With regard to the issue of financial savings and debt repayment, the math speaks
for itself. As of February 2019, Quebec government 10-year bonds yield 2.7%,
slightly lower than most provinces, and the government maintains a high grade
credit rating.5 Quebec is no longer Canada’s most indebted province, though 9.3%
of provincial expenditure in FY 2017/18 was still spent on debt servicing, the govern-
ment’s third largest expenditure item after healthcare and education (Government of
Quebec 2017).
By comparison, the fund has generated an annual average return of 6.1% since
inception. As a result, in the current environment, reducing the debt by USD 1
billion at the expense of the Generations Fund would lead to an opportunity cost
of approximately USD 34 million. As can be seen from this example, what matters
more than gross debt is net debt.
Should the gap between the average return and provincial bond yields shrink
significantly, a greater portion of fiscal surpluses ought to be allocated to debt
reduction. However, the government’s savings policy has been sound. Of concern,
Quebec’s new government, elected in 2018, plans to use CAD 10 billion of the
Generations Fund to pay down the public debt. This would lower debt payments but,
given the spread between sovereign debt interest rates and the rate of return on the
fund, would lead to a loss of hundreds of millions of dollars to future generations of
Quebecers.

5 Thedrop in borrowing costs is mainly a product of lower interest rates across Canada, not an
improved macroeconomic context in Quebec.
Non-renewable Natural Resource Wealth Management … 205

6 Conclusion

Canada is often lauded as a model of good economic and public sector governance. Its
citizens benefit from relatively high per capita income, broad and fair access to quality
healthcare and education, low crime rates, political freedoms and environmental
protections (Social Progress Imperative 2018; OECD 2017). Yet these strengths
and successes often mask specific failings, such as leading the world in per capita
greenhouse gas emissions and chronic poverty and weak social indicators among
Indigenous groups (Boothe and Boudreault 2016; Eisler 2018).
Similarly, the success of Canada’s oil, gas and mining companies’ in expanding
production in Canada and abroad—along with Canada’s well-earned reputation as
a global leader in exploration, extractive technologies, and extractive sector project
management—mask serious weaknesses in the sector’s governance framework at
home. This chapter has highlighted three challenges: low ‘government take’ by global
standards, limits to the benefits that can be captured by the territories, and a tendency
towards discretionary use of sovereign wealth funds. To these we can add challenges
that fall outside the scope of this chapter, such as an antiquated licensing regime—for
instance, in some jurisdictions, companies can physically “stake” and explore land
without consulting nearby residents—and weaknesses in environmental oversight
(Bauer 2017). Canada had one of the highest rates of known tailings accidents in the
world from 2007 to 2017, second only to China (Roche et al. 2017). And, as of 2013,
the Alberta government intervened in less than 1% of cases of alleged contravention
of environmental regulations in the oil sands (Canadian Press 2013).
Canada’s resource governance ought to be measured relative to its potential rather
than in sheer production figures. Given the country’s vast natural resource wealth,
paying for social services and infrastructure should be easy for Canadian provinces
and territories. Standard of living for citizens should be comparable to Iceland,
Norway, Qatar or the UAE, where poverty has been all but eliminated among citi-
zens and infrastructure is cutting-edge. Instead, several resource-rich provinces or
territories—namely Alberta, Newfoundland and Labrador, Saskatchewan and the
three Northern Territories—still struggle with poverty, especially in Indigenous
communities living close to extractive sites; Austria and Oman are Canada’s nearest
comparables in terms of general standard of living.
The resource sector can fill the financing gap. While fiscal regimes in Canada
incentivize exploration and development of marginal deposits, they generate some
of the lowest government revenue per unit extracted anywhere in the world. Rela-
tive to fiscal regimes in most other countries, this system shifts billions of dollars
in economic rents each year from Canadian taxpayers to shareholders of oil and
mining companies. Furthermore, since many if not most of the shares of extractive
companies operating in Canada are owned by foreigners, the system represents an
implicit transfer of wealth from Canada to foreign countries. As has been shown, the
employment benefits and economic multipliers do not justify such low tax rates.
A technical review of Canadian fiscal regimes for oil, gas and mining is warranted,
as is an evidence-based public discussion on the net benefits of extraction in Canada.
206 A. Bauer and S. Daitch

At present, resource taxation policy discussions are usually focused on increasing

production rather than increasing the benefits from extraction. Notably, the strength
of industry sector interest groups—the Mining Association of Canada, the Prospec-
tors and Developers Association of Canada, the Canadian Association of Petroleum
Producers, provincial industry groups and public relations departments of the largest
companies—in capturing policymakers and academic institutions makes broadening
the discussion to include net benefits and ‘government take’ exceedingly difficult.
A proper review of distribution of resource revenues to the territories may also
increase the net benefits accruing to Canadians. At present, Territorial Formula
Financing and the Devolution Agreements, particularly in the Northwest Territo-
ries, discourage extractive activities and severely limit the benefits that can accrue
to Northerners. Reforming these systems could help transform lives in the North,
particularly among Indigenous governments who are entitled to a share of resource
revenues and whose education and healthcare systems are chronically underserved.
Finally, Canadian governments, especially in resource-dependent provinces and
territories, may wish to review aspects of how they manage their resource revenues.
The key to benefiting from non-renewable resource wealth is investing the proceeds
in financial assets (e.g. savings funds), physical assets (e.g. infrastructure) or human
capital (e.g. universities) rather than consuming them. At the same time, mitigating
the negative effects of resource revenue volatility on budget expenditures often
requires a stabilization mechanism, whether a fund or through counter-cyclical debt
management (Collier et al. 2009).
Historically, Canadian provincial governments have often made the implicit
choice to prioritize consumption over investment of resource revenues. This emphasis
on consumption shows up in some net debt figures. For example, while Alberta and
Saskatchewan managed to keep debt levels low until recently, Newfoundland and
Labrador’s net debt per capita nearly doubled in the decade from 1997 to 2007, the
years of peak oil production. Today, the province has the highest rate of net debt
per capita in Canada (Government of Newfoundland and Labrador 2018). Only the
governments of Alberta and Quebec have significant financial savings in sovereign
wealth funds, though in Alberta, the savings are much less than economic models
suggest are optimal (Van der Bremer and Van der Ploeg 2014).
In some regions, the choice to consume rather than invest has taken the form
of low taxes, leading to greater discretionary income for households at the expense
of public investment. Alberta, British Columbia, Ontario, Saskatchewan, and the
Territories, several of the most resource-dependent regions, have some of the lowest
personal income tax rates in the OECD (EY 2017). These same jurisdictions plus
Manitoba minus Ontario have some of the lowest value added tax rates (OECD
2018). In a different subset of jurisdictions, governments have underinvested in public
services and infrastructure, as evidenced by Canada’s more than CAD 180 billion
infrastructure gap (Government of Canada 2018). On an optimistic note, resource-
dependent provinces and territories seem to have learned lessons from the past;
today, they are the ones invested most heavily in modern infrastructure and education
(Statistics Canada 2016; Statistics Canada 2018b).
Non-renewable Natural Resource Wealth Management … 207

What’s more, most resource-rich provinces have historically not countered the
negative effects of commodity price volatility on government budgets, either because
it was unnecessary due to low resource revenues or as a result of a lack of appropriate
counter-cyclical fiscal rules (Atkinson et al. 2016). However, over the last three
decades, several provinces have taken steps to introduce mechanisms to smooth
fiscal expenditures. For example, Manitoba established a stabilization fund in 1989
(current balance less than CAD 200 million) (Government of Manitoba 2018; Tapp
2013).6 Quebec established the Stabilization Reserve Fund in 2009 to support its
cyclically adjusted balanced budget rule. The British Columbia Prosperity Fund
was established in 2013, partly to stabilize the budget. And Alberta created the
Contingency Fund in 2013 to mitigate the effects of oil revenue volatility (NRGI-
CCSI 2013). Interestingly, Saskatchewan established a Fiscal Stabilization Fund in
2000, which was replaced by the Growth and Financial Security Fund in 2008. The
government abandoned efforts at counter-cyclical fiscal policy when it wound down
the fund in 2016 (Graham 2016).
Foreign governments could draw on some of Canada’s more successful experi-
ences to improve their natural resource revenue management. With respect to revenue
distribution, Canada’s equalization formula and some Territories’ revenue sharing
formulas with Indigenous governments are both useful models that could be adapted
to different contexts. With respect to fiscal stability and sustainability, Alberta’s
Fiscal Management Act (2013) and Quebec’s Act to Reduce the Debt and Establish
the Generations Fund (2006) both represent practical examples of how to manage
large, volatile and finite revenue flows. It should be noted that, similar to other global
experiences of resource revenue management, in each of these cases, governments
mismanaged their public finances for decades before enacting more responsible and
broadly accepted fiscal management legislation.
Canadian governments may wish to build on the success stories within Canada
and draw lessons from countries like Chile, Norway and the UAE on how to smooth
fiscal expenditures, promote fiscal sustainability, and invest in projects that will help
diversify their economies. Regarding the funds captured in this chapter, we have
specific recommendations.
In British Columbia, the disparity between the fund’s earnings and the cost of
capital to the provincial government suggests that the fund’s balances would best be
used to pay down public debt or be allocated to finance public services. Furthermore,
the province is not resource-dependent nor is it expected to be in the foreseeable
future, meaning that existence of a subnational sovereign wealth fund to manage
resource revenues may not be justified. On the other hand, the government could
convert the fund into a contingency or stabilization fund that would serve during
economic downturns.
The Northwest Territories Heritage Fund is a nascent fund and, as such, may
require significant changes to its governing legislation and regulations to meet inter-
national good practices in sovereign wealth fund governance. Among our recom-
mendations are: (1) clarifying objectives, as the investment strategy and deposit and

6 New Brunswick also had a short-lived fiscal stabilization fund.

208 A. Bauer and S. Daitch

withdrawal rules each flow from clear fund objectives; (2) formalizing the deposit
amount; (3) clarifying how withdrawals will be used once the 20-year no-withdrawal
period has ended; (4) drawing on independent expertise to revise the investment
mandate and hire external managers; (5) requiring independent audits once the fund
reaches a critical size; and (6) publishing annual reports online that cover, among
other information, balances, returns, assets, fund managers, significant fund activ-
ities and transactions. Since fiscal revenues are smoothed through federal transfers
to the Northwest Territories, we would recommend that the fund serves as a future
Generations Fund and that the returns be earmarked to underfunded expenditure
items, such as renewable energy or education.
In many ways, Quebec’s Generations Fund is a model of good governance. Its
deposits and investment strategy are rules-based and consistent with the fund’s objec-
tives, it is well-managed by a professional entity, it is transparent and audited annu-
ally, and the fund serves a logical macroeconomic purpose. Its main weakness is the
ability of the government to make arbitrary and discretionary withdrawals. With-
drawals ought to be a function of the spread between sovereign debt rates and the
long-term return on the fund; the rule should be codified in legislation. Similarly, the
use of the Stabilization Reserve Fund should be clarified by formalizing a counter-
cyclical fiscal rule in legislation. Part of the challenge may be that the respective
funds’ roles in promoting intergenerational equity and stabilizing fiscal expenditures
are poorly understood, not only by the public but also by Quebec policymakers.
Finally, we would recommend that both Newfoundland and Labrador and
Saskatchewan consider enacting counter-cyclical fiscal rules that would smooth fiscal
expenditures and better balance spending today with the needs of future genera-
tions. This may imply establishing sovereign wealth funds, certainly in the case of
Saskatchewan given low public debt levels, provided that fund design is aligned
with global best practices such as the Santiago Principles. In 2017, Saskatchewan
collected at least CAD 1.4 billion (USD 1.1 billion) in revenue mainly from oil and
potash, representing more than 20% of fiscal revenues. Newfoundland and Labrador
collected at least CAD 989 million (USD 761 million) in the same year, mainly from
offshore oil, representing just under 20% of provincial fiscal revenues (Resource
Projects 2019; Government of Newfoundland and Labrador 2017; Government
of Saskatchewan 2018). Both provinces are resource-dependent, and government
spending tends to oscillate with the ups and downs of commodity prices, amplifying
boom-bust cycles that harm growth and lead to poor public investment choices (RBC
2018). Along with other parts of Canada, Saskatchewan and Newfoundland and
Labrador could benefit from a more evidence-based and longer-term vision of
resource revenue management.

References

Act to Reduce the Debt and Establish the Generations Fund. Available at: http://legisquebec.gouv.
qc.ca/en/pdf/cs/R-2.2.0.1.pdf.
Non-renewable Natural Resource Wealth Management … 209

Alexander, I. et al (2018) Provincial and territorial natural resource indicators, 2009 to 2016.
Statistics Canada. [online] Available at: https://www150.statcan.gc.ca/n1/pub/13-604-m/13-604-
m2018088-eng.htm [Accessed 3 Mar. 2019]
Atkinson, M. M. et al. (2016). Fiscal rules in Canadian provinces: Abject failure or qualified
success? Canadian Public Administration, 59(4), 495–515. http://www.pbo-dpb.gc.ca/web/def
ault/files/files/files/Publications/Fiscal_Rules_Oct_2010.pdf.
Balanced Budget Act 2001, c. 56, s. 10. Available at: http://legisquebec.gouv.qc.ca/en/ShowDoc/
cs/E-12.00001.
Baldwin, C., & Fipke, J. (2010). Canadian Mining Law. In Paper presented at a Rocky Mountain
Mineral Law Foundation Mining Law Short Course. Lawson Lundell.
Bauer, A. (Ed.). (2013). Managing the public trust: How to make natural resource funds work for
citizens. Columbia Center on Sustainable Investment—Natural Resource Governance Institute.
[online] Available at: https://academiccommons.columbia.edu/doi/10.7916/D80P10KX.
Bauer, A. (2017). Northwest territories mineral sector review and benchmarking. Government of the
Northwest Territories. [online] Available at: https://www.engage-iti.ca/3808/documents/7981.
Bauer, A. (2018). How good are sovereign wealth funds at investing money made from natural
resources? Natural Resource Governance Institute. [online] Available at: https://resourcegoverna
nce.org/blog/how-good-are-sovereign-wealth-funds-investing-money-made-natural-resources.
Beers, R. (2018). N.W.T. Heritage Fund not keeping up with inflation, gov’t borrows money to feed
it. CBC News. [online] Available at: https://www.cbc.ca/news/canada/north/nwt-heritage-fund-
inflation-1.4734937.
Béland, D., Lecours, A., Marchildon, G. P., Mou, H., & Olfert, M. R. (2017). Fiscal federalism
and equalization policy in Canada: Political and economic dimensions. Toronto: University of
Toronto Press.
Boothe, P., & Boudreault, F. -A. (2016). By the numbers: Canadian GHG emissions. Lawrence
National Centre for Policy and Management, Ivey Business School at Western University. [online]
Available at: https://www.ivey.uwo.ca/cmsmedia/2112500/4462-ghg-emissions-report-v03f.pdf.
British Petroleum. (2018). bp statistical review of world energy, June 2018. [online] Available
at: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-econom
ics/statistical-review/bp-stats-review-2018-full-report.pdf [Accessed 20 Feb. 2019].
Caisse de dépôt et placement du Québec. (2018). Annual report additional information.
[online] Available at: https://www.cdpq.com/sites/default/files/medias/pdf/en/ra/ra2017_rensei
gnements_add_en.pdf.
Caisse de dépôt et placement du Québec. (2019). Risk management. [online] Available at: https://
www.cdpq.com/en/investments/risk-management. [Accessed 2 Mar. 2019].
Canadian Press. (2013). Enforcement lacking in oilsands infractions, study finds. Canadian Broad-
casting Corporation. [online] Available at: https://www.cbc.ca/news/canada/edmonton/enforc
ement-lacking-in-oilsands-infractions-study-finds-1.1383760.
CERI. (2018). Canadian oil sands supply costs and development projects (2018–2038). [online]
Available at: https://ceri.ca/studies/canadian-oil-sands-supply-costs-and-development-projects-
2018–2038 [Accessed 25 Feb. 2019].
Chen, D., & Mintz, J. (2013). Repairing Canada’s mining-tax system to be less distorting and
complex. University of Calgary School of Public Policy. [online] Available at: https://www.pol
icyschool.ca/wp-content/uploads/2016/03/mining-tax-chen-mintz.pdf [Accessed 22 Feb. 2019].
Collier, P., Van der Ploeg, F., & Venables, A. J. (2009). Managing resource revenues for developing
economies. Oxcarre—CSAE, University of Oxford. [online] Available at: http://citeseerx.ist.psu.
edu/viewdoc/download?doi=10.1.1.554.9061&rep=rep1&type=pdf.
Daitch, S., Schwann, A., Bauer, A., Dias, A., & Fan Li., J. (2014). A question of future pros-
perity: Transforming natural resource wealth into citizen well being through the northwest terri-
tories heritage fund. Arctic Yearbook. [online] Available at: https://arcticyearbook.com/images/
yearbook/2014/Scholarly_Papers/10.Daitch_et_al.pdf [Accessed 3 Mar. 2019].
210 A. Bauer and S. Daitch

Daniel, P., et al. (2017). How should shale gas extraction be taxed? IMF Working Paper 17/254.
[online] Available at: https://www.imf.org/~/media/Files/Publications/WP/2017/wp17254.ashx
[Accessed 22 Feb. 2019].
Deh Cho First Nations—Government of Canada. (2003). Deh Cho first nations interim resource
development agreement. [online] Available at: https://dehcho.org/docs/Interim-Resource-Develo
pment-Agreement.pdf.
Department of Finance Canada. (2017). Federal support to provinces and territories. Government
of Canada. [online] Available at: https://www.fin.gc.ca/fedprov/mtp-eng.asp [Accessed 3 Mar.
2019].
Eisler, D. (2018). The grim reality of Canada’s biggest policy failure. University of Saskatchewan
School of Public Policy. [online] Available at: https://www.schoolofpublicpolicy.sk.ca/research/
publications/policy-brief/the-grim-reality-of-canadas-biggest-policy-failure.php.
EITI. (2018). Norway. [online] Available at: https://eiti.org/norway [Accessed 3 Mar. 2019].
EY. (2017). 2017 personal income tax calculator. [online] Available at: https://www.ey.com/ca/en/
services/tax/tax-calculators-2017-personal-tax.
Feehan, J. (2014). Canada’s equalization formula: Peering inside the black box… and beyond.
University of Calgary School of Public Policy. [online] Available at: https://www.policyschool.
ca/wp-content/uploads/2016/03/feehan-equalization.pdf [Accessed 20 Feb. 2019].
Finances Québec. (2018a). The generations fund. Government of Quebec. [online] Available at:
http://www.budget.finances.gouv.qc.ca/fondsdesgenerations/index_en.asp.
Finances Québec. (2018b). Quebec’s Debt. Government of Quebec. [online] Available at: http://
www.finances.gouv.qc.ca/en/Quebecs_debt325.asp.
Financial Post. (2012). Majority of oil sands ownership and profits are foreign, says analysis. The
Financial Post, May 10. [online] Available at: https://business.financialpost.com/news/majority-
of-oil-sands-ownership-and-profits-are-foreign-says-analysis.
Goldsworthy, B., & Zakharova, D. (2010). Evaluation of oil fiscal regime in russia and proposals
for reform. IMF Working Paper 10/33. [online] Available at: https://www.imf.org/external/pubs/
ft/wp/2010/wp1033.pdf [Accessed 22 Feb. 2019].
Government of Alberta. (2018a). Alberta economic multipliers 2013. [online] Available at: https://
open.alberta.ca/publications/alberta-economic-multipliers [Access 20 Feb. 2019].
Government of Alberta. (2018b). Freehold mineral rights in Alberta. [online] Available
at: https://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/ofa16605/$file/freeholdnew.pdf?
OpenElement [Accessed 3 Mar. 2019].
Government of Alberta. (2019). Mineral ownership. [online] Available at: https://www.alberta.ca/
mineral-ownership.aspx [Accessed 3 Mar. 2019].
Government of British Columbia. (2016). Budget and fiscal plan 2016/17-2018/19. [online] Avail-
able at: https://www.bcbudget.gov.bc.ca/2016/bfp/2016_Budget_and_Fiscal_Plan.pdf [Accessed
2 Mar. 2019].
Government of British Columbia. (2019). Estimates: Fiscal year ending March 31, 2020. [online]
Available at: https://www.bcbudget.gov.bc.ca/2019/pdf/2019_Estimates.pdf [Accessed 2 Mar.
2019].
Government of Canada. (2016). Exploration and mining in Canada: An investor’s brief . Ottawa,
ON: Natural Resources Canada.
Government of Canada. (2018). Investing in Canada—Canada’s long-term infrastructure plan.
[online] Available at: https://www.infrastructure.gc.ca/site/alt-format/pdf/plan/icp-pic/IC-Invest
ingInCanadaPlan-ENG.pdf.
Government of Manitoba. (2018). Manitoba budget 2018. [online] Available at: https://www.gov.
mb.ca/finance/budget18/papers/Summary_Budget_r.pdf.
Government of Newfoundland and Labrador. (2017). Estimates of the program expenditure and
revenue of the consolidated revenue fund 2017–18. [online] Available at: https://www.budget.
gov.nl.ca/budget2017/estimates/estimates.pdf.
Government of Newfoundland and Labrador. (2018). Economic and project analysis. [online]
Available at: https://www.economics.gov.nl.ca/EB-Oil.asp [Access 3 Mar. 2019].
Non-renewable Natural Resource Wealth Management … 211

Government of Quebec. (2007). Public accounts 2006–2007. [online] Available at: http://www.fin
ances.gouv.qc.ca/documents/Comptespublics/en/CPTEN_vol1-2006-2007.pdf.
Government of Quebec. (2017). Generations fund—A renewed commitment to fostering intergener-
ational equity. [online] Available at: http://www.budget.finances.gouv.qc.ca/budget/2017-2018/
en/documents/Budget1718_GenerationsFund.pdf.
Government of Quebec. (2018a). The generations fund: Quebec is repaying its debt. [online]
Available at: http://www.budget.finances.gouv.qc.ca/budget/2018-2019/en/documents/Generatio
nsFund_1819.pdf.
Government of Quebec. (2018b). The Quebec economic plan. [online] Available at: http://www.bud
get.finances.gouv.qc.ca/budget/2018-2019/en/documents/EconomicPlan_1819.pdf#page=499.
Government of Saskatchewan. (2018). Saskatchewan provincial budget 18–19: On track. [online]
Available at: http://publications.gov.sk.ca/documents/15/106322-2018-19%20Budget%20for%
20WEB.pdf.
Government of the Northwest Territories. (2012). Northwest territories heritage fund act. [online]
Available at: http://www.justice.gov.nt.ca/collections/legislation/acts/NWT%20Heritage%20F
und%20Act.pdf.
Government of the Northwest Territories. (2013). Public Accounts 2012–2013, consolidated finan-
cial statements and government indicators. [online] Available at: http://www.fin.gov.nt.ca//pub
lic-accounts/index.htm.
Government of the Northwest Territories. (2013). Northwest territories lands and resources devo-
lution agreement. [online] Available at: http://devolution.gov.nt.ca/wp-content/uploads/2013/09/
Final-Devolution-Agreement.pdf.
Government of the Northwest Territories. (2013). Resourcing our legacy. [online] Available at:
http://www.fin.gov.nt.ca/Dialogue%202013/documents/ResourcingourLegacy.pdf.
Government of the Northwest Territories. (February 11, 2019). Northwest territories legislative
assembly hansard. [online] Available at: https://hansard.opennwt.ca/debates/2019/2/11/kevin-ore
illy-6/.
Government of the Northwest Territories. (February 23, 2018). Northwest territories legislative
assembly hansard. [online] Available at: https://hansard.opennwt.ca/dbates/2018/02/23/mr-ste
wart-9/.
Government of the Northwest Territories. (June 5, 2013). Northwest territories legislative assembly
hansard. [online] Available at: http://www.assembly.gov.nt.ca/sites/default/files/hn130605.pdf.
Government of the Northwest Territories. (October 6, 2013). Public consultation report. [online]
Available at: http://www.fin.gov.nt.ca/Dialogue%202013/Dialogue2013.htm.
Graham, J. (2016). Saskatchewan repeals ‘balanced budget’ law”. The Canadian Press. [online]
Available at: https://globalnews.ca/news/2745116/saskatchewan-repeals-balanced-budget-law/.
Hogan, L., & Goldsworthy, B. (2010). International mineral taxation. In P. Daniel, M. Keen & C.
McPherson (Eds.) The taxation of petroleum and minerals: Principles, problems and practice.
Washington: IMF.
IFSWF. (2008). Sovereign wealth funds: Generally accepted principles and practices “Santiago
Principles”. [online] Available at: https://www.ifswf.org/santiago-principles-landing/santiago-
principles.
IFSWF. (2019). International forum of sovereign wealth funds. [online] Available at: http://www.
ifswf.org/ [Accessed 3 Mar. 2019].
Irlbacher-Fox, S. (2012). Gahcho Kué economic impacts and NWT devolution, 4 May 2012 [Web
log message]. Retrieved from: http://www.northernpublicaffairs.ca/index/irlbacher-fox-gahcho-
kue-economic-impacts-and-nwt-devolution/.
Irlbacher-Fox, S. & Mills, S. J. (2007). Devolution and resource revenue sharing in the Canadian
North: Achieving fairness across generations. Walter and Duncan Gordon Foundation.
Jog, V. (2016). Rates of return on flow-through shares: Investors and governments beware. SPP
Research Paper No. 9–4. [online] Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=2741764.
212 A. Bauer and S. Daitch

Keen, M., et al. (2014). Israel: Reviewing the fiscal regime for mining. IMF Country Report No.
14/125. [online] Available at: https://www.imf.org/external/pubs/ft/scr/2014/cr14125.pdf.
KPMG. (2016). A guide to Canadian mining taxation. [online] Available at: https://assets.kpmg/con
tent/dam/kpmg/pdf/2016/04/KPMG-Mining-Taxation-Guide-2016.pdf [Accessed 12 Feb. 2019].
Laurin, A. (2018). The generations fund fails the test of fiscal transparency for Quebec’s dudget.
C.D. Howe Institute. [online] Available at: https://www.cdhowe.org/intelligence-memos/alexan
dre-laurin-generations-fund-fails-test-fiscal-transparency-quebec%E2%80%99s-budget.
Manley, D. (2017) Ninth time lucky: Is Zambia’s mining tax the best approach to an uncertain
future? Natural Resource Governance Institute. [online] Available at: https://resourcegoverna
nce.org/sites/default/files/documents/ninth-time-lucky.pdf.
Martin, C. (1973). “Dominion Lands” policy. Toronto: McClelland and Stewart Ltd.
Mining Association of Canada. (2017). Facts and figures 2017: Facts and figures of the canadian
mining industry. Toronto: Mining Association of Canada. [online] Available at: http://mining.ca/
sites/default/files/documents/Facts-and-Figures-2017.pdf.
Mintz, J., & Chen, D. (2012) Capturing economic rents from resources through royalties and taxes.
University of Calgary School of Public Policy. [online] Available at: https://www.policyschool.
ca/wp-content/uploads/2016/03/economic-rents-mintz-chen.pdf [Accessed 25 Feb. 2019].
MIT observatory of economic complexity. (2019). OEC-Canada (CAN) exports, imports, and trade
partners. [online] Available at: https://atlas.media.mit.edu/en/profile/country/can/ [Accessed 3
Mar. 2019].
Natural Resource Governance Institute. (2017). Resource governance index 2017. [online] Available
at: https://www.resourcegovernanceindex.org/.
Natural Resources Canada. (2012). Taxation of mineral income 2012–How Canada compares.
[online] Available at: https://www.nrcan.gc.ca/mining-materials/markets/8358 [Accessed 22 Feb.
2019].
Natural Resources Canada. (2018a). Canadian mineral production. [online] Available at: https://
www.nrcan.gc.ca/mining-materials/publications/17722 [Accessed 12 Feb. 2019].
Natural Resources Canada. (2018b). Crude oil facts. Government of Canada. [online] Available at:
https://www.nrcan.gc.ca/energy/facts/crude-oil/20064#L1.
Northwest Territories Bureau of Statistics. (2012). NWT economic multipliers—Overview and
results. [online]. Available at: https://www.statsnwt.ca/economy/multipliers/Multiplier%20R
eport-2012.pdf [Accessed 12 Feb. 2019].
Norwegian Petroleum. (2019). Exports of Norwegian oil and gas-Norwegianpetroleum.no. [online]
Available at: https://www.norskpetroleum.no/en/production-and-exports/exports-of-oil-and-gas/
[Accessed 3 Mar. 2019].
NRGI-CCSI. (2013). Alberta heritage savings trust fund and contingency account. Natural Resource
Governance Institute—Columbia Center on Sustainable Investment. [online] Available at: https://
resourcegovernance.org/sites/default/files/NRF_Alberta_September2013.pdf.
OECD. (2017). OECD better life index: Canada. [online] Available at: http://www.oecdbetterlifei
ndex.org/countries/canada/.
OECD. (2018). OECD tax database. [online] Available at: http://www.oecd.org/tax/consumption/
tax-database.htm#VATTables.
Ordre des comptables professionnels agréés du Québec. (2018). Réflexions sur les priorités budgé-
taires due Québec en 2018–2019. [online] Available at: https://cpaquebec.ca/~/media/docs/salle-
de-presse/memoires/2018-03-06-priorites-budgetaires-quebec-2018-2019.pdf.
PwC. (2016). Canadian mining taxation. [online] Available at: https://www.pwc.com/ca/en/min
ing/publications/pwc-canadian-mining-taxation-2016-11-en.pdf [Accessed 12 Feb. 2019].
RBC. (2018). Canadian federal and provincial fiscal tables. [online] Available at: http://www.rbc.
com/economics/economic-reports/pdf/provincial-forecasts/prov_fiscal.pdf.
Resource Projects. (2019). Resource projects: An open-source data repository on oil, gas and
mining projects. [online] Available at: https://resourceprojects.org/country/Canada [Accessed 3
Mar. 2019].
Non-renewable Natural Resource Wealth Management … 213

Roche, C., et al. (Eds.) (2017) Mine tailings storage: Safety is no accident. United Nations Envi-
ronment Programme and GRID-Arendal. [online] Available at: https://www.grida.no/publicati
ons/383.
Royalty Review Advisory Panel. (2016). Alberta at a crossroads: Royalty review advisory panel
report. [online] Available at: https://open.alberta.ca/dataset/01b3af57-350c-43ec-8c73-d70
fe74523cb/resource/94fca310-354d-4604-bccb-d897c2f68b91/download/2016-royalty-framew
ork-report.pdf [Access 22 Feb. 2019].
Ryser, L., et al. (2008). Extracting the value. Community Development Institute, University of
Northern British Columbia. [online] Available at: https://www.unbc.ca/sites/default/files/assets/
community_development_institute/extracting_the_value_draft_1.pdf [Accessed 21 Feb. 2019].
Social Progress Imperative. (2018). 2018 social progress index. [online] Available at: https://www.
weforum.org/agenda/2016/07/these-countries-have-the-highest-quality-of-life.
Statistics Canada. (2016). Consolidated per capita spending by selected Canadian classification of
functions of government, 2016. [online] Available at: https://www150.statcan.gc.ca/n1/daily-quo
tidien/180111/t001b-eng.htm.
Statistics Canada. (2018a). The daily—Oil and gas extraction, 2017. [online] Available at: https://
www150.statcan.gc.ca/n1/daily-quotidien/180924/dq180924d-eng.htm [Accessed 3 Mar. 2019].
Statistics Canada. (2018b). Infrastructure economic account, 2017. [online] Available at: https://
www150.statcan.gc.ca/n1/daily-quotidien/180913/dq180913b-eng.htm.
Statistics Canada. (2018c). National and provincial multipliers, 2014. [online] Available at: https://
www150.statcan.gc.ca/n1/en/catalogue/15F0046X [Accessed 21 Feb. 2019].
Statistics Canada. (2018d). Oil and gas extraction, 2017. [online] Available at: https://www150.sta
tcan.gc.ca/n1/daily-quotidien/180924/dq180924d-eng.htm [Accessed 20 Feb. 2019].
Statistics Canada. (2019a). Employment by industry, annual. [online] Available at: https://www150.
statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410020201 [Accessed 21 Feb. 2019].
Statistics Canada. (2019b). Provincial and territorial natural resource indicators, 2009 to 2016.
[online] Available at: https://www150.statcan.gc.ca/n1/pub/13-604-m/13-604-m2018088-eng.
htm [Accessed 3 Mar. 2019].
Tapp, S. (2013). The use and effectiveness of fiscal rules in Canadian Provinces. Canadian Public
Policy, 39(1), 45–70.
Toledano, P., & Maennling, N. (2018). Local content policies in the mining sector: Fostering down-
stream linkages. IISD and IGF. [online] Available at: https://www.iisd.org/sites/default/files/pub
lications/local-content-policies-mining-downstream-linkages.pdf. [Accessed 3 Mar. 2019].
Van den Bremer, T., & Van der Ploeg, R. (2014). Digging deep for the heritage fund: Why the right
fund for Alberta pays dividends long after oil is gone. University of Calgary School of Public
Policy. [online] Available at: https://www.policyschool.ca/wp-content/uploads/2016/03/digging-
deep-bremer-ploeg.pdf.
Van Meurs Energy. (2019). Fiscal rating of oil terms. [online] Available at: https://vanmeursenergy.
com/World-Fiscal-Rating [Accessed 3 Mar. 2019].
Non-Renewable Resource Revenue
Savings and Distribution in Canada:
Alberta

Shantel S. Jordison and Niloo Hojjati

Abstract The Alberta Heritage Savings Trust Fund is Canada’s first and largest
sovereign wealth fund. Like Norway’s oil fund, the Heritage Fund is fuelled by oil
wealth. As one of the first funds of its kind, in 1976 it inspired many other countries
to start funds of their own but unfortunately, it has experienced persistent challenges
from the start. It has had different, and often conflicting objectives, low public buy-
in, and inconsistent and discretionary deposit and withdrawal rules. With the current
balance of the Heritage Fund standing at a mere $17.5 billion (CBC News 2004)
(CDN), many argue that the Heritage Fund has largely failed to achieve its savings
mandate, especially when compared to other funds around the world in countries
with similar populations and resource profiles. However, while the Heritage Fund is
much smaller than its Alaskan and Norwegian peers, Alberta has made key policy
decisions that have set it on a unique path. It has chosen to maintain historically
low tax rates (with no provincial value added tax), a competitive royalty framework,
and historically has spent the most dollars per capita on public services for its citi-
zens. This chapter explores the history, governance, oversight, investment policy,
operational and deposit/withdrawal rules of the Heritage Fund. It also discusses how
wealth is transferred from Alberta to other parts of Canada and offers some critical
observations about the Fund’s successes and failures.

Keywords Natural resource management · Non-renewable resource revenue

savings · Alberta heritage savings trust fund · Canada sovereign wealth fund ·
Ralph Bucks

S. S. Jordison (B)
Alinea International, Calgary, Canada
e-mail: [email protected]
N. Hojjati
Extractive Resource Governance Program, School of Public Policy, University of Calgary,
Calgary, Canada
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 215
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_11
216 S. S. Jordison and N. Hojjati

1 Introduction

The Alberta Heritage Savings Trust Fund is Canada’s first and largest sovereign
wealth fund. As the name suggests, the Fund was established in the Western Cana-
dian province of Alberta as a long-term savings fund to collect and save a portion
of non-renewable resource revenue. With a current balance of $17.5 billion CAD
(approx. $13.2 billion USD)1 the Heritage Fund alone is larger than the balance of
all of Canada’s other sovereign wealth funds put together. Like Norway’s oil fund,
but unlike other Canadian sovereign wealth funds, the Heritage Fund is fuelled by
oil wealth. Canada has the world’s third largest proven petroleum reserves next to
Venezuela and Saudi Arabia, with Alberta producing more than eighty per cent of the
country’s total crude oil. Current figures from the Government of Alberta Ministry
of Energy place provincial crude oil production at 2.5 million barrels per day (bpd)
and natural gas reserves stand at 33 trillion cubic feet (tcf) (Jordison 2018, p. 79)
(Fig. 1).
Established in 1976, nearly fifteen years before the onset of Norway’s savings
program, the Heritage Fund was born out of an era of rising oil prices and economic
growth. As one of the first funds of its kind, it inspired many countries around
the world to develop similar savings funds. But unfortunately, the Heritage Fund
has experienced persistent challenges from the start. It has had different, and often
conflicting objectives, low public buy-in, and inconsistent and discretionary deposit
and withdrawal rules. Since its establishment, $43 billion has been withdrawn from
the Alberta Heritage Fund to support government spending in healthcare, education,
infrastructure, debt reduction and social programs (Government of Alberta; Alberta
Treasury Board and Finance 2018). And with the current balance of the Heritage
Fund standing at a mere $17.5 billion (CDN), many argue that the Heritage Fund
has largely failed to achieve its savings mandate, especially when compared to other
funds around the world in countries with similar populations and resource profiles.
By way of comparison, the Heritage Fund’s current balance constitutes only 5.3%
of Alberta’s total GDP2 (Government of Alberta 2019) whereas Norway’s fund is
valued at 2.5 times its annual GDP.
Interestingly, in 2015 the Calgary Chamber of Commerce calculated that Alberta’s
sovereign wealth fund would be worth $40.9 billion if it followed Alaska’s model
of taxation and $163.7 billion in the case of Norway (Wit 2017). But unfortunately
these comparisons do not take into account important differences between Alberta,
Alaska, and Norway, and have been widely criticized as being unfair. While the
Heritage Fund is much smaller than Norway’s oil fund, Alberta has made key policy
decisions that have set it on a different path. Alberta has chosen to maintain low tax
rates (with no provincial value added tax), maintain a competitive royalty framework,
and historically has spent the most dollars per capita on public services for its citizens.

1 Current market rate at February 23, 2019.

2 As of September 30, 2018.
Non-Renewable Resource Revenue Savings and Distribution … 217

Fig. 1 Province of Alberta, Canada. Source Natural Resources Canada (2017)

Undisputedly, Albertans experience a very high quality of life. Indeed, according to

the Economist Intelligence Unit’s 2018 Global Liveability Index, the thriving oil and
gas metropolis of Calgary was ranked as the fourth most liveable city in the world
(The Economist 2018).
Thanks to the work of our other Canadian colleagues (Bauer et al.), who provided
an overview of Canada’s fiscal landscape and smaller sovereign wealth funds in the
previous chapter, we focus exclusively on Alberta in this chapter. We will explore
the history, evolution, and current status of the Heritage Fund and also explain its
governance, oversight, investment policy, operational and deposit/withdrawal rules.
We will conclude by offering some information about how the Heritage Fund is
218 S. S. Jordison and N. Hojjati

distributed across Alberta, including how wealth is transferred from Alberta to other
parts of Canada. Lastly, we will offer some critical observations about its successes
and failures.

2 History of the Heritage Fund

The Heritage Fund is the main vehicle for savings of Alberta’s non-renewable
resource revenues. It was established by Alberta Premier Peter Lougheed through
the Alberta Heritage Savings Trust Fund Act (AHSTF Act) in 1976, when the price
of oil was at a historical high. The Fund was initially created with three different, and
as time would tell—sometimes incompatible—objectives. These objectives were to
save for future generations, strengthen and diversify the Alberta economy, and lastly
to improve the quality of life of Albertans (Government of Alberta 2019a, b, c).
At the time, the price of oil increased dramatically, first after the Yom Kippur War
in 1973 and then again after the Iranian revolution in 1979 (Morton 2018 p. 7). Early
estimates projected that the Heritage Fund could top $50 billion by 2000; however,
this would never become a reality. The AHSTF Act set out two main sources of
financing for the Heritage Fund: an initial endowment of $1.5 billion in cash and
other financial assets; plus 30% of revenues generated from non-renewable resources
collected by the provincial government (in the period between April 1, 1976 to
March 31, 1977), which amounted to $620 million (Government of Alberta; Alberta
Treasury Board and Finance, 2018, p. 1). In the period between 1976 and 1983,3
$9.69 billion in non-renewable resource revenue was transferred to the Heritage
Fund, which generated $4.13 billion in investment income. Of this, $1.6 billion was
used to fund spending on capital projects.
These capital projects were one distribution method to the public. They included
parks, medical research centres, as well as a golf course. The now famous Kananaskis
Golf Course included summer and winter destinations where Albertans could expe-
rience the beauty of the Canadian Rockies outside of the National Parks (Kananaskis
Country Golf Course 2019). Kan-Alta Golf Management Ltd. still exists today and
has managed the facility since it first opened in 1983. These projects were not without
criticism. At the time of their development, they were harshly criticized for being
wasteful and needlessly luxurious. One example was the import of products to the
golf course, such as white sand from the Caribbean. According to Nelson (2015)
“The Kananaskis course was controversial from the very start. Many questioned
why $25 million from the Heritage Fund’s energy royalties—supposed to diversify
the economy or be saved for when the oil runs out—was going instead to build a
luxury golf course during a time when Alberta was bleeding from the effects of the
National Energy Program” (Nelson 2015).
By 1983, the Heritage Fund had accumulated assets with a net value of $8.3 billion
(Government of Alberta; Alberta Treasury Board and Finance 2018, p. 21). Around

3 Note: fiscal year.

Non-Renewable Resource Revenue Savings and Distribution … 219

this time, $1.9 billion from the Heritage Fund was also loaned by the province of
Alberta to six borrowing Canadian provinces (Government of Alberta 2019a, b, c,
p. 2). These provinces included: Manitoba, Quebec, Newfoundland, New Brunswick,
Nova Scotia, and Prince Edward Island. These loans offered the opportunity for the
borrowing provinces to use Alberta’s credit rating to their advantage (Government of
Alberta 2019, p. 2) and represented an indirect distribution of wealth from resource-
rich Alberta to the rest of Canada, which was struggling at the time.
Unfortunately due to the volatile nature of oil prices, by the mid-1980s, Alberta
was experiencing significant economic turmoil due to falling oil prices, leading to a
sharp drop in its resource revenues. With a looming election in 1982, the Heritage
Fund’s architect, Premier Lougheed, reduced deposits from 30 to 15% into the Fund in
order to help maintain government spending during the campaign period. This proved
to be a troubling move that other politicians would emulate in the future, eventually
eroding the deposit rule and removing it completely (Morton 2018, p. 7). Oil prices
continued to drop into the late 80s, and by 1987 deposits of resource revenues into the
Heritage Fund were suspended altogether, reducing the deposit rate to zero. Thus, all
investment income from the Heritage Fund was transferred to the provincial govern-
ment’s general revenue to finance its operating and capital expenditures (including
the financing of capital projects), while the principal remained untouched. Alberta
has always relied heavily on oil and gas royalties to fund its public spending, rather
than relying on other sources of revenue (such as a value added tax for instance) as
is the case in other Canadian provinces.
As a result of this, by March of 1996, the Heritage Fund shrank to 11.8% of
Alberta’s GDP, a substantial decrease of 7.5% since 1983 (see Fig. 2.) According to
critics, “the variety of objectives in its first 20 years made it difficult to pursue any
one effectively. An even worse design flaw of the Heritage Fund was the decision

Fig. 2 Alberta heritage savings trust fund, as a % of provincial GDP (1981–2015). Source Dahlby
(2017)
220 S. S. Jordison and N. Hojjati

to make contributions voluntary and subject to political approval, and to give those
same politicians access to the investment income it generated” (Fawcett, 2016).
In 1995, the Alberta government conducted a public survey to determine the
perspective of Albertans on the future of the Heritage Fund. The results of the survey
indicated that a vast majority of Albertans believed that the primary focus of the
Heritage Fund should be centred on savings for future generations and for long-term
investments. Consequently, in 1996, an amendment was made to the AHSTF Act to
reflect this and the Heritage Fund was reconstructed so that it could no longer be
used for direct social investment or economic development purposes (Government
of Alberta 2019a, b, c, p. 3). To ensure the fulfilment of the Heritage Fund’s new
objectives for long-term savings, a Legislative Standing Committee (Province of
Alberta 2019, p. section 6), separate from the provincial government, was created in
1997 to review and approve the Fund’s new business plans (Government of Alberta
2019a, b, c, p. 3).
The 2000s brought with them increasing oil prices, and consequent improvements
in Alberta’s resource-dependent economy. In 2003 Alberta added a new fund, the
Alberta Sustainability Fund4 (Fiscal Planning and Transparency Act, 2015). It was
established as an account within the General Revenue Fund with the aim of providing
short-term fiscal stabilization. Often this fund has been referred to as the “Rainy Day”
Fund (Wood, 2015). On 12 July 2004, Alberta proudly became the only debt-free
province in the country, with then-Premier Ralph Klein stating in the news: “I’ve been
dreaming about this day for quite some time now. Today, I’m very, very proud to
announce that Alberta has slain its debt” (CBC News 2004). This was followed by a
$7.4 billion surplus in 2005, and a ground breaking decision to share Alberta’s wealth
in an unprecedented manner. The Premier of the day Ralph Klein, commonly referred
to as “King Ralph”—as a reference to his political longevity and his management
style—made the decision to give each resident in Alberta and their children, a tax-free
$400 cheque. The disbursements were formally called prosperity bonus cheques, but
were more commonly referred to at the time as “Ralph Bucks”. In an open letter to
Albertans, Premier Ralph Klein wrote, “I’m sure many of you have already heard
that Alberta expects a big surplus this year, thanks to higher-than-expected energy
revenues. Energy prices remain volatile and it is difficult to know today exactly how
large the surplus will be at the end of the year. […] This year, government is giving
back a portion of the surplus to the owners of Alberta’s energy resources: you. The
Alberta government is going to use about $1.4 billion of this year’s surplus to give
every Albertan a one-time rebate of $400” (Klein 2005).

4 This was later renamed the Contingency Account. This came as a result of the Fiscal Management

Act that was introduced as part of the 2013 provincial budget. The Contingency Account continues
to operate under the general revenue fund, with the purpose of covering provincial budget deficits.
It is worth noting that the Fiscal Management Act was repealed and subsequently replaced with the
Fiscal Planning and Transparency Act in 2015. The Act did not have a notable impact on the flows
in/out of the Fund, but rather has been used to cover the provincial budget deficits. As of March
2018, the balance of the Contingency Account is $1.7 billion, a decrease of $638 million from the
prior year (Government of Alberta; Alberta Treasury Board and Finance, 2019, p. 8).
Non-Renewable Resource Revenue Savings and Distribution … 221

The total cost to government of the program was $1.4 billion, representing 20%
of that year’s $6.8 billion budget surplus. While Premier Klein said that there might
be more cheques in the future for Albertans, the program was a one-hit-wonder, and
no future cheques were issued. Largely, the program was heralded as a success by
the public, but it also faced harsh criticism. Former Premier Lougheed, the architect
of the Heritage Fund, did not approve of the prosperity bonus cheques. In an open
letter in the Calgary Herald on 16 February 2006, he wrote: “If we do not save a
sufficient portion of these oil and gas revenues, history proves that much of it will
be dissipated on non-essential expenditures and we will not have much to show for
it 10 years or so from now” (Fawcett 2016).
Later in 2005, non-renewable resource revenues peaked at over $12.5 billion,
a new historical high for the province (Morton 2018, p. 8). And later in the year,
the Heritage Fund began retaining a portion of its investment income in order to
counteract the effects of inflation. An estimated $226 million was retained in the Fund
to protect it against inflation (Government of Alberta 2019a, b, c, p. 9), while The Act
was amended to ensure that the inflation proofing became a statutory requirement
(Province of Alberta 2019, p. section 11).
The next big change came in 2007, when the Alberta Investment Management
Corporation (AIMCo) was established through an act of legislation (Province of
Alberta 2007 Current as of 12 June 2013). AIMCo would come to serve as the
external managers of the Heritage Fund’s investments. Prior to this, the Ministry of
Finance carried out the daily management of the Fund and its investment portfolio.
AIMCo’s establishment signified an important milestone in the Heritage Fund’s
history. It enabled the Ministry to utilize the extensive technical expertise of a new,
arms-length body to make investment decisions, and also provided a new level of
transparency and credibility to the Heritage Fund’s management.
In 2007, an advisory committee chaired by Canada’s foremost tax policy expert,
Jack Mintz, set an ambitious target for the Heritage Fund: $100-billion by 2030. They
recommended “a fiscal adjustment” to make that possible. “Alberta’s non-renewable
resources should provide significant benefits not just to Albertans today, but also
for our children and grandchildren. When our stock of non-renewable resources
dwindles, Alberta’s economy will need to rely only on its people—not its natural
resources—to create wealth. Alberta should not look like a ghost town in the next
century when the resources are depleted” (Fawcett 2016).
Between 2010 to present day, there have been some modest changes to the Heritage
Fund; however, the most drastic changes occurred in the Fund’s earlier days. Today,
the Alberta Investment Management Corporation (AIMCo) invests the Fund in a
globally diversified portfolio across many assets classes, such as stocks, bonds,
and real estate. Throughout its history, the Heritage Fund’s mandate has changed
numerous times, but the current objective is to: “provide prudent stewardship of the
savings from Alberta’s non-renewable resources by providing the greatest financial
returns on those savings for current and future generations of Albertans” (Province
of Alberta 2019, p. preamble) (Fig. 3).
Since its inception in 1973, the Heritage Fund has contributed $43 billion to
the benefit of Albertans through financing provincial priorities such as health care,
222 S. S. Jordison and N. Hojjati

Fig. 3 Alberta government total expenditures, resource revenues and non-resource revenues. Source
Kneebone (2016)

education, infrastructure, and other social programs. Since the 80s, there has only
been three ad hoc deposits made into the Fund tracking against higher oil prices
later in the 2000s (Dahlby 2014, p. 1). Fast forward to 2017/2018, the Heritage Fund
earned $1.787 billion in net income, $230 million of which was retained in the Fund
for inflation proofing and $1.557 billion was transferred to the province’s general
budget to support government spending (Government of Alberta 2019a, b, c, p. 4).

3 Heritage Fund Governance

Now that we have explored the history of the Heritage Fund, we will dive into some of
the distinguishing characteristics of the Fund. The Heritage Fund operates under the
legislative authority as established through the AHSTF Act, which provides a prudent
governance structure with clear roles and responsibilities for the management and
oversight of the Fund. The following section outlines the bodies that hold responsible
roles in the management of the Heritage Fund and its investments, illustrated in Fig. 4.
Under The AHSTF Act, the President of Treasury Board, Minister of Finance, holds
ultimate responsibility for the management of the Heritage Fund and its investments
(Province of Alberta 2019). The Minister is supported in the investment manage-
ment of the Heritage Fund by two main groups which includes: (i) the Ministry of
Treasury Board and Finance; and (ii) the Alberta Investment Management Corpora-
tion (AIMCo) (Government of Alberta 2011, p. 6). The Ministry of Treasury Board
and Finance determines the Statement of Investment Policies and Goals (SIP&G),
which sets out the Fund’s long-term investment strategy and policy through ongoing
research and analysis. The Ministry is also responsible for the risk management and
financial reporting of the Heritage Fund, which occurs on a monthly, quarterly, and
Non-Renewable Resource Revenue Savings and Distribution … 223

Fig. 4 Governance of the Alberta Heritage Fund

annual basis (Government of Alberta 2011, p. 6). The second body, which provides
support to the President of Treasury Board, Minister of Finance in the Fund’s invest-
ment management is AIMCo. AIMCo, a provincial Crown Corporation5 (Province
of Alberta 2019), is an external body that is responsible for the day-to-day manage-
ment of the Fund and its investments in accordance to the guidelines in the SIP&G,
as developed by the Ministry.
AIMCo manages the purchase of the Heritage Fund’s investment portfolio that
includes a range of investments in public and private companies, real estate, bonds,
mortgages, and infrastructure developments6 using internal AIMCo staff as well
as external managers (Government of Alberta 2011, p. 7). AIMCo also supports
the Ministry in its preparation of the Heritage Fund’s publicly available financial
reporting documents, by providing reports on the performance of investments and
their associated costs. In addition, to ensure that the investment portfolio is reflec-
tive of changing market conditions, AIMCo conducts ongoing research to provide
recommendations to the Ministry in regards to potential improvements to the SIP&G
(Government of Alberta 2011, p. 7).

5A crown corporation refers to a corporation that is established and regulated by the Canadian
government.
6 Further details on the Fund’s investment assets will be discussed in the next section of this chapter.
224 S. S. Jordison and N. Hojjati

4 Heritage Fund Oversight Mechanisms

The Heritage Fund also has several oversight mechanisms as core elements of
its governance structure. These mechanisms have resulted in high levels of trans-
parency and independent oversight. As mentioned in an earlier section of this chapter,
following changes to the mandate of the Heritage Fund in the 1990s towards long-
term savings (rather than social and economic spending), a Standing Committee
was established to provide an oversight role in ensuring the Fund’s fulfilment of
its new mandate (Government of Alberta 2019, p. 3). The membership of this
standing committee includes representation from all parties in the Alberta Legisla-
ture (Province of Alberta 2019), which represents both the governing political party
of the day, as well as opposing parties. This Standing Committee, which is comprised
of nine members of the Alberta legislature, reviews and approves the business plan
for the Heritage Fund each fiscal year; and receives and reviews the operations and
results of the Fund’s investment activities (Committees of the Legislative Assembly
of Alberta 2019).
A key obligation carried out by the Standing Committee is to hold annual public
meetings with Albertans (recordings of which are streamed and available on their
website) on the Heritage Fund’s performance (Heritage Savings Trust Fund 2019).
These sessions allow Albertans to enquire about the Fund’s various investments, and
if the mandate of the Fund for long-term savings is in fact being fulfilled. Lastly, the
Standing Committee also approves the annual financial reports of the Heritage Fund
prepared by the Ministry of Treasury Board and Finance and reports on the status
of the Fund to the Alberta Legislature (Province of Alberta 2019). The final element
of oversight in the Heritage Fund’s management is an independent Auditor General,
which is responsible for performing an external audit of the Fund’s annual finan-
cial report (Province of Alberta 2019). These annual external audits are performed to
ensure that the reports prepared by the Ministry are accurate, fair, and meet Canadian
accounting standards. The Auditor General’s findings are summarized in a financial
statement, which is included in the Heritage Fund’s publicly available annual finan-
cial reports (Government of Alberta; Alberta Treasury Board and Finance 2018,
p. 24).

5 Heritage Fund Investment Policy and Operational Rules

As described in the previous section, the investment authority of the Heritage Fund
lies with three bodies: the President of Treasury Board, Minister of Finance, Ministry
of Treasury Board and Finance, as well as AIMCo. The investment policy of the
Heritage Fund is developed by the Ministry (and approved by the Minister) through
the SIP&G, as previously described. The SIP&G determines the Fund’s target
policy portfolio, risk profiles, and expected rate of returns; all of which governs
the parameters available to AIMCo for investment decisions.
Non-Renewable Resource Revenue Savings and Distribution … 225

Fig. 5 Heritage Fund

long-term target policy asset
mix. Source Government of
Alberta; Alberta treasury
board and finance (2018,
p. 7)

The investment policy of the Heritage Fund is based upon two vital concepts:
a long-term planning approach and a diverse portfolio to manage and mitigate risk
levels. The Heritage Fund is invested globally and across three broad asset classes
consisting of: 50% in equities (42% global equities and 8% Canadian equities); 20%
in money markets and fixed income; and 30% in inflation sensitive and alternative
investments (such as real estate and infrastructure) (Government of Alberta 2011,
p. 9). Through these mix of assets, which is illustrated in Fig. 5, the Heritage Fund’s
investment goal is to earn a target rate of return of 4.5% above the rate of inflation (as
measured by the Canadian Consumer Price Index) over a 5-year period. Furthermore,
it is expected that AIMCo will utilize its expertise to make investment decisions,
which earn an additional 1% on top of the 4.5% rate of return (Government of
Alberta 2011, p. 8).
The Heritage Fund’s investment policy can be reviewed or revised at any time;
however, the Ministry must formally review the policy at least once each calendar
year (Government of Alberta 2011, p. 7). A significant recent revision to the Fund’s
investment policy occurred in November of 2015, when the provincial government
introduced a new investment mandate for AIMCo aimed towards encouraging direct
investments within Alberta. This new mandate, aptly named the “Alberta Growth
Mandate”, requires AIMCo to invest up to three per cent of the Heritage Fund
(approximately $500 million) in investments, which create jobs in Alberta, build new
infrastructure in the province, diversify the economy and support growth, connect
Alberta businesses to export markets, and lastly, develop subject matter expertise
within the province (Alberta Investment Management Corporation 2015).
Prior to this announcement, the Heritage Fund did not have clear mandate to invest
directly in the Alberta market (Government of Alberta; Alberta Treasury Board and
Finance 2018, p. 20). Since the announcement of this mandate, AIMCo has invested
226 S. S. Jordison and N. Hojjati

$362.1 million in 20 separate transactions in the province (Government of Alberta;

Alberta Treasury Board and Finance 2018, pp. 8-9).

6 Deposit and Withdrawal Rules

The operational rules around the amounts deposited into, and withdrawn from the
Heritage Fund, are made in practice at the discretion of the President of the Treasury
Board, Minister of Finance. These rules have changed several times throughout the
Fund’s history, in response to economic turmoil in the province. This has resulted
in lack of clarity on the limitations of how money is transferred into the Fund, but
more importantly, it puts into question whether the Fund has in fact achieved its
mandate for long-term savings of non-renewable resources for future generations of
Albertans.
While the variations in the rules surrounding deposits and withdrawals into the
Heritage Fund have been highlighted in earlier sections of this chapter, it is worth-
while to revisit these changes in the context of the impact on the growth of the
Heritage Fund over the years (Fig. 6).

3000
MILLIONS OF CANADAINA DOLLARS

2000

1000

-1000

-2000

-3000
1975 1980 1985 1990 1995 2000 2005 2010 2015

Net Income Resource Revenue Alloc on

Capital Project Expenditures Ad-Hoc Deposits

Investment Income
Transfers

Fig. 6 Flows to and from the Heritage Fund. Source Government of Alberta; Alberta treasury board
and finance (2018)
Non-Renewable Resource Revenue Savings and Distribution … 227

Upon the creation of the Heritage Fund in 1976, there was a statutory requirement
to deposit 30% of non-renewable resource revenues into the Heritage Fund. However,
this percentage was reduced to 15% in 1982 in response to economic downturn
in the province, and by 1987, deposits into the Fund were suspended all together
(Government of Alberta 2019, p. 2). From 1987 to present day, there is no longer
a statutory requirement for a particular percentage to be deposited into the Fund.
Since 1987, the provincial government has only deposited into the Heritage Fund on
two occasions (in 2006 and 2008) for a total amount of $3.9 billion due to provincial
budget surpluses (Government of Alberta; Alberta Treasury Board and Finance 2018,
p. 4).
As it relates to the rules around withdrawals from the Heritage Fund, the principle
amount in the Heritage Fund cannot be withdrawn. However, all investment income
earned each year through AIMCo’s efforts minus the amount retained for inflation
proofing (as required by legislation) is transferred to the provincial government’s
general budget (Province of Alberta 2019, p. section 8(2)). In 2017–18, the Heritage
Fund earned $1.787 billion in net income, $230 million of which was retained in the
Fund for inflation proofing, while $1.557 billion was transferred to the province’s
general budget to support government spending (Government of Alberta; Alberta
Treasury Board and Finance 2018, p. 4).

7 Distribution Mechanisms

While some intra-provincial wealth distribution mechanisms have already been

discussed above with regard to State fund and natural resource revenue, we have
not yet discussed Canada’s most important wealth distribution mechanism: equal-
ization. As already mentioned, Canada’s system of federal–provincial relationships
is complex, including wealth distribution mechanisms between provinces: “there are
areas of joint or overlapping federal and provincial jurisdictions, grey areas of juris-
diction, complex tax harmonization and co-ordination arrangements, shared-cost and
joint programs, and substantial transfers from the federal to provincial governments
and territories. The pillars of those federal transfers are the Canada Health Transfer
(CHT), the Canada Social Transfer (CST) and equalization payments” (Feehan 2014,
p. 2).
Simply, equalization is a national Canadian program that distributes wealth across
the country from rich to poor; it affects all provinces and territories. There is a formula
applied on an annual basis whereby provinces with stronger economies and higher
income households and businesses (referred to as “have” provinces) distribute their
wealth via transfer payments, to provinces with weaker economies (referred to as
“have-not” provinces). Fifty per cent of natural resource revenues, including royalties
from oil and gas count towards this calculation. Ultimately, this means that there is
a wealth transfer from resource-rich provinces like Alberta, to other provinces with
228 S. S. Jordison and N. Hojjati

Table 1 Critical observations

Successes Failures
• High level of transparency • Lack of coherency in Fund objective
• Public disclosure of annual reports and audits • No deposit rules since 1987
• Independent oversight • Lack of coherency in government policy
• High level of technical expertise of fund • No clear withdrawal rules
manager • Lack of government commitment to savings
• Low tax rates; high quality of life; high over time
quality public services; competitive royalty • Legislators frequently used fund for public
structure expenditures
• Lack of public understanding and
commitment to Fund

weaker economies. In the history of equalization, Alberta has always been a “have”
province, meaning that it has never received equalization payments.7

8 Critical Observations

While it is clear that higher deposits and fewer withdrawals from the Heritage Fund
in its 43 years of existence would have yielded a higher balance than what exists
today, there are other important lessons to be learned from the Alberta experience
(Table 1).

9 Conclusion

As one of the first funds of its kind, the Heritage Fund holds interesting and histori-
cally relevant lessons to be learned regarding public wealth management and natural
resource revenue. Chief among its successes are that it has achieved a high level
of transparency, with public disclosure of annual reports and audits. It also boasts
independent oversight with a high level of technical expertise/fund management.
Alberta has chosen the path of levying low taxes with a highly competitive royalty
structure and has historically offered high-quality public services contributing to a
high quality of life for its citizens. It undeniably holds a special place among the
world’s earliest sovereign wealth funds, and with a current balance of $17.5 billion
CAD (approx. $13.2 billion USD),8 the Heritage Fund is larger than the sum of all
other Canadians sovereign wealth funds put together. However, its savings are a far
cry from what could have been if the province had been able to maintain consis-
tent contributions and had high levels of public spending using investment income.

7 Please see chapter in this book from Bauer et al. for more information on equalization.
8 Current market rate at 2019-02-23.
Non-Renewable Resource Revenue Savings and Distribution … 229

Among its primary failures are that the Fund lacks coherency in its objective, which
has changed several times since its inception; absence of clear deposit rules since
1987; and lack of clear withdrawal rules. Perhaps the most significant failure of the
Fund has been the lack of an overall government commitment to accruing savings
over time. Historically, the Fund has been used to fund public expenditures, and there
has been an overarching lack of public understanding and commitment to the Fund
and its mandate over time. Because revenue from oil and gas extraction is temporary,
and revenues end when resources become depleted or extraction becomes too costly,
it remains very important to save resource revenue (van den Bremer, 2016, p. 2),
and so, while there have been some successes along the way, there remains room for
much improvement in the future of the Heritage Fund.

References

Alberta Investment Management Corporation. (2015). Alberta Growth Mandate, Edmonton: s.n.
CBC News (2004). Alberta debt free, Klein says, Calgary: s.n.
Committees of the Legislative Assembly of Alberta (2019). Standing Committee on the Alberta
Heritage Savings Trust Fund, Edmonton: s.n.
Dahlby, B. (2017). The Alberta Experience. Calgary, s.n.: Alberta Heritage Savings Trust Fund
Graph.
Dahlby, B. a. N. H. (2014). The Challenge of Saving Natural Resources Revenues: An Overview
of the Alberta Heritage Savings Trust Fund. ITIC Special Report 19th Annual Edition,July.
Fawcett, M. (2016). Heritage Trust Fund: Better Late Than Never for Saving. Alberta Views, 1
March.
Feehan, J. (2014). Canada’s Equalization Formla: Peering Inside the Black Box…And Beyond. The
School of Public Policy SPP Research Papers, September. 7(24).
Fiscal Planning and Transparency Act (2015).
Government of Alberta; Alberta Treasury Board and Finance. (2018). Alberta Heritage Savings
Trust Fund 2017-2018 Report, Edmonton: s.n.
Government of Alberta; Alberta Treasury Board and Finance (2019). Alberta Treasury Board and
Finance, 2019-19 Third Quarter Fiscal Update and Economic Statement, Edmonton: s.n.
Government of Alberta. (2011). Alberta Heritage Savings Trust Fund Statement of Investment Policy
and Goals: Heritage Fund, Edmonton: s.n.
Government of Alberta. (2019a). Alberta Heritage Savings Trust Fund Historical Timeline,
Edmonton: s.n.
Government of Alberta. (2019b). Heritage Savings Trust Fund. (Online) Available at: https://www.
alberta.ca/heritage-savings-trust-fund.aspx#toc-2. Accessed 01 03 2019.
Government of Alberta. (2019c). Alberta Treasury Board and Finance, 2018–19 Third Quarter
Fiscal Update and Economic Statement Available at: https://open.alberta.ca/dataset/9c81a5a7-
cdf1-49ad-a923-d1ecb42944e4/resource/a0f104f4-75a6-4d7e-8e52-dbad812c3941/download/
2018-19-3rd-quarter-report-fiscal-update.pdf. Accessed 13 Sept 2019.
Heritage Savings Trust Fund. (2019). Assembly Online Website: Standing Committee on the Alberta
Heritage Savings Trust Fund, Edmonton: s.n.
Jordison, S. (2018). Canada. In I. Overland (Ed.), Public Brainpower: Civil Society and Natural
Resource Management (pp. 75–90). s.l.: Palgrave Macmillan.
Kananaskis Country Golf Course (2019). The Alberta Advantage. (Online) Available at: https://
www.kananaskisgolf.com/blog/110-title-of-blog-3. Accessed 23 Feb 2019.
Klein, P. R. (2005). An Open Letter to Albertans, Edmonton : s.n.
230 S. S. Jordison and N. Hojjati

Kneebone, R. a. M. W. (2016). Canadian provincial government budget data 1980/81 to 2013/14

(updated annually). Canadian Public Policy, 42(1).
Morton, F. (2018). Why Alberta needs a fiscal constitution. The School of Public Policy Publications
SPP Research Paper, pp. 1–24.
Natural Resources Canada (2017). Reference Maps; Alberta Relief. (Online) Available at: http://geo
gratis.gc.ca/pub/nrcan_rncan/raster/atlas_6_ed/reference/bilingual/alberta_relief.jpg. Accessed
23 Feb 2019.
Nelson, C. (2015). Calgary Herald: Kananaskis golf course has taxpayers in the rough.
(Online) Available at: https://calgaryherald.com/opinion/columnists/nelson-kananakis-golf-cou
rse-has-taxpayers-in-the-rough. Accessed 23 Feb 2019.
Province of Alberta. (2007). Current as of June 12, 2013. Alberta Investment Management Corporate
Act, Edmonton: s.n.
Province of Alberta (2019). Queen’s Printer: Laws Online/Catalogue. (Online) Avail-
able at: http://www.qp.alberta.ca/1266.cfm?page=A23.cfm&leg_type=Acts&isbncln=978077
9726646&display=html. Accessed 01 03 2019.
The Economist (2018). Global Liveability Index 2018, s.l.: s.n.
Van den Bremer, T. S. a. F. c. d. P. (2016). Saving Alberta’s resource revenues: Role of
intergenerational and liquidity funds. Energy Policy, pp. 1–16.
Wit, J. (2017). Norway’s Oil Savings Just Hit $1 Trillion. Alberta Has $17 Billion. What Gives?,
s.l.: The Narwhal.
Wood, J. (2015). Alberta’s Rainy Day Fund to Be Liquidated Next Year. Calgary: Calgary Herald.
Sovereign Wealth Funds and Impact
Investing in Australia

Rochelle Spencer, Eduardo G. Pereira, and Fadzai Matambanadzo

Abstract Sovereign wealth funds (SWFs) have gained traction in recent years as
effective capital pools created by governments to invest surplus funds in markets, both
internationally and domestically. This chapter looks at the role that SWFs can play
in Australia’s next resources boom, and whether SWFs can provide a sustainable
development pathway through an alternative and innovative investment structure
such as social impact investing. We shed light on the dynamics and role of SWFs in
promoting sustainable development in Australia and the role of impact investing for
accelerating sustainable development.

Keywords Extractives industry · Sovereign wealth funds (SWFs) · Sustainable

development · Social impact investing

1 Introduction

The increasing global demand for commodities due to population growth, ongoing
processes of industrialisation and rising urbanisation necessitates governments to
embrace sustainable development and meet their commitments to the Paris Agree-
ment (UNFCCC 2020); in turn, this will affect the nature of commodity demand

R. Spencer (B)
Centre for Responsible Citizenship and Sustainability, Murdoch University, Perth, Australia
e-mail: [email protected]
E. G. Pereira
Siberian Federal University, Krasnoyarsk, Russia
e-mail: [email protected]
The University of West Indies, St. Augustine Campus, St. Augustine, Trinidad and Tobago
University of São Paulo, São Paulo, Brazil
F. Matambanadzo
Socio-Economic Development and Impact Strategist, Perth, Australia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 231
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_12
232 R. Spencer et al.

as we see nations becoming wealthier. In Australia, a resource-rich country, gold

rushes were pivotal in the early development of the nation state, marking mining
as a cornerstone of the Australian economy. Australia has experienced a number of
mining booms through the 1960s, 1980s and early 2000s, with the states of Western
Australia and Queensland being the most resource-rich areas of the country. However,
Australia has arguably not made the best use of harnessing the wealth from these
resource booms to sustainably finance a new era of sustainable development as we
see in other nations that have cultivated sovereign wealth success. Some have argued
that Australia failed to capitalise on the mining booms because of political short-
sightedness for votes and powerful mining lobby interests (Fernyhough 2015; Szatow
2020). Instead of putting the increased corporate tax revenue during the mining boom
into a sovereign wealth fund, the government instituted personal tax cuts. At the same
time, the mining lobby spent more than $20 million AUD on an anti-tax advertising
campaign to sway public opinion and warn the Federal government not to imple-
ment further tax increases on the extractives sector; it was successful. Some critics
have compared Australia’s squandered iron ore boom with Norway’s successful oil-
funded SWF, urging Australia not to squander the next boom–electrification, and to
ensure that a SWF benefits all Australians (Szatow 2020).
Sovereign wealth funds (SWFs) constitute just one of many sovereign investment
vehicles1 and are heterogeneous in nature, making them dynamic, complex and multi-
faceted investment instruments. Defining the key characteristics of SWFs beyond
being state-owned investment vehicles can therefore be challenging. Most SWFs
have been established in countries that are rich in natural resources, with oil and
gas-related SWFs being the most common and largest group (Bortolotti et al. 2015).
Such funds have their origins in either commodity-based surplus such as oil, gas
and minerals, or non-commodity trade-based surpluses such as currency reserves.
This chapter focusses on the former; the state funds that are created in Australia as
a result of commodity exports and are either privately owned assets and taxed, or
state-owned assets. Moreover, we delve into how SWFs can be a central function in
sustainable development through ‘impact investing’ in Australia.

2 Defining Sovereign Wealth Funds

SWFs have gained traction in recent decades as effective capital pools set up by
the state for macroeconomic purposes to invest surplus funds in foreign countries
or domestically. They are increasingly being seen as effective state wealth redistri-
bution vehicles, particularly in resource-rich countries such as Australia. The World
Economic Forum (2017) identifies over 40 SWFs created since 2005 with a value of
over $8.4 trillion (SWFI 2020). Indeed, the recent expeditious growth of SWFs has

1 Typesof sovereign investment vehicles include SWFs, Pension Funds, State-Owned Enterprises,
and Sovereign Wealth Enterprises (Sovereign Wealth Fund Institute, 2008-2018).
Sovereign Wealth Funds and Impact Investing in Australia 233

led to the rapid evolution of the role of the state in recent years. While many govern-
ments began privatising state-owned assets since the 1970s, over the 2001–2012
period governments globally acquired more assets through stock purchases (US$1.52
trillion) than they sold through share issue privatisations and direct sales (US$1.48
trillion) (Bortolotti et al. 2015). The world has thus witnessed two powerful, simulta-
neous and apparently contradictory economic phenomena over recent years: contin-
uing sales of state-owned assets and enterprises to private investors by some govern-
ments, coupled with increasingly large purchases of private, often listed, corporate
equity by other governments (Bortolotti et al. 2015).
The International Monetary and Financial Committee (IMFC)2 has recognised
SWFs as well-established institutional investors and important participants in the
international monetary and financial system (IWG 2008). This phenomenon can be
called the rise of the fiduciary state, and SWFs are the single most important expres-
sion of this; we have seen their total assets grow to exceed those of hedge funds and
private equity combined (Bortolotti et al. 2015). Within their host countries, particu-
larly countries that are high exporters of natural resources, SWFs play an instrumental
role in improving the management of state surpluses and creating an environment
that promotes sustainable investment practices, both of state funds and of the entities
in which they invest (Karametaxas 2017). The overall structure of SWFs means they
are well placed to substantially shift the dial on socio-economic and environmental
outcomes in their host countries and the regions the funds directly invest in, partic-
ularly in emerging economies. As demonstrated during the global financial crisis,
SWFs can have a catalyst effect on global financial markets (Karametaxas 2017).
They would equally have the same transformative effect on sustainable development
in emerging economies through the rapid emergence of ‘impact investing’, discussed
below in the Australian context.
While it is difficult to broadly define the dynamic nature of sovereign wealth
funds, Rozanov (2005) first coined the term describing it as the accumulation of
national budget surpluses from long-term budget planning and spending restraint,
with the aim of building a nest egg for future generations to spend on social and
economic development initiatives. Perhaps the most cited definition comes from the
International Working Group of Sovereign Wealth Funds (IWF-SWF) convened by
the International Monetary Fund (IMF) commonly known as the Santiago principles
(2008: 7–9) that defined SWFs as:
special-purpose investment funds or arrangements that are owned and created by the general
government for macroeconomic purposes; which hold, manage, or administer assets to
achieve financial objectives, and employ a set of investment strategies that include investing
in foreign financial assets. The SWFs are commonly established out of balance of payments
surpluses, official foreign currency operations, the proceeds of privatisations, fiscal surpluses,
and/or receipts resulting from commodity exports.

The above definition is broad and offers little insight to the meaning of ‘macroe-
conomic purposes’ and ‘financial objectives’. It also only places emphasis on

2 The
IMFC is a committee of the Board of Governors of the International Monetary Fund (IMF),
comprising representatives of all 185 IMF member countries..
234 R. Spencer et al.

investments being foreign assets. The Organisation for Economic Cooperation and
Development (OECD) has loosely defined SWFs as:
government investment vehicles funded by foreign exchange assets that manage those assets
separately from official reserves. Some are funded directly through commodity exports with
an explicit decision to transfer wealth to future generations, while others result from trying
to make the best from official reserves accumulation. Countries running current account and
budget surpluses for macroeconomic stabilisation purposes, as well as those accumulating
reserves to maintain a pegged exchange rate, have found themselves with amounts of currency
well above levels deemed necessary to face external shocks. The creation of SWFs is then
seen as an attempt to increase the return of this accumulated wealth (OECD 2007: 42).

This definition has a narrower view on SWFs than previous definitions, tracing
their establishment to excess foreign exchange reserves, and their main objective as
macroeconomic stabilisation strategies and general management of foreign currency
reserves. But as we have seen throughout the world, SWFs are established using
various state capital sources, and their objective and investment strategies vary
greatly. The above definitions do not offer enough insight as to what role SWFs play
in the context of other alternative investments such as environmental, social, and
corporate governance (ESG) and sustainable development investments. These defi-
nitions attempt to define SWFs purely as traditional institutional investment vehicles
without defining their dynamic characteristics that result from them being extensions
of the state and consequently a reflection of the state’s broad and diverse mandate
of medium- to long-term social and economic development across generations. The
strategic objectives of SWFs vary; therefore, defining SWFs in the context of their
broad strategic objectives not only contextualises the SWF, but also gives greater
clarity. Therefore, with the strategic objective of sustainable development in mind,
we consolidate these definitions to offer a more refined vision for strategic devel-
opment SWFs that we would like to see emerge in the Australian context, where
arguably, Australia wasted SWF opportunities from the previous mining booms:
Government owned, controlled and managed investment vehicles established as a result
of balance of payments surpluses, official foreign currency operations, the proceeds of
privatisations, proceeds of equity holdings in national assets, fiscal surpluses, and/or receipts
resulting from commodity exports. These funds make strategic risk adjusted domestic and
cross border investments in traditional assets, ESG assets and/or large-scale social or envi-
ronmental projects that generate a mixture of financial and social or environmental returns
for the host or recipient country.

Despite the variation of definitions, it is important to note that as alternative SWFs

continue to grow in size and importance, so will their potential impact on diverse
markets. Furthermore, while not nearly as homogeneous as central banks, public
pension funds or traditional private investment funds, SWFs do have a number of
unique characteristics, which make them a distinct and potentially valuable tool
for achieving certain public policy and macroeconomic goals (Rozanov 2005). Their
overall structure and dynamic characteristics could make them a transformative driver
of sustainable development (particularly in emerging economies) when coupled with
impact investing models.
Sovereign Wealth Funds and Impact Investing in Australia 235

3 Australian Sovereign Wealth Funds

Despite a number of mining booms, Australia came to the SWF party rather late,
finally establishing a SWF, The Future Fund, in 2006 via The Future Fund Act 2006
(the Act). The Act established the Future Fund Special Account, the Future Fund
Board of Guardians and the Future Fund Management Agency (FFMA), and collec-
tively, they are referred to as the Future Fund. The FFMA has a mandate to invest
the assets of five special purpose public asset funds: The Future Fund, the Disability-
Care Australia Fund,3 the Medical Research Future Fund4 and three Nation-Building
Funds.5 The FFMA has no role in determining how drawdowns will be distributed
out of the various funds. The Fund received contributions from a combination of
budget surpluses, proceeds from the sale of the state holding of the national telecom-
munications company Telstra and the transfer of remaining Telstra shares. Each of
the Funds in Australia is invested across public and private markets domestically and
internationally. Within each category, they develop an investment strategy for each
Fund that is consistent with its investment objectives and approach to the total port-
folio construction. The Future Fund provides for unfunded superannuation liabilities
that will become payable when the ageing population of Australia is likely to place
significant pressure on the Commonwealth’s finances with the drawdown from 2026
to 2027.
In addition to the above Future Funds, The Western Australian Future Fund (WA
Future Fund) was established by the Western Australian Future Fund Bill 2012
(Australian Parliament 2012) and is the only natural resource fund in Australia. It
was launched with an initial investment of $300 million by the state of Western
Australia, and distributions towards infrastructure will begin in 2032. The objective
of the WA Future Fund is to set aside and accumulate a portion of the revenue from
the state’s finite mineral resources for the benefit of future generations of Western
Australians (Parliament of Western Australia 2012).
The WA Future Fund was established with seed capital from the Royalties for
Regions Fund totalling an estimated $1.04 billion AUD between 2012 and 2016.

3 The DisabilityCare Australia Fund was established in 2014 as a result of the DisabilityCare
Australian Funds Act 2013, to help the National Disability Insurance Scheme (NDIS), with the
goal to help support Australians with significant and permanent disabilities and their families and
carers. The Fund reimburses States, Territories and the Commonwealth for expenditure incurred in
relation to the National Disability Insurance Scheme Act 2013 and to fund initial implementation
of this Act.
4 The Medical Research Future Fund was established by the Medical Research Future Fund Act

2015 to improve the health and wellbeing of Australians by providing grants of financial assistance
to support medical research and medical innovation.
5 The Nation-Building Funds were established in 2008 as a result of the Nation-Building Funds

Act 2008, namely the Building Australia Fund (BAF) and the Education Investment Fund (EIF).
The BAF enhances the Government’s ability to make payments in relation to the development
of transport, communications, energy and water infrastructure and in relation to eligible national
broadband matters. The EIF enhances the State’s ability to make payments in relation to the devel-
opment of higher education infrastructure, research infrastructure, vocational education and training
infrastructure. Health and Hospitals Fund: to support capital investment in health infrastructure.
236 R. Spencer et al.

Since 2008, the Royalties for Regions Fund has invested over $6 billion AUD of
the mining and onshore petroleum royalties in Western Australia to nearly 4000
projects and programmes including transfers to the WA Future Fund. Since 2016–17
onwards, the Fund has been credited each and every year with a minimum 1% of the
state’s annual royalty income. For the first 20-year accumulation period (until 2032),
earnings on the WA Future Fund balance are retained and reinvested in the Fund
whereby drawdowns from the Fund are prohibited. The balance of the WA Future
Fund at 30 June 2032 will be maintained into perpetuity, and the income earned
on the balance of the Future Fund after that date may be applied for the purpose
of providing public works and other public infrastructure in the metropolitan and
regional areas of the state of Western Australia (Australian Parliament 2012).
Western Australia covers a land area over 2.6 m km2 (to put that in some perspec-
tive, it is four times the size of Texas and twelve times the size of the UK). Therefore,
the division of the Fund’s income between the metropolitan area and the regions must
be comprehensively negotiated between the state’s Treasurer and the Minister for
Regional Development. The Minister for Regional Development also consults with
the Western Australian Regional Development Trust in considering the application
of the Future Fund in the regions across the state.
In legal parlay, the Australian commonwealth and state governments own
Australia’s mineral and petroleum resources and share the responsibility in the taxing
of projects. Irrespective, Australia is still grappling with recognition of the custodi-
anship over land and sea that Aboriginal and Torres Strait Islander people have held
for tens of thousands of years. At the time of writing this chapter, the extractives
sector is backing a referendum for enshrining the voice of Australia’s First Nations
people in the Constitution. However, some critics ostensibly question the support of
the big mining giants, saying:
When mining companies are able to control Indigenous lands, extract from them and prevent
them from being lovingly cared for by the peoples who are its custodians, then their profits
keep incurring sovereign debt. They prosper from the exploitation of land that they have never
had to pay for. This perhaps is so obvious that it is easily forgotten; or worse, dismissed. And
yet in any other profit-making context it would be unintelligible for an industry to be able
to access its raw materials, the basis for its profit and prosperity, for free (Giannacopoulos
2019).

While Australia has made some important headway in terms of Native Title, it does
not equal land rights, particularly when faced with the prosperity of mining interests.
Giannacopoulos (2019) argues that the extractives sector may well support a constitu-
tional reform for First Nations peoples in Australia, ‘but this is just to side-step the real
question of self-determination … it underscores the fact that mining wealth creation
actually heightens the austere conditions Aboriginals face in their own country’.
Understanding this contested background provides the basis for the need to think
about SWFs as instruments for impact investment in sustainable development in
Australia.
In the Australian context, the state levies company taxes and royalties on mining
projects, and these are the main fiscal instruments used by governments to collect
revenues from the extractives industry. Despite the mining sector in Australia paying
Sovereign Wealth Funds and Impact Investing in Australia 237

almost a quarter of all company tax nationally, it is a fiercely debated arena where
many lobby for the government to introduce a stricter fiscal regime for the extractives
sector in Australia. The existing model sees most of the economic value obtained from
minerals and petroleum concessions derived largely from royalties and corporate
income tax. The corporate tax rate is 30%, which is relatively high among other
OECD countries (PWC 2018: 10). However, statistics from the Australian Tax Office
reveal the amount of tax credits increased from $282 billion AUD to $324 billion AUD
highlighting that Australia has generous tax concessions available on spending that is
greater than a company’s assessable tax receipts, which can be carried over from year
to year. This means that the largest global oil and gas companies accumulate hundreds
of billions in tax credits in Australia and pay much lower amounts or even close to
nothing. Lobbies are calling for a 10% royalty to replace the existing petroleum
resource rent tax (PRRT) established in the late 1980s to apply to new offshore
projects (Centre for International Corporate Tax Accountability and Research 2019).
The PRRT was revised in 2012 at the peak of the most recent mining boom to
apply to all oil and gas production including coal seam gas and shale oil and gas.
Where previously large resources companies, such as Shell and Chevron, failed
to pay PRRT in Australia despite earning billions of dollars, the 2010 Henry Tax
Review reinforced that the PRRT revenues are declining and the system fails to
capture an appropriate share of economic resource rents that major gas projects
deliver to their owners (Treasury Department 2010). When compared to Qatar’s
similar LNG export volumes, which collects over $25 billion in royalties alone,
Australia will collect nothing in PRRT from its booming offshore gas industry. A
review of the PRRT by The Australia Institute (2017: 4) called for Australia to learn
from the example of Norway where ‘the total tax on profits can approach 90% without
deterring investment’. They propose that the majority of the profits should be returned
via the PRRT to the people who own the resource with enough left for the project
to operate efficiently. Interestingly, The Australia Institute (2017: 6) recommends
that the current 40% PRRT should be increased to 70% on projects that have earned
double their costs.
Despite the above critiques, mining contributed 6–7% of GDP in 2016–17 making
it the fourth largest contributor to the national economy, and according to the Minerals
Council of Australia, the mining equipment, technology and services sector brings
this share of GDP to over 15% (Minerals Council of Australia n.d.). Mining is the
largest source of export revenue, representing 60% of total exports (Heath 2019).
Australia is the world’s largest exporter of iron ore, accounting for 53% of world trade
in 2018 (Department of Industry 2019), the largest exporter of metallurgical (54%)
coal (ibid) and lithium (44%) (Mayyas 2018) and second largest exporter of thermal
coal (20%) in the world. Significant investment has been made in mining of minerals
used in modern technologies such as electronics, renewable energy and electric vehi-
cles, particularly in Western Australia where minerals projects are increasingly value-
adding through further downstream processing. Taxes and royalties from mining are a
relentlessly debated topic in Australia, precisely because they provide a major source
of income for the national, state and territory governments in the contested context
of Native Title. Approximately $31 billion AUD in company taxes and royalties was
238 R. Spencer et al.

received in the 2017–2018 financial year (Minerals Council of Australia n.d.b). A

previous study from Deloitte Access Economics released in January 2018 showed
mining companies alone paid an effective tax rate of 51% in 2015–16 in company
tax and royalties (ibid).
Australia has a strong performing economy and is the only major economy in the
world to be entering its 28th year of continuous economic growth with no reces-
sion as at 2019 (ATIC 2020). According to the IMF (2018) between 2019 and
2023, the Australian economy is predicted to outperform every other major advanced
economy. Despite the size of the extractives and agriculture sectors, their exposure
to global commodity price volatility and the global financial crisis of 2007–2008,
growth has been inclusive and broad based. The Australian economy has proved
to be a resilient and diversified economy, highlighting that Australia is well placed
to responsibly and ethically manage its resource base for sustainable development
outcomes that all Australians will benefit from.

4 Sustainable Development Challenges and Opportunities

The broad and overarching goal of sustainable development is to achieve both intra-
generational and inter-generational equity (Hanley et al. 2007). This goal evokes
Brundtland’s now infamous definition of sustainable development from the World
Commission on Environment and Development report: to fulfil the needs of the
present generations, while ensuring future generations have the opportunity to fulfil
their needs. This is particularly relevant in resource rich countries such as Australia
where a large proportion of export receipts (whether directly or indirectly) are derived
from non-renewable resources often exposed to the volatility of commodity prices.
As further elaborated by Ashiem (2013; 2017), sustainable development is a require-
ment of our generation to manage the resource base such that the quality of life we
ensure ourselves can potentially be shared by all future generations. This chapter
recognises sustainable development as fundamentally an equity imperative rather
than an efficiency issue, as pointed out by Howarth and Norgaard (1993). This does
not suggest that efficiency is not a fundamental requisite to sustainable development,
but it is merely not a core focus for the purposes of this chapter.
In 2015, a gathering of world leaders convened at the United Nations in New York
to endorse the Sustainable Development Goals (SDGs) with the Secretary General
exclaiming that the SDGs and Agenda 2030 signal a ‘paradigm shift for people and
the planet’ (UN 2014: para. 24). This new agenda differs from the preceding Millen-
nium Development Goals in numerous ways; there is greater integration among
SDGs than the MDGs (Le Blanc 2015) with all countries being responsible for
progressing a pathway forward considering different national realities, capacities
and levels of development and respecting national policies and priorities. As well,
all sectors of society are responsible including businesses, governments and civil
society. The extractives sector arguably has particular strengths that can be brought
to bear on delivering the SDGs (Lucci 2012; Porter and Kramer 2011) whereby
Sovereign Wealth Funds and Impact Investing in Australia 239

cutting-edge technologies, big data and specialised skills underpin the competition
required to drive innovation and efficiency (Kramer 2014). The question for Australia
is whether the extractives sector will make a meaningful contribution to achieving
the SDGs or continue with ‘business as usual’ where we will see social, economic
and environmental winners and losers vis-à-vis the extractives sector.
The extractives industry is at the centre of modern industrial and post-industrial
societies. Since the mid-1990s, global mining companies have actively engaged in
shaping sustainability discourses, particularly in the lead up to the 2002 Johannes-
burg Summit (Danielson 2006). Typically, the extractives sector has been champi-
oned as leading investment, creating job opportunities and developing new economic
prospects. Now with the introduction of the SDGs, it is incumbent on the extractives
sector to be a ‘consciously engaged agent of development’ (Blowfield 2012: 415)
rather than simply contributing to economic growth.
Arguably, host governments face enormous economic pressure, both internation-
ally and nationally, to overexploit their resource base and keep up with growing global
consumer demands. Paradoxically many of the SDGs would not be reached without
the contribution of minerals, metals, oil and gas, which fuel manufacturing, create
jobs along supply chains (Mancinia and Sala 2018) and generate much needed capital
to drive sustainable development projects. Despite this, the extraction and processing
of raw minerals, metals, oil and gas generates social, economic and environmental
impacts that are often contradictory to the SGDs (Hickel 2019), particularly for
host communities in close proximity to the projects, and specifically for women in
mining and artisanal and small scale miners in developing countries. Despite the
extractives sector representing a large portion of exports and current accounts, the
majority of positive economic impacts from the extraction of these resources do not
flow equitably in host countries and/or communities who experience the lion’s share
of negative impacts.
The extractives sector is thus often criticised for its role in perpetuating inequality,
corruption and even violence (Spencer 2018), with critics ‘highlighting patterns of
continuity and the enduring legacy of extraction, exploitation and empire building’
(Gilberthorpe and Rajak 2017: 188). But, in the context of Agenda 2030, the extrac-
tives industry is increasingly recognised as important because of the capacity to ‘draw
on their global resources for community-based ‘sustainable’ development projects’
(Spencer 2018: 75). Exercising some caution obliges us to monitor that resource
companies do not simply adopt the discourse of sustainable development to signify
economic growth (where they bear no responsibility for development outcomes),
rather than to signify social equality and poverty reduction. Agenda 2030 explic-
itly shifts the logic from resource companies simply doing business in emerging
economies, to being far more intentional and instrumental, to doing development;
not just development, but sustainable development (Blowfield and Dolan 2014).
Sustainable development within the context of the extractives industry in Australia
can work to ensure economic and social benefits from the sector are broad-based
and inclusive, and environmental impact to the host communities and First Nations
people are minimised to their full extent.
240 R. Spencer et al.

In the context of planetary boundaries and tipping points (Rockström et al. 2009;
Steffen et al. 2015), the extractives sector unquestionably contributes to the spectre of
climate change impacts (Intergovernmental Panel on Climate Change 2018) through
the extraction and use of fossil fuels, which are increasingly conflictive in an era of
SDGs (Klein 2014; Luke 2017; Ritter 2018). We increasingly see sector specific codes
adopted by extractives companies to ensure mining activities have reduced impact
on environment and communities and lasting value for society, demonstrating that
the sector is a vocal proponent of sustainability in extractives (see the International
Council on Mining and Metals 2001, 2015). Indeed, in Australia the extractives
sector has made some progress towards improving environmental impact protocols
(Morrison-Saunders et al. 2015) and mine site rehabilitation (Gardner and Bell 2007),
and without doubt, the extractives sector could play a key role in energy transition
and climate initiatives like carbon sequestration, cleaner fuel, eliminating/reducing
flaring, etc. Nevertheless, with the SDG framework mandating the private sector
to contribute to achieving Agenda 2030, a key issue for extractives companies in
Australia is to advocate for the fair and equitable distribution of wealth emanating
from the SWFs in order to mitigate the resource curse.

5 Sovereign Wealth Funds as Impact Investors

The objective of sustainable development and the integrated nature of the global envi-
ronment and development challenges pose problems for institutions that were estab-
lished on the basis of narrow profit preoccupations. However, funding models can be
transformed or improved to sustainably finance a new era of sustainable development.
SWFs offer governments and ethical investors concerned with sustainable develop-
ment an opportunity to reframe solutions with regards to financing sustainable devel-
opment. SWFs can have a transformative impact on the development of Australia
in terms of how the wealth is redistributed equitably (World Bank 2015/2016). Like
SWFs, social impact investments are rapidly emerging and gaining traction globally
with an increasing recognition of the power of investment capital to address social
and environmental challenges. The Global Impact Investing Network’s Sizing the
Impact Investing Market 2019 report provides an in-depth analysis of the current
size and composition of the global impact investing market estimating its size at
$502 billion USD at the end of 2018. Meeting the SDGs imperative requires tril-
lions of dollars, and already we see a quarter of professionally managed assets now
embracing sustainability principles (USSIF 2018). Indeed there is great potential
for impact investing to intentionally progress sustainable social and environmental
development.
There are lessons to be gleaned from the SWFs of other countries, which could
have a bearing on the intentional social impact investing of Australia’s SWF. Norway,
for example, used its SWF to invest outside the country thereby protecting its currency
and market against so-called Dutch disease. Alternatively, SWFs could be invested
Sovereign Wealth Funds and Impact Investing in Australia 241

within Australia to develop key strategic areas of social development or environ-

mental conservation. In any case, regardless of whether SWFs are invested abroad
or domestically, impact investing requires that the SWF supports sustainable devel-
opment projects. In the Australian context, where the large portion of the SWFs
is derived from the extractives sector, there is a push from lobby groups for the
government to prioritise energy transition. When the Western Australia Environ-
mental Protection Authority recently recommended a carbon neutral proposal for
new or expanding projects to offset their emissions, oil and gas companies strongly
resisted attempts to enforce them to pay to limit the impact of their pollution. It’s a
familiar story where the Australian government claims it is serious about a climate
policy that accords with the Paris Agreement while vastly increasing its fossil fuel
sales to developing countries. This is where utilising Australia’s SWFs for impact
investing could lead to sustainable development outcomes from the extractives sector.
The World Bank investigated the relationship between SWF investments, economic
growth and long-term financing (Diallo et al. 2016) finding that the average GDP
growth rate positively correlates with SWF investments (Diallo et al. 2016: 8). This
suggests that countries receiving SWF investments grow faster, and these investments
positively affect economic growth, illustrating the transformative potential of SWFs
in sustainable development.
An emerging trend that responds to multiple SDGs is social impact investing.6
This is the notion that investors can pursue financial returns while also intention-
ally addressing social and environmental challenges (Bugg-Levine and Emerson
2011). Impact investing has also been described as actively placing capital in enter-
prises that generate social or environmental goods, services or ancillary benefits
with expected financial returns ranging from the highly concessionary to above
market (Brest and Born 2013). The overall simplicity of the definition can often
seem ominous to some mainstream investors who see social impact and sustainable
development as purely the role of government, aid and philanthropy. The intention is
to make social/environmental impact the primary qualifying criterion and motivation
is the presiding factor; investments that unintentionally result in social good are not
regarded as impact investments (Monitor Institute 2009). The idea that capital can
create blended value7 may seem like a dichotomy. All organisations, whether they
are for-profit or non-profit, create value that has economic, social or environmental
significance; however, failing to manage for blended value or developing an inten-
tional impact strategy, means business managers and investors miss opportunities to
capture their total value potential (Bugg-Levine and Emerson 2011).
SWFs have a dual mandate. On the front-end, they must invest surplus funds for
future generations and achieve the best rate of return relative to their strategic objec-
tive. On the back-end, they must distribute drawdowns equitably in a manner that has
the maximum socio-economic or environmental impact. Impact investing can address
both of these roles–capital can be used to secure financial and social/environmental

6 Social impact implies the inclusion of social, environmental and economic impact in its meaning.
7 Blended value is the recognition that capital, community, and commerce can create more together

than the sum of the three independently. See Bugg-Levine & Emerson (2011).
242 R. Spencer et al.

returns simultaneously at the front-end, while being used to distribute funds equi-
tably at the back-end. For the Australian context, we focus here on the front-end
and discuss how SWFs can structure strategic development funds as impact invest-
ment vehicles to seek out both financial and social impact dividends. It is not to say
the distribution of funds is any less important; however, given the maturity stage of
SWFs and impact investing in Australia, the investment mandate is our main focus
(Monitor Institute 2009: 12).
Impact investors place capital across all asset classes, including private equity,
debt, working capital lines of credit, soft loans, loan guarantees, fixed income and
real estate. In addition to this, impact investing has various financing innovations,
namely social impact bonds (or development bonds), and pays for entrepreneur-
ship (World Bank 2015/2016). The generally accepted rate of return varies among
investors; however, market-rate return is the expectation. Growth in impact investing
has predominantly been fuelled by:
• prominent family offices looking for large-scale innovative opportunities to social
problems,
• clients of private banks needing more investment options than traditional
investments or philanthropy,
• private equity funds looking to provide growth capital to business with social
environmental solutions,
• mutual funds who dedicate a portion of their funds to emerging companies with
social and environmental solutions,
• pension funds and sovereign wealth funds wanting to diversify their funds,
• corporations who want to materially improve people’s lives, and governments
investing in funds that support economic development (Monitor Institute 2009).
SWFs have a significant role to play in the growth of the impact investment
market globally and in particular in Australia. Despite being at an embryonic stage
in Australia, impact investing is increasingly being used by countries to deliver
aid programmes and achieve development policy outcomes, like reducing poverty
(Commonwealth of Australia 2017). The overall investment mandate for SWFs is
closely aligned to the mandate of impact investing. As investors of social and envi-
ronmental progress, strategic capital partnerships between the private institutional
impact investors and SWFs, could be transformative.
Thus far, both private and public investors involved in impact investing agree that
financial and sustainable development returns can go hand-in-hand (OECD 2019) and
that impact investing offers a unique opportunity to leverage private capital at a large
scale to achieve sustainable development. Despite the fact that impact investors have
a common vision of balancing financial with social/environmental returns, their rate-
of-return expectations can still conflict and therefore these investors are categorised
into two broad groups. The Monitor Institute, in their Investing for Social and Envi-
ronmental Impact report, defines these two broad groups as: financial first investors
who seek to optimise financial returns with a floor for social/environmental impact.
This group tends to consist of commercial investors who search for investment vehi-
cles that offer market-rate returns while yielding some social/environmental good.
Sovereign Wealth Funds and Impact Investing in Australia 243

The second group are defined as impact first investors who seek to optimise social
or environmental returns with a financial floor. This group uses social/environmental
good as a primary objective and may accept a range of returns, from return of prin-
cipal to market rate. This group is willing to accept a lower than market rate of
return on investments that may be perceived as higher risk in order to help reach
social/environmental goals that cannot be achieved in combination with market rates
of financial return.
There are several ways to invest capital as an impact investor (e.g. traditional
investments like public equities and hedge funds or social impact investments like
special bonds and aid development). However, given the maturity stage of the impact
investment market and SWFs, social impact bonds (SIBs) or development bonds
(DBs), are an asset class that could potentially play a strategic role in driving the
impact investment market in economies of the Global South. SIBs or DBs are pay-for-
success instruments (OECD 2019) that not only allow investors and governments to
share risk, but the leverage lender (which is usually government, but not always) only
pays for successful outcomes and investors receive a coupon at a premium, usually
above market rate8 when outcomes are met by the operator or service provider. SIBs
or DBs allow governments to test innovative solutions for sustainable development
while sharing the risk with private investors. In the context of the SWF as an investor
(and not the leverage lender),9 the investment model for SIBs/DBs where the SWF
is a sole or co-investor means SWFs can play a more active and even riskier role
as an investor rather than just a leverage lender. However, in this case, a SWF must
consider not only the risks associated for its ‘shareholders’ but also the SIBs/DBs
goals, thereby providing a more balanced approach than a traditional investor seeking
profits as their main goal.
Underpinning the 17 SDGs is the need for sustainable financing to drive each SDG.
Goal 17 (revitalise the global partnership for sustainable development) addresses the
need to improve financial resources available to drive sustainable development. In
particular, the SDG targets 17.1, 17.3, 17.6 and 17.17 (UN n.d.). call for a need to
strengthen domestic resource mobilisation, the mobilisation of additional financial
resources from multiple sources, global multi-stakeholder partnerships for sustain-
able development that mobilise financial resources to support the achievement of
the SDGs in all countries, and encourage effective public-private and civil society
partnerships (UN n.d.b). Impact investing is one pathway to bridge this gap, partic-
ularly in relation to enhancing public–private partnerships in the mobilisation of a
diverse suite of financial resources. By leveraging the private sector, these invest-
ments can provide sustainable development solutions at a scale that philanthropy, aid
or traditional business interventions usually cannot reach (OECD 2019).
In Australia, impact investing is at a critical phase in its market adoption. It has
transitioned from uncoordinated innovation to market building (Monitor Institute

8 Coupon rates are determined by considering the potential savings that government would receive
as a result of the successful outcomes.
9 SWFs could also be leverage lenders (or the outcome funder), at which point they will no longer

be investing, but distributing funds.

244 R. Spencer et al.

2009). During this market building phase, impact investors have shifted from activist
investors to mainstream investors, social businesses have improved their business
models, and there has been a general improvement in impact measurement practices.
In Australia, the impact investment market has somewhat matured, and there have
been five SIBs launched in several states (Western Australia, New South Wales and
Victoria) (SWFI 2020b). These SIBs were launched without the involvement of any
SWFs but have been a collaboration between state governments and institutional
investors such as private banks, major philanthropists and corporations. Integration
of SWFs as major investors and drivers of market maturity is critical. Increasingly,
investors are looking for the best ways to achieve financial return and impact and are
eager to source deals in diverse settings.
General practice is that SWFs establish several vehicles that have distinct strate-
gies and objectives. In order to integrate impact investing into the investment strate-
gies of Australia’s SWFs, a specific impact investing development fund would need
to be established. Depending on the goals and objective of that fund, the SWF investor
could seek financing partners from other impact investors. Each partnership would
decide the investment motivation; profit first or impact first. Ultimately, motivation
will play a role in determining the types of investments each investor will consider
regardless of the asset class or geography in which they choose to invest. Given the
market stage of impact investing globally and in Australia, the government needs to
initially see itself as a key market enabler and stimulator and invest in building and
developing a coordinated impact investment ecosystem.
The Australian Government highlights the main principles that it considers
essential to implement social impact investments (Treasury Department n.d.):
1. Government as market enabler and developer
2. Value for money
3. Robust outcomes-based measurement and evaluation
4. Fair sharing of risk and return
5. Outcomes that align with the Australian government’s policy priorities
6. Co-design.
These principles are somewhat self-explanatory; however, what’s important is that
they should not be seen in isolation. Rather these principles form a coordinated impact
investment ecosystem in which the government enables and facilitates a holistic
approach between diverse governmental authorities, private sector investors and civil
society in order to achieve such principles. Questions concerning these principles
might include what are the government priorities? How to fairly distribute wealth
from the investments across different regions of such a geographically large country?
What are the criteria to determine the value for money? Is there enough human capital
to attend to demand for the desired areas of investments? Are goals short-, mid-
or long-term? The answers to these questions might be complex but necessitate a
transparent and open debate, otherwise it will be difficult to provide accountability to
verify whether the SWF performance is consistent with its goals and the prescribed
Australian government principles.
Sovereign Wealth Funds and Impact Investing in Australia 245

While SIBs are suggested as a potential strategic entry point for SWFs into impact
investing, the Australian Government’s Treasury Department report on social impact
investing noted that social impact investing is not suitable for funding every service or
programme; it merely provides an opportunity to address problems where existing
policy interventions and service delivery are not achieving the desired outcomes
(Commonwealth of Australia 2017). Determining where these opportunities exist is
a fundamental action towards deciding which areas of development social impact
investing might have the most leverage to deliver better sustainable development
outcomes for Australia’s SWFs. This section of the chapter has delved into social
impact investment as a central function for how Australia’s SWFs manage their
resource wealth for sustainable development outcomes of such investments.

6 Conclusion

Sovereign wealth funds can play an essential role in assisting resource-rich countries
to protect against volatility of commodity prices as well as save valuable resources
for future generations. Australia provides an example of a resource-rich nation that
has historically lacked vision and planning on how to manage its natural resources
wealth. Although Australia has extracted natural resources (especially via mining)
for over a century, it took decades to develop a SWF. However, it is never too late to
review such decisions, and fortunately, Australia and one of its key resource states
(Western Australia) have developed such financial mechanisms as they move into
what may be another resources boom.
Australia faces serious challenges with its extractives sector if it is to strike a
balance between its climate commitments to the Paris Agreement, its recognition
of its Indigenous people via Native Title and in the Constitution, and managing its
sovereign wealth funds responsibly and equitably. We have suggested one pathway,
social impact investing, for how Australia might harness the wealth from its natural
resources to sustainably finance a new era of sustainable development as seen in
other nations that have cultivated sovereign wealth success.

References

Asheim, G.B. (2017). Sustainable Growth. Social Choice Welfare, 49, 825–848.
Asheim, G.B. (2013). Hartwick’s rule. In J. Shogren (Ed.), Encyclopedia of Energy, Natural
Resource and Environmental Economics (Vol. 2, pp. 314–320). Amsterdam: Elsevier.
Australia Institute, The. (2017). Review of the Petroleum Resource Rent Tax, Canberra. https://
treasury.gov.au/sites/default/files/2019-03/R2016-001_The-Australia-Institute.pdf. Accessed 3
March 2020.
Australian Parliament. (2012). Western Australian Future Fund Bill 2012: Explanatory Memo-
randum. Online at http://www.parliament.wa.gov.au/parliament/bills.nsf/6B335AD31398DA1
748257A5B00181391/%24File/EM%2B300-2.pdf. Accessed August 2019.
246 R. Spencer et al.

ATIC. (2020). “Why Australia.” Australian Trade and Investment Commission. Online at: https://
www.austrade.gov.au/International/Invest/Why-Australia/robust-economy. Accessed 26 March
2020.
Blowfield, M. (2012). Business and development: making sense of business as a development agent.
Corporate Governance, 12(4), 414–426.
Blowfield, M., & Dolan, C. (2014). Business as a Development Agent: Evidence of possibility and
improbability. Third World Quarterly, 35(1), 22–42.
Bortolotti, B., Fotak, V., & Megginson, W. L. (2015). The Rise of Sovereign Wealth Funds: Defi-
nition, Organization, and Governance. In Stefano Caselli, Guido Corbetta, & Veronica Vecchi
(Eds.), Public Private Partnerships for Infrastructure and Business Development (pp. 296–318).
New York: Palgrave MacMillan.
Brest, P., & Born, K. (2013). Unpacking the Impact in Impact Investing, Stanford Social Innovation
Review, Fall 2013: Leland Stanford Jr. California: University.
Bugg-Levine, A., & Emerson, J. (2011). Impact Investing: Transforming How We Make Money
while Making a Difference, Innovations: Technology. Governance, Globalization, 6(3), 9–18.
Centre for International Corporate (2019) Tax Accountability and Research, Submission of the
Centre for International Corporate Tax Accountability & Research (CICTAR) on the Treasury
Laws Amendment (Petroleum Resource Rent Tax Reforms No. 1) Bill 2019 https://treasury.gov.
au/sites/default/files/2019-04/t344421-centre_for_international_corproate.pdf.
Commonwealth of Australia. (2017). Social Impact Investing: Discussion Paper. Australian
Government: Canberra.
Danielson, L. (2006). Architecture for Change: an Account of the Mining. Berlin: Minerals and
Sustainable Development Project, Global Public Policy Institute.
Department of Industry. (2019). Australian Government, Department of Industry, Innova-
tion and Science. Office of the Chief Economist. Resources and Energy Quarterly, June
2019. Online at https://publications.industry.gov.au/publications/resourcesandenergyquarterly
june2019/documents/Resources-and-Energy-Quarterly-June-2019-Iron-Ore.pdf.
Diallo, B., Tchana Tchana, F., & Zeufack, A.G. (2016). Sovereign wealth funds and long-term
investments in Sub-Saharan Africa (English). Policy Research Working Paper; no. WPS 7903.
Washington, D.C.: World Bank Group.
Fernyhough, J. (2015). How Australia Squandered the mining boom. Online at https://thenewdaily.
com.au/finance/finance-news/2015/01/15/australia-squandered-mining-boom/.
Gardner, J. H., & Bell, D. T. (2007). Bauxite mining restoration by Alcoa World Alumina Australia in
Western Australia: Social, Political, historical, and environmental contexts. Restoration Ecology,
15(s4), S3–S10.
Giannacopoulos, M. (2019). Blood money: Why mining giants are backing an Indigenous voice to
parliament’, Opinion, ABC Religion & Ethics, Posted Fri 15 Feb 2019, 10:17am Updated Thu
30 May 2019, 8:50am. https://www.abc.net.au/religion/why-mining-giants-are-backing-an-ind
igenous-voice-to-parliament/10815008. Accessed 7 Mar 2020.
Gilberthorpe, E. & Rajak, D. (2017). The Anthropology of Extraction: Critical Perspectives on the
Resource Curse, The Journal of Development Studies, 53(2), 186–204.
Hanley, N., Shogren, J. F., & White, B. (2007). Environmental Economics in Theory and Practice.
UK: Red Globe Press.
Heath, A. (2019). Address to the association of mining and exploration companies, Perth. 5 June.
Online at https://www.rba.gov.au/speeches/2019/pdf/sp-so-2019-06-05.pdf.
Hickel, J. (2019). The contradiction of the sustainable development goals: Growth versus ecology
on a finite planet. Sustainable Development, pp. 1–12.
Howarth, R.B., & Norgaard, R.B. (1993). Intergenerational transfers and the social discount rate.
Environ Resource Econ, 3, 337–358.
Intergovernmental Panel on Climate Change. (2018). Global warming of 1.5°C. An IPCC Special
Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global
greenhouse gas emission pathways, in the context of strengthening the global response to the
Sovereign Wealth Funds and Impact Investing in Australia 247

threat of climate change, sustainable development, and efforts to eradicate poverty. Geneva,
Switzerland: IPCC.
International Council on Mining and Metals. (2001). Sustainable Development Framework: ICMM
Principles. London: ICMM.
International Council on Mining and Metals. (2015). Sustainable Development Framework: ICMM
Principles. London: ICMM.
International Monetary Fund. (2018). World Economic Outlook April 2018: Cyclical Upswing.
Structural Change, Washington: International Monetary Fund, Publication Services.
IWG (International Working Group of Sovereign Wealth Funds). (2008). Sovereign Wealth Funds:
Generally Accepted Principles and Practices—“Santiago Principles” (Washington). http://www.
iwg-swf.org/pubs/eng/santiagoprinciples.pdf. Accessed 4 Mar 2020.
Karametaxas, X. (2017). Sovereign wealth funds as socially responsible investors. In: Adinolfi
G., Baetens F., Caiado J., Lupone A., Micara A. (Eds.) International Economic Law, Springer.
pp. 271–288.
Klein, N. (2014). This Changes Everything. New York: Simon & Schuster.
Kramer, M. (2014). Profit: The new corporate motivation to do good. https://sharedvalue.org/gro
ups/profit-new-corporate-motivation-do-good. Accessed 4 Mar 2020.
Le Blanc, D. (2015). Towards integration at last? The Sustainable Development Goals as a network
of targets. Sustainable Development, 23, 176–187.
Lucci, P. (2012). Post-2015 MDGs: What Role for Business?. London: ODI.
Luke, H. (2017). Social resistance to coal seam gas development in the Northern Rivers region of
Eastern Australia: Proposing a diamond model of social license to operate. Land Use Policy, 69,
266–280.
Mancinia, L., & Sala, S. (2018). Social impact assessment in the mining sector: Review and
comparison of indicators frameworks. Resources Policy, 57, 98–111.
Mayyas, A. (2018). Are there enough materials to cover li-ion batteries?. Clean Energy Manufac-
turing Analysis Center August 15. Online at https://www.manufacturingcleanenergy.org/blog-
20180815.html. Accessed 26 Mar 2020.
Minerals Council of Australia. (n.d.). Driving Prosperity. Online at https://minerals.org.au/driving-
prosperity. Accessed 26 March 2020.
Minerals Council of Australia. (n.d.). Taxation. Online at https://minerals.org.au/taxation. Accessed
26 Mar 2020.
Institute, Monitor. (2009). Investing for social and environmental impact: A design for catalysing
and emerging industry. USA: Global Impact Investing Network.
Morrison-Saunders, A., Bond, A., Pope, J., & Retief, F. (2015). Demonstrating the benefits of impact
assessment for proponents. Impact Assessment and Project Appraisal, 33(2), 108–115.
OECD. (2007). OECD Economic Outlook, 82, December.
OECD. (2019). Social impact investment 2019: The impact imperative for sustainable development.
Paris: OECD Publishing.
Porter, M.E., & Kramer M.R. (2011). The big idea: creating shared value. how to reinvent capi-
talism—and unleash a wave of innovation and growth. Harvard Business Review, 89(1/2),
62–78.
PWC. (2018). PWC Australia Africa practice report ‘battle of the taxes who comes out on top:
Australia and Africa compared. Online at https://www.pwc.com.au/industry/energy-utilities-min
ing/africa-practice/assets/battle-of-the-taxes-australia-and-africa-compared-2018.pdf.
Ritter, D. (2018). The coal truth: The fight to stop Adani, defeat the big polluters and reclaim our
democracy. Perth: University of Western Australia Press.
Rockström, J., Steffen, W., Noone, K., et al. (2009). Planetary boundaries: Exploring the safe
operating space for humanity. Ecology and Society, 14(2), 32.
Rozanov, A. (2005). Who holds the wealth of nations? International Journal of Central Banking,
15(4), 52–57.
248 R. Spencer et al.

Sovereign Wealth Fund Institute. (2020a). Top 89 largest sovereign wealth fund rankings by
total assets. https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund. Accessed 5 Mar
2020.
Sovereign Wealth Fund Institute. (2020b). List of sovereign wealth fund profiles in Australia and
Pacific. Online at: https://www.swfinstitute.org/profiles/sovereign-wealth-fund/australia-and-pac
ific. Accessed 24 Mar 2020.
Spencer, R. (2018). Corporate social responsibility as sustainable development: a critical anthro-
pology of development perspective. In M. Brueckner, R. Spencer, & M. Paull (Eds.), Disciplining
the Undisciplined: perspectives on responsible citizenship, corporate social responsibility and
sustainability. UK: Springer.
Steffen, W., Richardson, K., & Rockström, J. (2015). Planetary boundaries: guiding human
development on a changing planet. Science, 347, 6223.
Szatow T. (2020). Australia needs a sovereign wealth fund like Norway for the next boom—
electrification. Online at https://www.michaelwest.com.au/australia-needs-a-sovereign-wealth-
fund-like-norway-for-the-next-boom-electrification/. Accessed 6 Mar 2020.
Treasury Department. (2010). Australia’s future tax system review final report (2010). Online
at https://treasury.gov.au/review/the-australias-future-tax-system-review/final-report. Accessed 9
Mar 2020.
Treasury Department. (n.d.). Australian Government principles for social impact investing.
Online at https://treasury.gov.au/programs-initiatives-consumers-community/social-impact-inv
esting/australian-government-principles-for-social-impact-investing. Accessed 24 Mar 2020.
United Nations (UN). (2014). The Road to Dignity by 2030: Ending Poverty, Transforming All Lives
and Protecting the Planet. Synthesis Report of the Secretary-General on the Post-2015 Agenda.
New York. http://www.un.org/ga/search/view_doc.asp?symbol=A/69/700&Lang=E. Accessed 4
Mar 2020.
UN. (n.d.). Goal 17: Revitalize the global partnership for sustainable development. Sustainable
Development Goals. Online at https://www.un.org/sustainabledevelopment/globalpartnerships/.
Accessed 24 Mar 2020.
UN. (n.d.). #Envision2030 Goal 17: Partnerships for the Goals. UN Department of Economic and
Social Affairs Disability. Online at https://www.un.org/development/desa/disabilities/envision2
030-goal17.html. Accessed 21 Mar 2020.
UNFCC. (2020). Paris Agreement. Online at https://unfccc.int/process-and-meetings/the-paris-agr
eement/the-paris-agreement. Accessed 16 March 2020.
United States Social Impact Foundation (USSIF). (2018). Report on US Sustainable, Responsible
and Impact Investing Trends 2018, Washington. https://www.ussif.org/files/Trends/Trends%202
018%20executive%20summary%20FINAL.pdf. Accessed 23 March 2020.
World Bank. (2015/2016). Long-Term Finance. Global Financial Development Report,
Online at: http://documents.worldbank.org/curated/en/955811467986333727/pdf/99100-PUB-
REVISED-Box393195B-OUO-9-until-9-14-15.pdf. Accessed 24 Mar 2020.
World Economic Forum. (2017). What is a sovereign wealth fund. https://www.weforum.org/age
nda/2017/10/what-you-need-to-know-about-sovereign-wealth-funds/. Accessed 4 Mar 2020.
Norway’s Sovereign Wealth Fund

Jonathon W. Moses

Abstract Norway’s sovereign wealth fund (SWF), the Government Pension Fund
Global (GPFG), has become the largest in the world. But size is not the most unique or
interesting feature of Norway’s petroleum fund. This contribution describes how the
Norwegian authorities took their time before committing to a SWF, deciding instead
to spend the country’s first oil revenues on developing its welfare state and paying
down its debts. Once established, the GPFG developed several unique characteristics.
What is perhaps most remarkable about the GPFG is the way that its funds can (and
cannot) be accessed by political officials. In this way, the GPFG plays an important
role in protecting the Norwegian economy from some of the curses we often associate
with resource wealth. Finally, this contribution examines the unique way in which
Norway manages the GPFG, by including strong political and ethical components
when determining where it will place its investments.

Keywords Norway · Sovereign wealth funds (SWF) · Government Pension Fund

Global (GPFG) · Petroleum fund

Norway’s sovereign wealth fund (SWF), The Government Pension Fund Global
(GPFG), is the largest in the world. In 2017, the value of the GPFG tipped over the
$1 trillion USD threshold, and it shows little sign of slowing down. Given Norway’s
relatively small size (population, ca. 5.1 million people), the GPFG corresponds to
roughly $200,000 USD for every Norwegian citizen.
The success of this fund has won it admirers from around the world, and it has
become increasingly common for young oil states to establish a petroleum fund,
in hopes of following Norway’s example. This example is often misunderstood, as
Norway itself did not rush to establish a petroleum fund, and that the most remarkable

This contribution draws heavily from my book with Bjørn Letnes. See Moses and Letnes (2017a).

J. W. Moses (B)
Department of Sociology and Political Science, Norwegian University of Science and
Technology, Trondheim, Norway
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 249
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_13
250 J. W. Moses

component of the GPFG is not its size, nor its make-up, but the way it can (and cannot)
be accessed by elected officials.
For these reasons, this contribution aims to provide some nuance to the Norwegian
example. It does so by describing three of the more unique and admired components
of the Norwegian fund: how Norway postponed the creation of its petroleum fund,
spending the money instead on pressing political needs; how the GPFG is used to
buffer the national economy from volatile prices and the threat of Dutch Disease;
and how the fund provides political leadership to the global investment community
by being managed in an ethical and socially responsible manner.

1 The Birth of a Petroleum Fund

Norway first discovered oil, in its impressive Ekofisk field, at the end of 1969. Produc-
tion began soon thereafter, in 1971. Throughout the 1970s, the level of oil (and eventu-
ally gas) production increased gradually, and this increase continued over subsequent
decades, as seen in Fig. 1. Today Norway is the third largest exporter of natural gas
in the world and supplies about 25% of the EU’s demand (NPD 2019a).
It is not by accident that Norway was developing its productive petroleum capacity
at the very time the global price of oil shot through the roof, in a decade characterized
by “oil crises”. The North Sea was developed because it offered political stability,
when the Middle East was in crisis (even if the weather and production conditions
were anything but stable). Consequently, Norway’s oil activities generated substantial
economic rewards throughout this period. With all this oil money pouring into the
country, it is noteworthy that Norway did not immediately begin to invest its money in
a sovereign wealth fund. For the first 25 years of Norwegian oil production, Norway’s

300

250
Million SM3 Oil Equivalents

200

150

100

50

0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

Oil Consensate NGL Gas

Fig. 1 Norwegian production figures, 1971–2018. Source NPD (2019b)

Norway’s Sovereign Wealth Fund 251

9000 300
8000
250
7000
6000 200
Billions NOK

%of GDP
5000
150
4000
3000 100
2000
50
1000
0 0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Market Value % of GDP

Fig. 2 GPFG, 1996–2017. Source NPD (2018)

oil income was being consumed just as rapidly as it was being produced. As seen
in Fig. 2, the first instalments to what we now call the GPFG began in 1996, nearly
three decades after the initial North Sea discoveries. Once established, however, the
size of the Fund increased steadily and significantly over the subsequent years, along
with the production figures seen in Fig. 1, to become eventually the global leader
that it is today.
This temporal gap—between the wealth coming in, and the Norwegian govern-
ment’s willingness to invest it in a petroleum fund—can be explained by Norway’s
longstanding and growing debt at the time. Recognizing the enormous economic
promise latent in its proven petroleum reserves, the Norwegian government borrowed
substantially throughout the 1970s. These loans were used to prepare the country for
its subsequent management of that resource (e.g. developing professional and tech-
nical competencies) and to ensure that the Norwegian population would benefit from
this increased wealth (by investing in welfare and infrastructure). In other words,
Norway used its early oil money to develop the national economy: to pay off its
existing debts, encourage local development and growth, and to improve the basic
welfare of its population. It was only after these basic necessities were secured,
and when the country began to worry more about the inflationary consequences of
increased spending, that a petroleum fund was introduced.
This is not to say that Norwegian officials were unaware of the macroeconomic
threat from its new-found oil. Developing an oil-based economy is as much a curse
as it is a blessing (Karl 1997; Ross 1999). Already in the early 1970s, there was a
growing awareness of the threat that oil revenues could have on the competitiveness
of Norway’s tradeables sector. Today we refer to this threat with reference to Dutch
252 J. W. Moses

Disease1 : that too much money, entering too quickly into the domestic economy,
cannot be utilized effectively. When this happens, the result is inflation, an appre-
ciation of the national currency, and falling levels of international (price) competi-
tiveness. Worse still, the volatility of global oil prices makes oil a very poor leg for
any economy to stand (or rely) upon. Should a country come to rely too heavily on
this price-volatile commodity, it will find it quite difficult to sustain an alternative or
complementary export sector. An abundance of oil money can fuel an appreciation
of the country’s currency, which makes it tempting (and cheaper) to rely on imports,
and increasingly difficult (more expensive) to maintain (price) competitiveness in
the export sector. As a result, the economy becomes even more dependent on this
volatile commodity market (see, e.g., Moses and Letnes 2017a: Chap. 7).
There were also domestic political concerns that needed to be addressed in
Norway, as officials in the Finance Department were concerned that the existence of
a petroleum fund might undercut the Finance Minister’s position of power—funding
political measures through channels that existed outside the normal budgetary
routines (Lie 2010: 345). All too often, sovereign wealth funds offer an easy and
alternative source of funding for those looking to avoid constitutional or political
constraints on political authority. This additional pile of money constitutes a problem
in that it can reduce government transparency and accountability. Norway’s unique
institutional response to these concerns is described below.
In 1973, a Norwegian government white paper explicitly recognized that control-
ling the cost and pace of adjustment to the new oil wealth was one of the most
important issues facing the country (St. meld. nr.25 (1973–74), pp. 6–7). To address
that challenge, the government established what became known as the “Pace Commit-
tee”, under the leadership of Hermod Skånland—subsequently governor of Norway’s
central bank (NOU 1983: 27). The name of this committee is derived from its conclu-
sion: the committee recognized that the easiest and most realistic way to avoid the
inflationary consequences of increased oil revenues was to decrease the pace of
petroleum activities in Norway.
The Pace Committee entertained the possibility of creating a petroleum fund
(what they called a “buffer fund”), invested off shore, but they were (rightly) scep-
tical that politicians would be able to keep their hands off this fund.2 Although it made
economic sense, the committee doubted the political realism of a fund. Indeed, coun-
tries with a significant need for capital investment or those that suffer from corruption
might do more harm than good in establishing an offshore investment fund. It is for
these reasons that the Pace Committee concluded it was better to maintain interna-
tional competitiveness by reducing the country’s pace of resource extraction, rather
than developing a sovereign wealth fund. Reducing the pace of production was still

1 The Economist news magazine first coined this term in 1977. See Economist (1977).
2 It should be noted that this was not the first time that the idea of a fund was publicly entertained in

Norway. Already in the mid 1960s, when Norway was establishing its sovereign claim of the Norwe-
gian continental shelf, the Norwegian Prime Minister, Einar Gerhardsen, spoke of the potential for
a Norwegian oil fund (NBIM n.d.).
Norway’s Sovereign Wealth Fund 253

possible at a time when the oil industry remained nascent in Norway.3 Over time,
as the industry grew in size and political power, it has become increasingly difficult
(and politically unrealistic) to argue for a decreased pace of extraction.
It was not before 1990, almost a decade later, that the Norwegian government
adopted its Act on the Government Petroleum Fund (Act of 22 June 1990, No. 36).
This Act created “The Government Petroleum Fund”, but its name was changed in
2006 to the “Government Pension Fund Global” (GPFG).4 Despite the subsequent
name change, the GPFG is not (and has never been) formally linked to the Norwegian
pension system, nor does it include any pension liabilities. The initial motivation for
the fund was to establish a pile of savings that could help Norway transition to a
post-oil economy once the petroleum ran dry. To date, there has been no explicit
political decision as to how the money in the fund might be used in the future; the
reference to pensions was simply a convenient way for politicians to secure broad
political support for the fund.
Although it was created in 1990, the first transfer of funds to the Government
Petroleum Fund did not occur until 1996 (as we saw in Fig. 2). Since that first, some-
what tardy, deposit, the GPFG has grown beyond the wildest dreams of its original
creators. Today, as shown in Table 1, the GPFG is the largest sovereign wealth fund
in the world, with investments spread around the world and across a varied portfolio
that includes equity (roughly 67%), fixed-income (roughly 30%) and real estate
investments (roughly 3%) (NBIM 2018). The manner by which these investment
decisions are made is described in more detail below. But the end result is that the
GPFG owns shares in more than 9000 companies, invested in 72 different countries
around the globe, on behalf of the Norwegian people (NBIM 2017a). Calculated in
another way, Norwegians—who constitute less than one-thousandth of the world’s
population—own roughly 1.3% of the world’s listed companies (Moses and Letnes
2017a: 135).
The Norwegian experience offers a remarkable Cinderella story. Like many young
oil nations, Norway faced a long list of pressing economic and social needs when it
first found oil. It is not surprising, then, that the country decided to spend its early
oil money to develop Norwegian society and to pay off its sundry debts. It was only
later, when these basic needs were satisfied, and increased petroleum revenues risked
inflation and appreciation, that Norway diverted this money to an offshore fund.
This should be the lesson learnt from the Norwegian experience: it is not the
existence or size of its sovereign wealth fund that matters, but that it was introduced

3 Other countries could benefit from following Norway’s example, but they will find it difficult to
ignore intense political pressures to develop the resource as quickly as possible.
4 It is important to recognize that the Norwegian government has another fund, with a similar name:

The Government Pension Fund Norway (GPFN), which should not be confused with the GPFG.
Established in 1967, the GPFN is much smaller and functions as a sort of national insurance fund. The
GPFN is managed separately from the GPFG, by Folketrygfondet (the National Insurance Scheme
Fund), and its investments are limited to domestic and Scandinavian investments—making it a key
stock holder in many large Norwegian companies, predominantly via the Oslo Stock Exchange.
By the middle of 2018 (Q2), the market value of the GPFN was 250bn NOK, while the GPFG (by
contrast) was worth 8337 bn NOK. See Norwegian Government (2018a, b).
254 J. W. Moses

Table 1 Largest SWFs by assets under management

Country Name Assets Origin
1 Norway Government pension fund, global 1074.6 Oil
2 China China investment corporation 941.4 Non-Commodity
3 UAE-Abu Dhabi Abu Dhabi investment authority 683 Oil
4 Kuwait Kuwait investment authority 592 Oil
5 China-Hong Kong Hong Kong monetary authority 522.6 Non-Commodity
investment portfolio
6 Saudi Arabia SAMA foreign holdings 515.6 Oil
7 China SAFE investment company 441 Non-Commodity
8 Singapore Government of Singapore 390 Non-Commodity
investment corporation
9 Singapore Temasek holdings 375 Non-Commodity
10 Saudi Arabia Public investment fund 360 Oil
Source SWFI (2018)
Note Assets listed in Billions USD

after basic needs were satisfied, and in order to protect its economy from becoming
over-reliant on a very volatile commodity market. Developing countries should also
be allowed to use their oil wealth to grow their national capacities, before investing
the money offshore; but these domestic investments need to be done in a way that
does not undermine the country’s international competitiveness. In short, much of
the magic of Norway’s petroleum fund does not lie in the GPFG itself, or in its
impressive size, but in how the Fund is accessed by elected officials. It is to this
component that we now turn.

2 Accessing the Fund

One reason for global interest in the GPFG is its very size. Another reason, perhaps
a more important one, is the success that the fund has brought to political authorities
in protecting the Norwegian economy from Dutch Disease. While the Norwegian
economy remains dependent on oil and gas, the government works hard to ensure
that the Norwegian price level and alternative export sectors (such as fish) remain
internationally competitive. Norway’s capacity to avoid Dutch Disease has less to
do with the existence of a fund, and more with the way the GPFG is integrated into
Norway’s system of public financing.
The money found in most sovereign wealth funds is the result of government
budget surpluses. This means that the government receives its “oil money”, decides
how to spend it, and then invests whatever remains in the sovereign wealth fund.
Not only does this approach facilitate wasteful spending, as it is tempting to use
more of this money than may be prudent, but the approach can be destabilizing as
Norway’s Sovereign Wealth Fund 255

well. As the price of oil will vary substantially from year to year, letting it flood into
the government’s budget introduces a great deal of uncertainty and volatility in an
important source of government financing.
In Norway, the temptation for the government to spend its oil money is reduced by
the fact that its “oil money” goes directly to the GPFG (offshore), and the government
budget is only granted an annual share of the expected return from that Fund. This
allows Norwegian governments a steady income stream over time (de-linked from the
volatile price of oil), and it ensures that the wealth generated from oil is not allowed
to flood the domestic economy, generating inflation, an appreciation of the currency,
and threatening the international competitiveness of the country’s exposed sector. In
effect, the government follows something akin to Hartwick’s (1977) Rule, where the
resource owner (here the Norwegian State) is encouraged to invest (immediately) the
resource rents in reproducible capital, goods or assets, and to spend only the returns
from these investments to sustain consumption.

2.1 A Rule of Thumb

This need to limit access to the Fund was already recognized by the 1982 Pace
Committee, introduced in the previous section. When discussing their (“buffer”) fund
option, the committee explicitly recognized the need for a budgetary rule, or rule of
thumb (handlingsregel), to ensure that the rate at which the oil money entered the
Norwegian economy would be both consistent (stable) and economically prudent.
While the caveat was clear, the particular details of this rule of thumb were not
established until 2001, when the Finance Ministry published a white paper (St. meld.
nr. 29 (2000–2001)).
In short, the Norwegian budgetary rule has two main components, each of which
is informally constituted, largely by way of Norway’s consensual and democratic
norms. The first component concerns how the GPFG’s money is to be spent. When
the Norwegian parliament agreed to this rule of thumb, it emphasized that the money
generated should be aimed at measures that could increase productivity, and with it
the rate of economic growth, in the rest of the economy. In practice, however, it has
proven impossible to trace how this money is being spent, in that the money from
the GPFG (via the budgetary rule) is not earmarked for particular activities: it is (in
effect) lost when mixed together with the rest of the general budget.
The second, and perhaps the most important, component concerns the amount of
money that can be channelled back into the government’s budget. The government’s
white paper noted that this return should be determined by the expected real rate
of return from the fund (St. meld. nr. 29 (2000–2001), p. 9)—but what this actually
means has been a matter of varying political interpretation. When selling the idea
to the broader public, subsequent politicians have referred to alternative but more
familiar principles of resource management in Norway, such as silviculture (i.e. forest
management techniques), where the rate of harvest should not exceed the forest’s
expected rate of growth (see, e.g., Reinertsen 2009). The government in 2001, with
256 J. W. Moses

broad political support in parliament, employed a 4% threshold, believing that this

would be corresponded with the long-term return on the Fund’s investments. In
2017, another government reduced that threshold to 3%, in light of global economic
conditions, arguing that the long-term return of the Fund was now likely to be lower.
This (3%) level is not established by law, but reflects an informal agreement among
the leadership in all of Norway’s political parties. A future government could, in prin-
ciple, increase the share of the returns being repatriated, but it can expect significant
political pushback. The informal nature of the agreement allows the government a
good deal of flexibility, as is often required with a wildly fluctuating price for oil, or
in response to global economic crises. In practice, what this arrangement means is
that there is an implicit recognition that the money saved in the Fund reflects actual
budget surpluses, while the government aims to balance its (non-oil) revenues and
expenditures. It then estimates what a 3% return on the Fund is expected to look like,
and readjusts its budget balance accordingly (see Moses and Letnes 2017a: 132f for
more details).
This arrangement varies from that in many other States, in that Norway’s oil
money is not cycled through the government budget. Instead, Norway’s oil wealth is
directed offshore immediately into the GPFG, and then the government is allowed
access to a stable and predictable return on the investment from that Fund. Each year,
more and more oil money is poured into this (offshore) Fund, and the returns on the
Fund’s investment are (mostly) reinvested—providing another source of revenue for
the Fund. (I say mostly, because 3% of these returns are going to fill the government’s
coffers.) The relatively modest size of this transfer (from the Fund to the government’s
budget) is not sufficient to inflate the domestic economy, or undermine the country’s
international competitiveness. All the while, the remainder of the money is allowed
to grow, offshore, to be repatriated later—when needed.
In this way, Norway’s oil money can enter into the economy at a steady and
predictable rate (in contrast to the volatile price of oil), allowing governments to
plan accordingly. At the same time, the system is flexible enough to allow authorities
access to more money in times of economic crisis (See Moses and Letnes 2017b).
Hence, the GPFG acts like both a savings and a stabilization fund: it saves money for
future needs, but the Fund is also used to stabilize the broader Norwegian economy
from the volatility associated with global oil prices, and the threat that the resulting
wealth brings in the form of Dutch Disease.
As members of the 1982 Pace Committee noted: this is a remarkable (and rather
unlikely) political feat. As an immigrant to Norway, I marvel at the willingness and
ability of Norwegian elected officials to keep their hands out of the cookie jar. After
all, every country—even a rich country like Norway—has a long list of things that
it hopes to secure, and politicians will always be tempted to promise more than they
can deliver. There can always be better roads, shorter hospital queues, bigger defence
and educational budgets… As Norway’s elected officials sit on a huge pile of money,
in the form of the GPFG, it must be incredibly tempting to access this money to pay
for important and popular objectives. The budgetary rule is the economy’s first line
of defence that keeps this from happening.
Norway’s Sovereign Wealth Fund 257

3 Managing the Fund

We have now seen the immense size of the GPFG, and how it is designed to stabilize
the Norwegian economy from the threat of Dutch Disease and volatility in the global
price of oil. This final section examines the particular means by which the Norwegian
government manages its Fund. Like the other two aforementioned components, the
way that Norway manages its GPFG is quite unique.
Originally, and before 1998, the Fund was managed by Norway’s central bank
(Norges Bank), using the same strategy that the central bank uses to manage its
foreign reserves. In other words, the investment strategy had a very conservative (low-
risk, low-return) focus on government and government-guaranteed bonds, invested
offshore.
After 1998, Norwegian policymakers decided to increase the risk exposure of
the Fund, and with it the potential return. To do this, management of the Fund
was transferred over to the Norges Bank Investment Management (NBIM), which
manages the Fund on behalf of the Norwegian people and their representative, the
Norwegian Ministry of Finance (MoF). When the management reins were handed
over to NBIM, one of the first things it did was to convert about 40 percent of the
Fund’s bond portfolio into equities (NBIM n.d.: at 1998). In particular, the MoF
decides upon the investment strategy for the Fund, on advice provided from both
the NBIM and the people’s representatives in parliament. Today, the government is
more ambitious, in that it hopes:
to achieve the highest possible return with an acceptable level of risk. Management shall be
transparent, responsible long-term and cost effective. There is a broad political consensus
that the Fund shall not be used as a foreign policy or climate policy instrument (Meld. St. 13
(2017–2018), p.5).

The formal framework for managing the Fund is laid down by the Norwegian
parliament, in the form of the same Government Petroleum Fund Act, as mentioned
above. While the Ministry of Finance has the overall responsibility for the Fund’s
management, it issues guidelines through its Management Mandate for the Govern-
ment Pension Fund Global. Formally, the central bank (Norges Bank) remains respon-
sible for managing the Fund, but its Executive Board has delegated the operational
management of the Fund to the NBIM. In 2017, a government commission (NOU
2017: 13) recommended that the GPFG be given more autonomy from the central
bank—but (to date) this has not happened.
Over time, this investment portfolio was diversified with an eye at maximizing the
highest possible risk-adjusted return, combing equity, fixed-income, and (eventually)
real-estate holdings. What has remained constant is a requirement that the Fund
cannot invest in Norwegian holdings, and that it is not allowed to buy more than 10%
of the voting shares in any individual company (real estate companies are exempted
from this rule) (Ministry of Finance 2010: Sect. 3.4, §10). The likely reason for this
ceiling is an earlier, politically contentious, attempt by Swedish Social Democrats to
establish “wage earner funds” in the 1980s. The Norwegian authorities are afraid of
upsetting international markets (thus reducing their returns) by appearing to use their
258 J. W. Moses

ownership position to secure explicitly political objectives. This obviously limits the
Fund’s ability to actively influence the firms in which it invests, so the Fund has
developed other, less direct, means of influence. These include the use of ethical
guidelines (and the threat of exclusion), explicit voting strategies (given their limited
holdings in any given company), and simply talking to the companies in which they
invest.

3.1 Ethical Guidelines

In 2004, the Petroleum Fund’s Advisory Council on Ethics was established, and since
that time, the Fund has been required to follow strict ethical guidelines (with new
ethical measures being added subsequently, see https://etikkradet.no/en/). Today, the
Council on Ethics is an independent body made up of five members (with a staff of
8) that makes (public) recommendations, on the basis of guidelines determined by
the MoF to Norges Bank (see Ministry of Finance 2017). These guidelines help to
establish whether a given company should be excluded from the GPFG, or placed
under observation.
These guidelines include product-based as well as conduct-based exclusion
criteria. The product-based criteria can be used to exclude firms that produce tobacco,
coal, or certain types of weapons; while the conduct-based criteria search out gross
corruption, human rights violations, environmental damage, and/or unacceptably
high greenhouse gas emissions (Council on Ethics 2017: 7; see also Council on
Ethics 2019). Much political attention has been directed to the fact that a petroleum-
generated GPFG is now prohibited from investing in coal-based industries.5 Given
the size of the GPFG, and the fact that the Council’s recommendations are made
public (Council of Ethics n.d.), prospective firms and other investors pay attention to
the Council’s recommendations. Then, when the NBIM makes its decision against
the backdrop of these recommendations, the list of excluded companies is made
public (see NBIM 2019a). In 2019, for example, three companies were held out
for special mention: Texwinca Holdings Co was excluded for serious or systematic
human rights violations; while Evergy Inc. and Washington H. Soul Pattinson &
Co Ltd. were excluded based on an assessment of the product-based coal criterion
(NBIM 2019b). A full list of the excluded companies can be found here: https://
www.nbim.no/en/the-fund/responsible-investment/exclusion-of-companies/.

5 The original Standing Committee on Finance and Economic Affairs was tasked to look into
excluding both petroleum and coal companies (Recommendation 290 S (2014-2015)), but
the resulting parliamentary resolution focused only on coal (see https://www.stortinget.no/en/
In-English/About-the-Storting/News-archive/Front-page-news/2014-2015/hj9/). In particular, the
resulting exclusion criterion holds that mining companies and power producers can be excluded
from the fund if they themselves (or through entities they control) derive 30% or more of their
revenue from thermal coal, or base 30% or more of their operations on thermal coal.
Norway’s Sovereign Wealth Fund 259

In addition to the ethical guidelines, the NBIM uses its ownership rights in different
companies to promote long-term value creation. It does this in two ways: by voting
its share and by joining in dialogue with company boards.

3.2 Ownership Strategy

By exercising its voting rights, the NBIM seeks to strengthen governance, improve
performance, and promote sustainable practices in the firms in which it invests (NBIM
2017b:13). Obviously, the impact of this voting behaviour is limited by the fact that
the NBIM can only secure 10% of the voting shares in any given company. In practice,
this means that the NBIM votes in a way to support long-term value creation, sustain-
able business practices, board accountability, shareholder rights, equal treatment of
shareholders, and transparent company communications. In particular, their public
voting guidelines (see NBIM 2016a) are used to motivate their voting decisions, and
a public record of how they have voted helps to send the message home (NBIM
2016b). For example, in 2017, the NBIM voted at 11,084 shareholder meetings
(NBIM 2017b: 28).
In their dialogues with companies, the NBIM asks the companies in which they
invest how they intend to address global challenges related to child labour, water
management, climate change, and (more recently) human rights (NBIM 2017b: 6).
In 2017, the NBIM held 3252 meetings with 1380 companies, on a number of strategic
topics, including issues concerning the environment, social issues, shareholder rights,
CEO remuneration, corruption, etc. (NBIM 2017b: 38–45).

4 Conclusion

It is not generally advisable to follow slavishly the economic model of another

country. Countries and contexts change over time, making any country’s lesson diffi-
cult to transfer. This is also true with regard to the use of particular policy instruments,
such as a sovereign wealth fund. It is important to consider the local conditions on
the ground before carefully deciding whether a SWF is useful for a country, and
how it should be designed. But the key lessons of Norway’s SWF can be fruitfully
transmitted to other countries; its approach is transparent, democratic, and fiscally
conservative.
This contribution has focused attention on three of the most unique and often over-
looked characteristics of Norway’s successful SWF: the GPFG. Unlike the SWFs in
many other countries, Norway’s Fund was relatively late in coming, and when it was
first established, it was managed in a very conservative manner. More importantly,
the GPFG was set up in a way that keeps temptation at bay: it was created to keep
the money offshore (away from the domestic economy) and to ensure only a (steady)
fraction of the money gets repatriated. This is key to Norway’s macroeconomic
260 J. W. Moses

success and its ability to (mostly) avoid the Dutch Disease. Finally, by using ethical
and socially responsible investment guidelines, the Norwegian authorities are able to
influence international investment trends in a positive direction, without appearing
to be intervening, politically, in the market.
The design and make-up of Norway’s GPFG, and the NBIM that manages it, draw
a significant amount of domestic political attention to the Fund. This attention is of
two types: in terms of the ethical guidelines—of how Norway aims to invest for the
future—but also in terms of how the money should be spent; e.g. when (or if) it is
appropriate to dip into the Fund in light of pressing and/or special circumstances.
This is very much the case at the time of this writing, when a conservative coalition
government is hinting that it will take money out of the Fund to replace a naval frigate
that sunk in a recent collision (among other unforeseen expenses). The opposition, in
return, declares this is the top of a very slippery slope—making it easier to draw down
the Fund in the future, rather than make difficult decisions about political priorities.
Hence, the political consensus that lies at the centre of Norway’s SWF continues to
be challenged and defended.
Such is the nature of an active and effective sovereign wealth fund: it should draw
attention to, and provoke disagreement about, how a country’s collective savings are
to be saved (and spent).

References

Council on Ethics. (n.d.). Recommendations. Online at: https://etikkradet.no/recommendations/.

Council on Ethics. (2019). Council’s Activities. Council on Ethics for the Norwegian Government
Pension Fund Global. Online at https://etikkradet.no/councils-activities/.
Council on Ethics. (2017). Annual Report 2017. Council on Ethics for the Norwegian Government
Pension Fund Global. Online at https://nettsteder.regjeringen.no/etikkradet3/files/2018/03/Etikkr
adet_arsmelding_2017_eng_UU.pdf.
Economist, The (1977). The Dutch Disease. November 26.
Hartwick, J. M. (1977). Intergenerational equity and the investing of rents from exhaustible
resources. The American Economic Review, 67(5), 972–974.
Karl, T. L. (1997). The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of
California Press).
Lie, E. (2010). Over Evne: Finansdepartementet 1965-1992 (Oslo: Pax).
Meld. St.13 (2017–2018). The Government Pension Fund 2018. (Oslo: Norwegian Ministry of
Finance).
Ministry of Finance. (2017). Guidelines for observation and exclusion of companies from the
Government Pension Fund Global. 17 February draft. Online at https://www.regjeringen.no/glo
balassets/upload/fin/statens-pensjonsfond/formelt-grunnlag/guidelines-for-observation-and-exc
lusion-from-the-gpfg—17.2.2017.pdf.
Ministry of Finance, Norway. (2010). Management mandate for the Government Pension Fund
Global. Adopted 8 November. Online at https://www.nbim.no/en/the-fund/governance-model/
management-mandate/.
Moses, J., & Letnes, B. (2017a). Managing Resource Abundance and Wealth: The Norwegian
Experience (New York: Oxford University Press).
Moses, J., & Letnes, B. (2017b). Breaking brent: Norway’s response to the recent oil price shock.
Journal of World Energy Law and Business, 10(2017), 103–116.
Norway’s Sovereign Wealth Fund 261

NBIM. (n.d.). The History. Online at: https://www.nbim.no/en/the-fund/the-history/.

NBIM. (2019a). Observation and exclusion of companies. 17 January draft. Online at https://www.
nbim.no/en/responsibility/exclusion-of-companies/.
NBIM. (2019b). Decisions to exclude companies from the government pension fund global. 17
January draft. Online at: https://www.nbim.no/en/the-fund/news-list/2019/decisions-to-exclude-
companies-from-the-government-pension-fund-global/.
NBIM. (2018). Market Value. 26 October. Online at: https://www.nbim.no/en/the-fund/market-
value/.
NBIM. (2017a). Holdings. December 31. Online at: https://www.nbim.no/en/the-fund/holdings/hol
dings-as-at-31.12.2017/?fullsize=true.
NBIM. (2017b). Responsible investment. Global pension fund global. No. 4 (Oslo: Norges Bank
Investment Management).
NBIM. (2016a). Voting Guidelines. 22 March draft. Online at: https://www.nbim.no/en/responsib
ility/our-voting-records/voting-guidelines2/.
NBIM. (2016b). Our Voting Records. 4 February draft. Online at: https://www.nbim.no/en/respon
sibility/our-voting-records/.
Norwegian Government. (2018a). Market value: government pension fund global (GPFG).
6 November. Online at https://www.regjeringen.no/en/topics/the-economy/the-government-pen
sion-fund/government-pension-fund-global-gpfg/market-value-and-capital-inflow/id696852/.
Norwegian Government. (2018b). Market value: government pension fund Norway (GPFN).
6 November. Online at https://www.regjeringen.no/en/topics/the-economy/the-government-pen
sion-fund/government-pension-fund-norway-gpfn/market-value-gpfn/id710461/.
NOU 2017:13. New Central Bank Act (Oslo: Norges Offentlige Utredninger).
NOU 1983:27. Petroleumsvirksomhetens framtid: det framtidige omfanget av petroleumsvirk-
somheten på norsk sokkel (Oslo: Norges Offentlige Utredninger).
NPD [Norwegian Petroleum Directorate]. (2019a). Exports of Oil and Gas. Norwegian Petroleum.
Online at https://www.norskpetroleum.no/en/production-and-exports/exports-of-oil-and-gas/.
NPD [Norwegian Petroleum Directorate]. (2019b). Annual Production. Norwegian Petroleum.
Updated 10 Jan 2019. Online at: https://www.norskpetroleum.no/en/facts/production/#annually.
NPD [Norwegian Petroleum Directorate]. (2018). The market value to the government pension fund
global, 1996–2017. Norwegian Petroleum. 17 Feb 2018 draft. Online at: https://www.norskpetr
oleum.no/en/economy/management-of-revenues/.
Reinertsen, M. (2009). Oljefondets utspring. Morgenbladet, 22 May.
Ross, M. L. (1999). The political economy of the resource curse. World Politics, 51(2), 297–322.
St. meld. nr. 25. (1973–74). Petroleumsvirksomhetens plass i det norske samfunnet (Oslo:
Finansdepartementet).
St. meld. nr. 29. (2000–2001). Retningslinjer for den økonomiske politikken (Oslo: Finansdeparte-
mentet).
SWFI. (2018). Sovereign wealth fund rankings. November 2018 update. Online at: https://www.
swfinstitute.org/sovereign-wealth-fund-rankings/.
LCP
Local Content in the Extractive Resource
Industry in Nigeria

Chilenye Nwapi

Abstract Most of Nigeria’s application of local content in the extractive industry is

focused on the oil and gas sector, the mining sector receiving only marginal attention,
without a well-established policy or legislation. In the oil and gas sector, local content
is pursued through three key vehicles: state participation, the Oil and Gas Industry
Local Content Development Act, 2010, and the marginal fields policy. These vehicles
express the Nigerian government’s understanding of local content in the oil and gas
sector, which is not limited to value addition. In its broadest sense, value addition
is about what the industry as a whole can contribute to the wider economy, for
instance, the contributions of oil and gas companies not only to the domestic oil
and gas industry but also to the growth of other industries. The key vehicle being
utilised to achieve value addition is the afore-mentioned Act. Nigeria’s local content
policy, however, embraces the somewhat wider concept of ‘local participation’. Local
participation aims to ensure that the citizens take charge of the development of
the industry. The extent to which the content of the industry is local is therefore
determined not only by the value brought to the local economy by the industry,
but also by the extent to which the participants in the industry are ‘local’. The key
vehicles being utilised to achieve local participation are state participation and the
marginal fields policy. This chapter discusses each of the three vehicles, highlighting
their successes and challenges.

Keywords Local content · Value addition · Local participation · State

participation · Marginal fields

C. Nwapi (B)
Canadian Institute of Resources Law, Calgary, Canada
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 265
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_14
266 C. Nwapi

1 Introduction

The need for local content promotion has been recognised in the Nigerian extractive
industry, particularly the oil and gas sector, for a long time. While International
Oil Companies (IOCs) dominated the oil and gas sector during the first decades of
commercial oil discovery in Nigeria,1 during the building of the first refinery by Shell
in 1965, the Nigerian government and Shell agreed to ‘give earnest consideration to
the possibility of enabling’ the government or the Nigerian public to invest in the
refinery ‘provided a minimum response [was] anticipated’ (Nwokeji 2007). This is
said to be the first deliberate opportunity offered to the Nigerian public to invest in the
oil and gas sector (Nwokeji 2007). Thirteen years after the official discovery of oil in
commercial quantities, the Petroleum Act, 1969, was enacted, drastically reshaping
the investment atmosphere in three key relevant ways, namely by (1) mandating that
oil and gas concessions could only be granted to companies incorporated in Nigeria2 ;
(2) reserving for the Nigerian government the option to acquire participation rights
in oil and gas concessions3 ; and (3) mandating every holder of an oil mining lease
to ensure that within 10 years of the grant of its lease, the number of Nigerian
citizens in their employ reaches a specified percentage.4 While the first requirement
was immediately implemented, the government did not immediately exercise the
option contained in the second requirement (Nwokeji 2007). The third requirement
was incorporated in contractual arrangements entered into between the Nigerian
government and IOCs.
While the local content provisions of the Petroleum Act were meagre, the
Petroleum (Drilling and Production) Regulations 1969 enacted pursuant to the Act
contained more elaborate provisions. Regulation 26 of the Regulations mandated
every holder of an Oil Prospecting Licence to submit for the Minister’s approval
within 12 months of the grant of its licence a detailed programme for the recruit-
ment and training of Nigerians in all phases of oil and gas operations. A similar
obligation was placed by the same regulation on every holder of an oil mining lease
upon the grant of its lease. Scholarship schemes proposed by a licencee or lessee
must be approved by the Minister of Petroleum and might not be varied without the
Minister’s permission.
Much of the focus on local content in the extractive industry in Nigeria is the oil
and gas sector. This is unsurprising given the dominance of oil and gas development
in Nigeria’s economy. The mining sector has far from gathered as much attention.
In fact, local content is being implemented in the mining sector without a well-
established official policy or legislation. The Nigerian Mines and Minerals Act,
2007—the principal law regulating mineral activities in the country—contains no
local content provisions other than the standard provision that only Nigerian citizens
and companies incorporated in Nigeria can be granted mining licences. The key

1 Oil was discovered in commercial quantities in Nigeria in 1956.

2 Petroleum Act, 1969, s 2(2).
3 Petroleum Act, 1969, First Schedule, para 35(a).
4 Petroleum Act, 1969, First Schedule, para 38.
Local Content in the Extractive Resource Industry in Nigeria 267

reason for the lack of a well-established local content policy for the mining sector
is, arguably, the decades-old neglect of the sector by successive governments. The
sector is significantly backward not only when compared to the oil sector but also
when compared with the mining sector in other African countries. To revamp the
sector, the government is currently focusing on the attraction of investors (Ministry of
Mines and Steel Development 2016). Introducing binding local content obligations
at this time would therefore likely be counterproductive.
Another reason for the lack of official local content policy for the mining sector
is the fact that most of the mining activities that have been going on for decades are
Artisanal and Small-scale Mining (ASM), a sub-sector that is dominated by local
actors rather than by foreign multinationals. Since the content is already local, there
is no need to introduce a local content policy. Instead, attention is focused on formal-
ising ASM (which for years was operating informally and without accountability)
and in jump-starting investments in large-scale mining. The latter requires rebuilding
market confidence through, inter alia, the establishment of a clear policy direction
and assuring investors that the government will be consistent in its policy imple-
mentation (Ministry of Mines and Steel Development 2016). That is not to say that
the government does not recognise the importance of local content in the sector.
As stated in its 2016 Roadmap for the Growth and Development of the Nigerian
Mining Industry, one of the government’s objectives is stated as ‘promoting formal
small scale operators through expanding access to funding and supporting knowl-
edge development to drive local content’ (Ministry of Mines and Steel Development
2016). However, this policy objective has not been elaborated in any policy document
or operationalised in legislation.
This is in clear contrast to the oil and gas sector where, apart from the Petroleum
Act, the government has adopted free-standing legislation (the Oil and Gas Industry
Local Content Development Act 2010) to promote local content and regulate its
implementation. The enactment of this law marked a watershed in the evolution
of the local content policy in the extractive industry in Nigeria. Given the limited
application of the local content policy in the mining sector in Nigeria, this chapter
focuses on the oil and gas sector.
Local content is discussed in the literature mainly in terms of value-added.
However, a key point made in this chapter is that Nigeria has adopted a broad under-
standing of local content in the oil and gas sector that is not limited to value-added.
Value-added is a narrow concept that speaks to the value the operations of a company
or industry bring to a country. It is thus primarily about obligations placed on compa-
nies, e.g. to use local raw materials, to employ the citizens of a country, and to use
local suppliers in the procurement of goods and services. In its broadest sense, value
addition is also about what the industry as a whole can contribute to the wider
economy, for instance, the contributions of the oil and gas industry to the growth of
other industries. Nigeria’s local content policy embraces the wider concept of local
participation. This is well captured by the local content policy objective established
in the National Petroleum Policy 2017: ‘Building Nigerian human resources, so that
Nigerians can take a full role in managing our own resources, is a key objective of
the Nigerian petroleum policy’. Local participation aims to ensure that citizens take
268 C. Nwapi

over the development of the industry. The extent to which the content of the industry
is local is therefore determined not only by the value brought to the local economy
by the industry (value-added), but also by the extent to which the participants in the
industry are local. Participants including not only employees and suppliers of goods
and services, but also the primary holders of the concession rights.
Accordingly, Nigeria’s local content policy in the oil and gas sector is implemented
through three key vehicles: (1) direct state participation, (2) the Oil and Gas Industry
Local Content Development Act of 2010, and (3) the marginal fields policy. This
chapter discusses the nature of local content obligations created in the oil and gas
sector in Nigeria under these key vehicles. It also considers the successes Nigeria
has achieved so far as well as the main challenges to the implementation of those
obligations.

2 Direct State Participation

During the first decade of commercial oil operations in Nigeria, there was little state
participation, as the government’s involvement was limited to regulation and revenue
collection from IOCs. In 1962, an agreement between the Nigerian government and
Italian oil giant Agip (now ENI) gave the government the right to acquire 33.3%
ownership in Agip’s Nigerian subsidiary (the Nigerian Agip Oil Company) (Frynas
2000; Pearson 1970). However, the Nigerian government did not exercise this option
until 1971, meaning that the government continued to limit its involvement in oil
and gas operations to regulation and revenue collection (Frynas 2000). The civil
war of 1967–1969 changed the government’s perception of the significance of oil
in international politics and the need for the government to have tighter control of
the industry (Frynas 2000). With the industry looking very promising globally, the
government enacted the Petroleum Act 1969, inter alia officially introducing state
participation into the oil and gas sector by giving the Nigerian government the option
to acquire part-ownership in oil and gas concessions. In 1971, it joined the Organi-
sation of Petroleum Exporting Countries and also established the Nigerian National
Oil Corporation (NNOC) as a state-owned company to implement its indigenisa-
tion policy. Due to lack of capital and technical capacity, however, the NNOC could
not operate on its own, compelling it to enter into joint venture agreements with
the IOCs (Intergovernmental Forum on Mining, Minerals, Metals and Sustainable
Development 2018). But institutional rivalry between the NNOC and the Ministry
of Petroleum prevented the government from taking advantage of the oil price boom
in the early 1970s. Efforts to address the problem led to the merger of the NNOC
and the Ministry to form the Nigerian National Petroleum Corporation (NNPC)
in 1977 (Intergovernmental Forum on Mining, Minerals, Metals and Sustainable
Development 2018).
The NNPC embarked on extensive contractual arrangements with IOCs aimed at
establishing the government’s interest in the industry. It used two principal partici-
pation arrangements: joint venture agreements and production sharing contracts and
Local Content in the Extractive Resource Industry in Nigeria 269

represents the government in all the arrangements. But the NNPC’s role was not
limited to the acquisition of interests in the IOCs. It also used those contractual
arrangements to implement the local content provisions of the Petroleum Act and
the Petroleum (Drilling and Production) Regulations 1969 enacted pursuant to the
Petroleum Act, which contains more elaborate local content provisions. Its model
service contract obliges the contractor to:
make the maximum use if available indigenous Nigerian manpower in the conduct of
petroleum operations under this contract. The contractor shall within six months after the
effective date and after consultation with the NNPC submit for NNPC’s approval a detailed
recruitment programme, and within 12 months, submit for NNPC’s approval, a training
programme for all Nigerians employed by the contractor in the conduct of all petroleum
operations (see Onyi-Ogelle 2016:138).

3 Local Content as Value-Added: The Oil and Gas

Industry Local Content Development Act 2010

Before the introduction of the Local Content Development Act in 2010, the Petroleum
Act 1969 and the Petroleum (Drilling and Production) Regulations had already estab-
lished local content obligations. However, these did not represent a focused approach
to local content development. Such an approach began with a workshop organised by
the National Petroleum Investment Management (NAPIMS) in 2001, during which
the participants produced a communique recommending the creation of a National
Committee on Local Content Development (NCLCD) (Falola and Achberger 2013).
A report produced by the NCLCD in 2002 proposed a local content target of 40% in
2005 and 60% in 2010 and recommended the enactment of local content legislation
to address local content development in a more targeted manner.
A 2003 report of the Department of Petroleum Resources that was commissioned
by the Norwegian Agency for Development Cooperation and the Norwegian Ministry
for Petroleum and Energy ‘[t]o assess the capabilities of the Nigerian Supply and
Service Industry and propose measures to enhance Nigerian private sector devel-
opment based on Petroleum Activities’ (Heum et al. 2003:1) strongly influenced
the drafting of the Local Content Development Act 2010. The report defined local
content as ‘value addition activities taking place in Nigeria’ and linked value addition
‘to the magnitude of manufacturing and service production that is taking place in
Nigeria’ (Heum et al. 2003:2). According to the report, this calls for the develop-
ment of indigenous companies and the encouragement of foreign investment in the
country, as value addition would occur through the interaction between indigenous
companies and foreign investors. This reflects a supply chain perspective to local
content and the report’s explanation is significant:
The oil industry … consists of a few major oil companies … and a large number of mainly
nationally based-oil companies. They have numerous suppliers, offering a wide variety of
goods and services, from the very sophisticated to more standardized products. Some are
global players as oil majors; others are more locally based. Contracts between the oil compa-
nies and their suppliers frequently involve a hierarchy, or a chain, of subcontractors. This
270 C. Nwapi

supply chain may be regard as a linear sequence of activities organised around the flow
of materials from source of supply to finished products, after-sales services and often also
recycling. It is in this context that the Nigerian industry has to perform and prove useful, if
the ambition of private sector development based on petroleum activities is to be met. In this
supply chain perspective, activities are only justified when they add value to the overall
process (Heum et al. 2003:5).

The report strongly decries the ‘dominance of foreign over local companies’ in
both the oil industry and the service industry, leading to most jobs being executed
by foreign contractors (Heum et al. 2003:24). The report therefore recommended
that ‘the ultimate goal of a viable local content policy should be to create jobs by
enhancing sustainable industrial growth and national wealth’ (Heum et al. 2003:63).
The Local Content Development Act (section 106) defines local content as ‘the
quantum of composite value added to or created in the Nigerian economy by a
systematic development of capacity and capabilities through the deliberate utilisa-
tion of Nigerian human, material resources and services in the Nigerian oil and gas
industry’. At the core of this definition is, thus, value addition to the country. This
is to be achieved by facilitating the participation of Nigerians in the oil and gas
industry and ensuring that all relevant economic activities in the oil and gas industry
take place in Nigeria. To this end, the Act prescribes several actionable steps that
would operationalise the local content policy. They include:
• Nigerians shall be given ‘first consideration’ before other nationals in matters of
employment and training.5 The rationale for this is not merely to help address
the unemployment problem in the country, but also to help to build the technical
skills of Nigerian nationals in the industry, which, in turn, would enhance their
full participation in the industry.
• In matters of procurement, raw materials available in Nigeria, services provided
by Nigerians, and goods manufactured in Nigeria shall receive first consideration.6
The rationale for this is to concentrate economic activities in the industry across the
entire spectrum of the value chain within Nigeria. By prohibiting the importation
of raw materials that are available in Nigeria, for instance, the Act ensures that
indigenous assets are utilised, which in turn would increase the value of those
assets, thus boosting backward linkages. The utilisation of those assets would
also invariably involve the participation of indigenous suppliers.
• In the award of oil blocks, oil field licences, oil lifting licences, and in all
projects for which contract is to be awarded, indigenous independent operators
shall receive first consideration, subject only to conditions to be specified by the
Minister.7 This prescription is addressed to the licencing authority rather than to
operators, since it is the government that awards licences. The provision itself is
intended to enhance indigenous participation and is not focused solely on value
addition.

5 Nigerian Oil and Gas Industry Content Development Act, 2010, s 28(1).
6 Nigerian Oil and Gas Industry Content Development Act, 2010, s 10(1).
7 Nigerian Oil and Gas Industry Content Development Act, 2010, s 3(1).
Local Content in the Extractive Resource Industry in Nigeria 271

• Indigenous service companies with evidence of ‘ownership of equipment, Nige-

rian personnel’ and requisite capacity shall receive ‘exclusive consideration’ for
contracts and services listed in the Schedule to the Act.8 ‘Exclusive consideration’
means that no other companies are to be considered for such contracts. The ratio-
nale is to ensure that no Nigerian company that has all the requisite qualifications
to execute a contract is rejected in preference for a non-Nigerian company.
• Operators are to carry out a programme for the promotion of technology transfer
to Nigeria.9 The essence of technology transfer is to ensure that Nigeria retains the
technical skills brought by the IOCs. However, it is one thing to invite technology
transfer; it is another to absorb the transferred technology (see Olawuyi 2018).
Furthermore, the Act provides targets for a progressive increase in local content,
from the pre-existing 2007 target of 45–70% in 2010 and 80% by 2020 (Ihua et al.
2011). It establishes minimum targets for Nigerian participation in specified cate-
gories of oil services, which include: engineering, fabrication, materials and procure-
ment, finance, research and development, shipping and logistics and other categories
(Ovadia 2013).
Prospective operators are required to submit a Nigerian Content Plan with their
bids, setting out in detail how they will fulfil their local content obligations.10 To
specifically ensure the employment and training of Nigerians, the Act requires oper-
ators to submit an Employment and Training Plan detailing their employment and
training needs, expected local skills shortage, project-specific training requirements,
etc.11 It establishes a Local Content Development Fund into which operators are
required to contribute 1% of the value of their contracts to support local training and
business support services (Ramdoo 2015).
There is empirical evidence that since the introduction of the Local Content Devel-
opment Act, Nigeria has slowly begun to localise its oil and gas industry and that
backward linkages are deepening (McCulloch et al. 2017). There has been a notice-
able growth in the number and range of local firms providing services to IOCs (Ovadia
2013). In 2013, the Local Content Board reported that Nigeria’s local content policy
led to the investment inflow of $5 billion into the economy and the creation of about
38,000 jobs (see Aoun et al. 2015). The IOCs have also reported significant increases
in the share of local procurement and the number of local employees in their compa-
nies (see Aoun et al. 2015). Through greater participation of local firms, the local
content policy has had positive impacts on local value creation (Adedeji et al. 2016).
Still, the overall impacts of the Local Content Development Act have in fact been
mixed. Using a structural equation modelling technique to analyse data from a survey
of over 200 local firms, Adedeji et al. (2016) find that the local content policy has
had a positive and significant impact on value creation in Nigeria, but that local value

8 Nigerian Oil and Gas Industry Content Development Act, 2010, s 3(2).
9 Nigerian Oil and Gas Industry Content Development Act, 2010, s 43.
10 Nigerian Oil and Gas Industry Content Development Act, 2010, s 7.
11 Nigerian Oil and Gas Industry Content Development Act, 2010, s 29.
272 C. Nwapi

creation traceable to the policy is lower than expected. In another study that consid-
ered the impact of local content policy on Small and Medium Enterprises (SMEs)
in Nigeria, Ihua (2010) finds that the policy has led to increased award of contracts
to local SMEs, but that this does not mean increased local SME participation, as the
contracts are awarded to the existing SMEs while new SMEs find it difficult to break
into the market. That is to say, the number of SMEs participating in the industry as a
result of the local content policy is largely stagnant. In Sect. 4, the chapter identifies
some of the major weaknesses of the Act that have contributed to its lack of greater
impact on local content development in Nigeria.

4 The Marginal Fields Policy

Marginal fields are fields allocated to IOCs, but which have remained undeveloped
because, for a number of factors, they are considered unprofitable by the IOCs. The
National Petroleum Policy 2017 defines such fields as ‘any field that has producible
reserves booked of less than 10,000 bbls/d and [that] has remained unproduced for
over 10 years’. The reasons that the IOCs have regarded such fields as unprofitable
include: the size of the oil reserves, availability of needed infrastructure in the reserve
area, excessive costs of development, technological constraints, environmental and
political concerns, and the price of the produced oil or gas (Dentons 2014). As stated
by the Ministry of Petroleum Resources, marginal fields must have some or all of
the following characteristics:
• Fields not considered by licence holders for development because of assumed
marginal economics under prevailing fiscal and market terms.
• Field with at least one exploration well drilled and have been reported as oil and or
gas discovery for more than 10 years with no follow up appraisal or development
effort.
• Fields with crude oil characteristics different from current streams (such as crude
with very high viscosity and low API gravity), which cannot be produced through
conventional methods or current technology.
• Fields with high gas and low oil reserves.
• Fields that have been abandoned by the leaseholders for upwards of three years
for economic or operational reasons.
• Fields that the present leaseholders may consider for farm-out as part of portfolio
rationalisation programmes (Ministry of Petroleum Resources 2013).
Section 17 of the Petroleum Act provides the legal framework for the development
of such fields by authorising the President to ‘farm-out’ marginal fields if they have
been left unattended to for at least 10 years ‘from the date of the first discovery
of the marginal field’ and when it is in the public interest to farm them out. It is
Local Content in the Extractive Resource Industry in Nigeria 273

the policy of the government, which dates back to the mid-1990s,12 to farm-out
these fields exclusively to indigenous companies as a way of promoting indigenous
participation (by giving local companies greater access to oil fields), generating
employment for Nigerians and the enhancement of the exploitation of oil and gas
reserves (Atsegbua 2005; Intergovernmental Forum on Mining, Minerals, Metals
and Sustainable Development 2018). The general consideration was thus to find an
indigenous company with the potential to be successful in the development of the
fields.
Since the marginal fields policy was aimed to promote indigenous participation
in the petroleum sector, the eligibility of participating operators is determined based
on the definition of a Nigerian company for the purposes of local content, i.e. under
the Local Content Development Act 2010. Thus, eligible operators are companies
formed and registered in Nigeria and in which Nigerians hold at least 51% of equity
shares.13 Guidelines for Farmout and Operation of Marginal Fields published by the
Ministry of Petroleum Resources in 2013 contained provisions encouraging states
and local communities to register companies to bid for contracts in marginal fields
bid rounds (Ministry of Petroleum Resources 2013).
The award of marginal fields to indigenous companies became the official policy of
the government in 2001. There are said to be about 183 marginal fields under conces-
sion in Nigeria (Ezeani and Nwuke 2017). Twenty-four marginal fields were awarded
in 2003 to 31 indigenous operators. Thirty-seven marginal fields were announced for
award during a 2014 bid round and as at 30 May 2016 had been awarded (Ezeani and
Nwuke 2017). Plans to hold marginal field bid rounds in 2013 and 2017 were not
followed through due in part to the stalled efforts to enact new petroleum legislation,
as public pressure mounted on the government to enact a new legal framework before
any bid rounds were to be conducted.

5 Weaknesses and Challenges in the Implementation

of Local Content in Nigeria

5.1 State Participation

The implementation of state participation in Nigeria has produced mixed results.

While the acquisition of equity interests in the operations of the IOCs has resulted
in an increase in the amount of revenues the government generates from the oil and
gas industry, the effective control of the operations has remained in the hands of the
IOCs which see to the day-to-day running of the operations. This means that the

12 The idea of marginal fields was introduced by the Petroleum (Amendment) Decree No 23 f 1996
which amended the Petroleum Act.
13 Nigerian Oil and Gas Industry Content Development Act 2010, section 106.
274 C. Nwapi

IOCs remain major players in the industry while the NNPC, which operates through
several subsidiaries, remains a relatively minor player.
State participation has had a negative impact on the capacity of the industry
to contribute to broad-based economic development. This is mainly because the
NNPC, which represents the government in the participation arrangements, has, for
the most part of its existence, been embroiled in political struggles over who is to
control its affairs (Nwokeji 2007). The main reason for its establishment was to
advance the government’s interests in the industry. However, its ability to adequately
advance those interests was strongly undermined from the very beginning by the
fact that it was established to serve as both industry participant and regulator—two
incompatible roles. This has made it difficult for it to perform either role well, as
it creates a conflict of interests in the corporation’s discharge of its functions (see
Sayne et al. 2012). Calls to restructure the corporation by divesting it of its regulatory
powers so that it would focus only on its commercial responsibilities have not been
adequately implemented due to lobbying by special interests and a lack of political
will on the part of the federal government. In theory, regulatory functions belong to
the Department of Petroleum Resources (DPR), an arm of the Ministry of Petroleum
Resources. However, the centrality of the NNPC in Nigeria’s political economy has
made it very difficult for the DPR or even the Petroleum Minister directly to control
it, and incidents of power clash between the corporation and the Minister are not
uncommon (Centurion Lawyers and Advisors 2017). While it is not unprecedented
for a government to form partnerships with entities it regulates, it is important for the
government to establish independent regulators to oversee the operations of those
entities to avoid a conflict of interest.
On revenue generation to the country, NNPC’s oil sales constitute roughly half of
the country’s total oil production (Sayne et al. 2015). However, its approach to oil
sale fails to maximise returns to the government. Proceeds of its oil revenues have not
always been transferred to the government coffers (KPMG 2010). A 2015 forensic
audit of its remittances to the government found that the NNPC spent 46% of its
domestic oil revenues on operations and subsidies, a situation the study decried as
unsustainable (Pricewaterhouse Coopers 2015). The corporation’s record of corrup-
tion is one of the worst among state-owned companies in the world (see Nwapi 2014).
A study by the Natural Resource Governance Institute identified political interfer-
ence as the root of the problem (Sayne et al. 2015). In addition, despite having been
in existence for more than 40 years, the NNPC has failed to develop its own commer-
cial or operational capabilities (Sayne et al. 2015), as a result of which it is unable
to compete favourably with IOCs.
These problems undermine the capacity of state participation in the oil and gas
industry to yield the desired result. The 2017 National Petroleum Policy proposed a
radical restructuring of the oil sector, including the NNPC, with a view to vesting the
regulatory, commercial and policy-making functions in separate institutions. State
participation will be operationalised through the establishment of a new state-owned
company to replace the NNPC, and which will focus solely on the commercial
interests of the government. The bill intended to operationalise aspects of the policy
Local Content in the Extractive Resource Industry in Nigeria 275

dealing with institutional restructuring was passed by the federal legislature in mid-
2018 but the President declined to sign it into law due to concerns over the reduction
of his control over the oil and gas sector. This act (or omission) by the President
reflects the political power struggles that have undermine state participation in the
oil and gas sector and which have generally torpedoed meaningful restructuring of
the sector.

5.2 The Local Content Development Act

While there is empirical evidence that the Local Content Development Act has led to
significant increases in the level of local procurement and job creation in the Nigerian
oil and gas industry, including deepening backward linkages, the implementation of
local content in Nigeria still faces significant challenges. One of the major challenges
is oil price volatility. This is a challenge because when prices are low, companies
are not only unwilling to make new investments, they cut jobs and sometimes divest.
This situation is inimical to local capacity development and has been blamed for the
low level of local content in the oil and gas industry in Nigeria (Ajayi 2017).
The Local Content Development Fund established under the Act has not been
adequately implemented. Local companies have found it difficult to access the fund
due mainly to inefficiency in the implementation of the fund (Ajayi 2017). The Nige-
rian Content Development and Monitoring Board has noted the lack of a transparent
system for the disbursement of the fund and the lack of adequate mechanism to
ensure that recipients of the fund pay back what they have been given (Ajayi 2017).
Another major challenge is the monitoring and evaluation of local content imple-
mentation. The World Bank (2015) has noted that Nigeria lags behind in monitoring
and evaluation of local content implementation in the oil and gas sector and noted
specifically a lack of transparency in the monitoring system. \query{Please check
whether the sentence ‘Adequate monitoring is critical to meaningful implementa-
tion because...’ conveys the intended meaning.}Adequate monitoring is critical to
meaningful implementation because it provides an avenue for the government to
understand weaknesses in the law and how they might be strengthened.
Another point of concern is the potential of the Local Content Development Act
to facilitate corruption. Section 92 of the Act provides broad discretionary powers
to the Content Development Board responsible for approving local content plans
submitted by companies. The Board is authorised to accept gifts of various kinds
from the public, without any restriction with regard to the person offering the gift.
In other words, the Board can accept gifts even from the very entities that it regu-
lates. The only restriction is that the conditions attached to the gift shall not be
incompatible with the Board’s functions. Since it is the person offering the gift that
determines its conditions or purposes, the restriction has little or no practical value.
This is because a Board that accepts gifts from a company is unlikely to be able to
evaluate a local content plan submitted by such a company in a fair and independent
manner. Such gifts could therefore serve as conduits for facilitation payments. Thus,
276 C. Nwapi

notwithstanding the restriction, the provision creates a potential conflict of interest

with regard to the Board’s ability to discharge its functions (Nwapi 2015:94). In addi-
tion, the discretionary powers of the Board to determine compliance with the Act are
broad and aggrieved parties do not have the right to challenge the Board’s decisions.
This may lead to uneven application of the Act. Also, the Minister of Petroleum
Resources has the power to grant waivers with regard to compliance with the Act,
based on criteria that are not known to the public. Such a lack of transparency opens
also the gate to uneven and corrupt application of the Act (Martini 2014; World Trade
Institute Advisors 2013).
Relatedly, there is also the problem of capture, which has been facilitated by
opacity in the oil and gas licencing process (Nwapi 2014). Although public officials
are bound by the Code of Conduct for Public Officers under the Nigerian Consti-
tution, which prohibits them from using their positions to secure financial gains for
themselves, there is no legal requirement for beneficial ownership disclosures by
companies participating in oil and gas licencing. Civil society investigations reveal
the existence of mystery investors in the oil and gas industry in Nigeria, who seek to
take unfair advantage of the Local Content Development Act (Global Witness 2012).
There are also structural barriers in the investment climate that militate against
the effective implementation of the Act. The barriers include poor infrastructure
(particularly energy and roads), high cost of business finance, and security (especially
in the oil region). These barriers increase the cost of doing business for both IOCs
and local firms, preventing them from effectively engaging in local value addition
activities. For instance, lack of finance for local firms makes it difficult for IOCs to
find local firms with the financial capacity to execute supply contracts. Poor energy
and road infrastructure affects the quality of local inputs (McCulloch et al. 2017).
Thus, while progress has been made to enhance the benefits of the local content
policy in the oil and gas industry in Nigeria, there still exist significant barriers to
meaningful local content development in the country.

5.3 The Marginal Fields Policy

The implementation of the marginal fields policy cannot so far be described as

successful as only about 30% of the allocated fields have reached commercial produc-
tion—a disappointing outcome given the fanfare that greeted the policy when it was
officially announced in 2001. The implementation weaknesses are highlighted by the
government’s inconsistency in the conduct of the bid rounds. For instance, plans to
hold bid rounds in 2013 and 2017 were not followed through. For the 2013 rounds, the
government had published a bid timetable and had conducted road shows to clarify
the guidelines and the bid process to the public. However, without any explanation
to the public, the bid rounds were delayed and no revised timetable was published.
Nothing further was heard about the rounds, which ultimately did not take place.
Sources had it that the rounds failed due, at least in part, to disputes between the
government and some IOCs that held the original licences over the fields regarding
Local Content in the Extractive Resource Industry in Nigeria 277

which fields should be included in the round (Dentons 2014). It appeared that due to
technological advances since the fields were abandoned, some fields that had been
considered unprofitable had become potentially profitable, with the result that the
original licence holders had once more become interested in developing them and
wanted to have them back (Dentons 2014).
Another major obstacle to the implementation of the policy is lack of access to
finance by indigenous operators awarded the marginal fields. They lack the ability to
provide adequate collateral for loans (Okonkwo 2011). Also, their lack of industry
experience, including managerial skills, denied them the technical capability to
operate the fields (Humphrey and Dosunmu 2017). Other obstacles include lack
of adequate geological data and lack of adequate infrastructure around the marginal
fields (Machunga-Disu and Sayne 2014).
Furthermore, while the provision in the 2013 Guidelines allowing communi-
ties and states to register companies to acquire marginal fields is commendable,
its practical application is very difficult. While it is not clear whether any commu-
nities or states have registered any indigenous companies for the purpose of partici-
pating in the marginal fields programme, any such newly registered company would
lack the industry experience—and most likely also the financial resources—to meet
the requirements for a successful marginal fields development. As a result, such a
company would be unable to launch a competitive bid. One way it can overcome
this obstacle is to either acquire an existing indigenous company that has the requi-
site experience—if it has the resources to do so—or co-bid with such an existing
company.

6 Conclusion

The local content policy in the oil and gas industry in Nigeria is pursued through
three key vehicles: state participation, the Local Content Development Act, and the
marginal fields policy. These vehicles represent the Nigerian government’s under-
standing of local content in the oil and gas sector, which is not limited to value
addition. In its broadest sense, value addition is about what the industry as a whole
can contribute to the wider economy, for instance, the contributions of oil and gas
companies not only to the oil and gas industry in the country but also to the growth
of other industries. The key vehicle being utilised to achieve value addition is the
Local Content Development Act. Nigeria’s local content policy, however, embraces
the wider concept of ‘local participation’. Local participation aims to ensure that
the citizens take control over the development of the industry. The extent to which
the content of the industry is local is therefore determined not only by the value
brought to the local economy by the industry, but also by the extent to which the
participants in the industry are ‘local’. The key vehicles being utilised to achieve
local participation are state participation and the marginal fields policy.
This chapter has considered the nature of the three key vehicles utilised by the
Nigerian government as well as key challenges and weaknesses related to each of
278 C. Nwapi

them. While state participation has enabled Nigeria to earn substantial revenue from
oil and gas resources, the benefits of state participation have been significantly below
expectation due to a combination of factors, including mainly the lack of a clearly
streamlined role for the state oil company (the NNPC), lack of transparency and
downright corruption. The Local Content Development Act marked a watershed in
the evolution of the local content policy in the oil and gas industry. However, the
ability of the country to derive optimal benefit from it has been marred by its ineffec-
tive implementation but also by downturns in oil prices (which slowed development
activities and resulted in job losses). Lastly, the marginal fields policy has achieved
very limited success due mainly to lack of available indigenous companies with
the requisite technical and financial capacity to undertake effective development of
marginal fields. Despite these barriers to local content development in Nigeria, the
country has shown determination to advance its efforts to increase the benefits of the
policy. More work, however, needs to be done particularly in the areas of financing
local companies, implementation monitoring, and corruption.

References

Adedeji, A. N., Sidique, S. F., Rahman, A. A., & Law, S. H. (2016). The role of local content policy
in local value creation in Nigeria’s oil industry: A structural equation modelling (SEM) approach.
Resources Policy, 49, 61–73.
Aoun, M.-C., Mathieu, C., & IFRI Centre for Energy. (2015). Local content strategies in the oil
and gas sector: how to maximise benefits to host communities. Institut Français des Relations
Internationales, 2012–2015 Triennium Work Reports. https://www.clingendaelenergy.com/inc/
upload/files/IGU-2015_Local_Content_TF3_IGU_Final_May_2015.pdf.
Ajayi, O. (2017). Why local content in Nigeria’s oil, gas industry is low—Executive Secretary.
NCDMB, Nigerian Content Development and Monitoring Board. https://ncdmb.gov.ng/2017/05/
why-local-content-in-nigerias-oil-gas-industry-is-low-executive-secretary-ncdmb/.
Atsegbua, L. (2005). Issues in the Development of Marginal Oilfields in Nigeria. Journal of Energy
and Natural Resources Law, 23(3), 323–336.
Bloomfield Law Practice. (2017). The proposed 2017 marginal fields bid round in Nigeria—An
investor’s guide. Bloomfield Law Practice. https://bloomfield-law.com/Publications/BLP_NEW
SLETTER%20_THE_PROPOSED_2017_MARGINAL_FIELDS_BID_ROUND_IN_NIG
ERIA_AN_INVESTOR’S_GUIDE.PDF.
Centurion Lawyers and Advisors. (2017). The Nigerian National Petroleum Corporation v the
Ministry of Petroleum Resources. https://centurionlg.com/2017/11/20/the-nigerian-national-pet
roleum-corporation-v-the-ministry-of-petroleum-resources/.
Dentons. (2014). Marginal fields in Nigeria: Recent developments.
Ezeani, E. C., & Nwuke, C. (2017). Local content and the marginal fields programme: Chal-
lenges for indigenous participation in the Nigerian oil industry. Oil, Gas and Energy Law
Intelligence, 15(1). https://openair.rgu.ac.uk/bitstream/handle/10059/2225/EZEANI%202017%
20Local%20content%20and%20the%20Marginal%20Fields.pdf?sequence=3&isAllowed=y.
Falola, T., & Achberger, J. (Eds). (2013). The political economy of development and underdevel-
opment in Africa. Taylor and Francis.
Frynas, J. G. (2000). Oil in Nigeria: Conflict and litigation between oil companies and village
communities. Lit Verlag Munster
Global Witness. (2012). Rigged? The scramble for Africa’s oil, gas and minerals—A report by
Global Witness.
Local Content in the Extractive Resource Industry in Nigeria 279

Heum, P. et al. (2003). Enhancement of local content in the upstream oil and gas industry in
Nigeria—A comprehensive and viable policy approach. SNF Report No. 25/03 (2003). https://
pdfs.semanticscholar.org/3532/457b23ddd81b6f9112b037fc4eb7cb86e52a.pdf.
Humphrey, O., & Dosunmu, A. (2017). The critical success factors for marginal oil field development
in Nigeria. Journal of Business and Management Sciences, 5(1), 1–10.
Ihua, U. B. (2010). Local content policy and SMEs sector promotion: The Nigerian oil industry
experience. International Journal of Business and Management, 5(5), 3–13.
Inter-Governmental Forum on Mining, Minerals, Metals and Sustainable Development. (2018).
Nigeria: National Capacity—Building Capacity in the Oil Sector through Indigenization Poli-
cies (Case Study), IGF Guidance for Governments: Leveraging Local Content Decisions for
Sustainable Development. IISD, Winnipeg. https://www.iisd.org/sites/default/files/publications/
case-study-nigeria-national-capacity.pdf.
KPMG. (2010). Interim report on the process and forensic review of NNPC. https://www.premiu
mtimesng.com/docs_download/Consolidated%20Detailed%20Findings-v1.pdf.
Machunga-Disu, L. L., & Sayne, A. (2014). Maximizing value from Nigeria’s marginal oil fields:
A survey of past awards.
Martini, M. (2014). Local content policies and corruption in the oil and gas industry. U4 Anti-
Corruption Resource Centre
Ministry of Petroleum Resources. (2013). Guidelines for Farmout and Operation Marginal
Fields. https://africaoilgasreport.com/wp-content/uploads/2013/12/GUIDANCE-NOTES-FOR-
NIGERIAN-2013-MARGINAL-FIELDS-BID-ROUND.pdf.
McCulloch, N., et al. (2017). Local content policies and backward integration in Nigeria.
Nwapi, C. (2015). Corruption vulnerabilities in local content policies in the extractive sector: An
examination of Nigerian oil and gas industry content development act, 2010. Resources Policy,
46, 92–96.
Nwapi, C. (2014). Enhancing the effectiveness of transparency in extractive resource governance:
A Nigerian case study. Law and Development Review, 7(1), 23–47.
Nwokeji, U. (2007). The Nigerian National Petroleum Corporation and the Development of the
Nigerian Oil and Gas Industry: History, Strategies and Current Directions. James Baker Institute
for Public Policy and Japan Petroleum Energy Center, Rice University. https://www.bakerinst
itute.org/media/files/page/9b067dc6/noc_nnpc_ugo.pdf.
Okonkwo, O. (2011). Inter-partner learning in asymmetric alliances between foreign and indige-
nous companies in the Nigerian oil industry. European universities series publisher. Peter Lang
International academic publishers.
Olawuyi, D. S. (2018). From technology transfer to technology absorption: Addressing climate
technology gaps in Africa. Journal of Energy and Natural Resources Law, 36(1), 61–84.
Onyi-Ogelle, H. O. (2016). National participation in the Nigeria oil and gas industry: Prospects
and challenges. Journal of Emerging Trends in Educational Research and Policy Studies, 7(2),
134–144.
Ovadia, J. (2013). Measurement and implementation of local content in Nigeria—a framework for
working with stakeholders to increase the effectiveness of local content monitoring and devel-
opment. Facility for Oil Sector Transparency in Nigeria. https://cpparesearch.org/wp-content/upl
oads/2014/12/FOSTER-Measurement-and-Implementation-of-Local-Content.pdf.
Pearson, S. R. (1970). Petroleum and the Nigerian economy. Stanford University Press.
Pricewaterhouse Coopers. (2015). Investigative forensic audit into the allegations of unremitted
funds into the federation accounts by the NNPC. https://www.wgei.org/wp-content/uploads/2015/
10/Full-report-20billion-dollars-missing-oil-money_SAI-Nigeria.pdf.
Ramdoo, I. (2015). Resource-based industrialisation in Africa: Optimising linkages and value
chains in the extractive sector. European Centre for Development Policy Discussion Paper No
179. https://www.extractiveshub.org/servefile/getFile/id/7232.
Sayne, A., Gillies, A., & Katsouris, C. (2015). Inside NNPC oil sales: A case for reform in
Nigeria. Natural Resource Governance Institute. https://resourcegovernance.org/sites/default/
files/NRGI_InsideNNPCOilSales_CompleteReport.pdf.
280 C. Nwapi

Sayne, A., et al. (2012). The petroleum industry bill and the future of NNPC. Revenue Watch
Institute. https://resourcegovernance.org/sites/default/files/rwi_bp_nnpc_synth_rev2.pdf.
World Bank. (2015). A practical guide to increasing mining local procurement in West Africa. Report
No AUS6324. https://documents.worldbank.org/curated/en/266701468119062079/pdf/AUS632
40WP0P130I0Guide0Eng0Feb02015.pdf.
World Trade Institute Advisors. (2013). Local content requirements and the green economy, Ad
Hoc Expert Group Meeting on domestic requirements and support measures in green sectors:
Economic and environmental effectiveness and implications for trade, June, 13–14 2013, Salle
XXI, Palais des Nations, Geneva.
Complexities of Local Content in Kenya’s
Extractive Sector: An Appraisal
of Policy, Legal and Institutional
Frameworks and Practice

Sarah Nduku Muyonga

Abstract The debate on local content has taken center stage since the discovery of
commercial quantities of oil in 2012 by Tullow Oil that could generate up to $1.2
billion in revenue for the Kenyan government. This chapter follows the evolution of
local content development in Kenya’s extractive sector, describing the existing legal,
institutional and policy frameworks promoting local content in the industry. Defining
the ‘local’ in local content has been a major source of conflict in the Kenyan context.
From the existing legislation, it is apparent that ‘local’ is synonymous with ‘national
content,’ meaning that inputs and skills can be sourced from anywhere in the host
country as opposed to local sourcing from the resource rich regions. Development of
favorable policies and legislation in the recent past have embolden the industry though
it is not clear that they would automatically resolve these issues and address other
glaring gaps. The chapter concludes that there is a need to prioritize the development
of an overarching Local Content Development Policy in Kenya that will define the
focus of local content, which should be based on the country’s priorities, needs, and
specific contexts. It should also address the question of ‘community content’ verses
‘local content.’ The policy would take into consideration the actual state of local
industry, noting that local content development is a long-term goal that needs to be
phased to adapt to the demands of each stage of development of the resources.

Keywords National content · Kenya local content policy · Community content ·

Local equity participation

1 Introduction

The debate on local content has taken center stage since the discovery of commer-
cial quantities of oil in 2012 by Tullow Oil that could generate up to $1.2 billion
in revenue for the Kenyan government. The discoveries were made in the remote,

S. N. Muyonga (B)
Natural Resource Governance Institute, New York, USA
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 281
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_15
282 S. N. Muyonga

underdeveloped and historically marginalized Turkana region of Kenya. As expected,

there have been great expectations on the oil revenues and the potential benefits for
the local communities of Turkana and the country as a whole, well before actual
drilling actually commenced. These expectations have inevitably caused numerous
challenges, especially at the community level, characterized by disputes between the
locals, their leaders and the oil companies. They have also contributed to delays in
the earlier anticipated production start date of 2020.
Local content is an evolving concept with slightly different deviations as different
countries with natural resource endowments have taken different approaches based
on contextual considerations. The issue of what constitutes local content is the subject
of different interpretations but the evolution of the debate can be linked to efforts
in addressing the so-called resource curse. The resource curse (also known as the
paradox of plenty) refers to the failure of many resource-rich countries to benefit
fully from their natural resource wealth, and for governments in these countries
to respond effectively to public welfare needs (NRGI 2015). Some argue that the
so-called natural resource curse and Dutch disease are outcomes of bad economic
decisions, while other arguments have advanced the notion that the limited linkages
between the extractive sector and the rest of the economy via sector’s value chain
propagates the problem (Torres et al. 2013a). The latter provides the basis of the
development and evolution of local content policies and strategies, as a response to
the tackling the challenge.
There is no universal definition of local content but it can be generally defined as
the ways countries benefit from extractives projects beyond the government revenue
accrued. These benefits include employment, skills, knowledge, technology transfer,
business for local companies and creation of local supply chains and markets to
enhance linkages between the oil, gas and mining sector and other sectors of the
economy. The World Bank defines local content as ‘the extent to which the output
of the sector generates further benefits to the economy beyond the direct contribu-
tion to its value add, through its links to other sectors’ ( Torres et al. 2013b). The
structures and definition of local content as mentioned vary in different contexts, the
common thread in all is the ‘value addition’. In this case, the concept of value addi-
tion focuses on the optimization of the economic value derived from the resource.
The critical understanding and application of considerations that relate to specific
contexts determine the success of policy design and implementation (Youssef 2016).
Kenya is one of the new producer countries currently seeking to develop local
content polices to increase local participation along the value chain of the oil, gas
and mining sector. The challenge for Kenya is on how to maximize the potential
benefits from the resources to avoid the under-developmental pathway that has been
the trajectory of major oil producing countries in Africa such as Nigeria and Angola
while taking into consideration the various complexities of the country’s context.
This chapter will discuss the evolution of local content development in Kenya’s
extractive sector, describing the existing legal and policy frameworks promoting local
content in the industry. It will further discuss some of the gaps in these frameworks,
the main challenges facing the development of local content in the extractive sector
and highlight some good practices. It is fair to note that the focus and evolving
Complexities of Local Content in Kenya’s Extractive … 283

discussions on local content in Kenya have been largely centered around the oil
sector with the discovery of oil and in anticipation of its potential economic benefits.
The mining sector has received less attention given its negligible contribution to
the economy at present, accounting for less than 1% of gross domestic product
(KPMG 2016). This is however not to say that there have not been concerted efforts
by government to include local content development in the mining sector and its
legislation.

2 Institutional Frameworks, Legal and Policy Instruments;

Local Content Obligations in Kenya’s Extractive Sector

The growing importance of the petroleum sector has led to the recent overhaul of the
legal and regulatory framework for the oil and gas industry. This has been achieved
through the promulgation of the Constitution of Kenya in 2010 as well as the subse-
quent enactment of the Petroleum Act 2019 and the development of the Local Content
Bill 2018 to create the necessary legal framework for local content in the country.
Kenya however lacks a set overarching policy that underpins or informs any
existing local content legislation in the extractive sector. The existing framework is
contained in various legislations related to the oil, gas and mining industry but it
is hard to identify the vision and policy objectives for these legal tools. The devel-
opment of the Local Content Bill, 2018 has proceeded in the absence of this kind
of policy. The government recently announced, through the Minister of Petroleum
and Mining, that it is in the process of developing such a policy that ‘will promote
a national development agenda by nurturing local participation and international
competitiveness of Kenyan nationals and firms at community, county and national
levels’ (Business Today 2019).

2.1 The Constitution of Kenya

The Kenyan Constitution promulgated in 2010 creates an excellent starting point

for local content development. It lays a foundation for the management of natural
resources and has enhanced protection and enforcement of fundamental rights among
other gains spelt out in the Bills of Rights. The document provides for a two-tier
structure of government, i.e., the National and the County Governments. It then
distributes functions and powers between these two levels of government, allowing
for local level government participation in governance processes. To this end, it
provides the locals, through the county governments, the legitimacy to participate in
decisions concerning management of extractive resources.
Article 66(2) of the Constitution requires parliament to enact legislation that
ensures investments in property shall benefit the local communities and their
284 S. N. Muyonga

economies. In addition, Section 69 (1) (a) provides that the state shall ‘ensure sustain-
able exploitation, utilization, management and conservation of the environment and
natural resources, and ensure the equitable sharing of the accruing benefits.’ These
provisions are viewed as the bedrock of local content development in Kenya and
provide the legal basis of local content policies and have equally led to the enact-
ment of legislation for the extractive industry that include the recently enacted Mining
Act 2016, the Energy Act 2019 and the Petroleum Act 2019. Additionally, with
the discovery of commercial quantities of oil, the 2nd Medium Term Plan (MTP)
of Kenya’s Vision 2030 included oil and other minerals in the economic pillars
and recognized the sector’s potential to contribute ‘to increased export earnings,
higher GDP growth, broader social development, and a major spur for infrastruc-
ture development and job creation’ (Second Medium Term Plan 2013–2017). The
plan highlights areas of intervention to include enhancement of local expertise and
skills development in petroleum exploration and production.1
The Oil and Other Mineral Resources sector was identified as an additional priority
sector under the Economic Pillar of Kenya Vision 2030. Even though the sector then
accounted for only one percent of GDP and three percent of total export earnings,
discoveries of oil, gas and other mineral resources pointed to an increasing importance
of this sector to contribute to increased export earnings, higher GDP growth, broader
social development, and a major spur for infrastructure development and job creation.

2.2 The Oil and Gas Sector

2.2.1 The Petroleum Act, 2019

In the oil sector, prior to the enactment of the Petroleum Act 2019, the legal framework
in existence was not sufficient to support the implementation of local content. The
only existing laws were contained in the Petroleum (Exploration and Production)
Act, chapter 308 and its model Product Sharing Agreement (PSA). The Petroleum
(Exploration and Production) Act 1986 requirements for local content were broad
statements that become subject to different interpretations. The Act included an
obligation for contractors to give preference to locally available goods and services
and to prioritize Kenyans in employment and training.
This Act had some important limitations. Perhaps most importantly, the drafters
did not provide for targets outlining how much local representation is needed. It is
unclear whether this was a deliberate approach, as there are some arguments against
the setting of targets—for example, that overly optimistic or rigid targets such as those
defining the percentage of local ownership in any joint ventures tend to create rent-
seeking behavior and market abuse that actually deny locals the very opportunities
the legislation is seeking to create (Esteves et al. 2013). The Act also did not provide
for monitoring or reporting. The lack of clarity meant that local content creation was

1 Ibid p. 67.
Complexities of Local Content in Kenya’s Extractive … 285

essentially left for negotiations between the government and the oil companies. No
standard requirements were set and different contracts were likely to have different
provisions guaranteeing no uniformity in practice. Local communities continued
to feel marginalized, as neither are they party to the negotiations or privy to the
agreements as contracts are not yet in the public domain.
The Petroleum Act, 2019 and its model Product Sharing Contract (PSC) schedule
18, also provide for local content development in the oil and gas sector. The 2019
Act defines local content as ‘the added value brought to the Kenyan economy from
petroleum-related activities through systemic development of national capacity and
capabilities and investment in developing and procuring locally available workforce;
resources and supplies; for the sharing of accruing benefits’.2 The Act also allows
the Cabinet Secretary to make regulations in respect to local content development.
Other provisions require that priority is given to services provided and good manu-
factured in Kenya, provided that they meet the specifications of the industry as set
by Kenya Bureau of Standards or, in the absence of this, any other international
standards provided by the authority created to regulate the sector. The Act further
requires that priority is given for the employment of or engagement of qualified and
skilled Kenyans at all levels of the value chain. The Act creates a Local Content
Training Fund and all moneys raised by contractors will be used for the purpose
of training Kenyan nationals in the upstream petroleum operations. Contractors are
required to submit a local content plan to the Energy Petroleum Regulatory Authority
(EPRA), the new sector regulator, before commencing any petroleum operations and
each consecutive year, thereafter, together with corresponding work programs. All
contractors are also required to evaluate their existing contractual and procurement
arrangements to ensure compliance with the local content requirement.3

2.3 National Energy Policy 2018 and Energy Act 2019

The Kenyan government published the National Energy Policy in 2018. This docu-
ment highlighted, among other things, the need for government to develop and imple-
ment a local content policy; to develop and implement education frameworks for
human capital development to build knowledge and technical capacity in the sector;
to develop and implement legislative framework to prioritize utilization of locally
available goods and services and human resource and ensure compliance by investors
and contractors to local content requirements. The Energy Act 2019, which was
enacted shortly after and also came into force at the same time as the Petroleum Act
2019, is intended to among other functions, regulates midstream and downstream
petroleum activities. The Act has a similar definition of local content as to that in the
Petroleum Act, imposing a requirement on contractors to comply with local content
requirements and to submit to the Energy Petroleum Regulatory Authority annual

2 The Kenya Petroleum Act, 2019.

3 Clause 50, The Petroleum Act, 2019.
286 S. N. Muyonga

local content plans for approval. The Act provides that the local content plan should
ensure that priority is given to services provided and goods manufactured in Kenya.
The Act requires the government to establish the Local Content Development and
Monitoring Unit. It also provides that skilled and qualified Kenyans should be given
first priority in respect to employment at all levels of the value chain. In this regard,
the provisions on local content in the Energy Act are in harmony with those of the
Petroleum Act 2019.

2.4 Mining Policies, Laws and Regulations

As mentioned above, most debates on local content have centered around the
petroleum sector, though the government has recently introduced some new mining
policies and legislation that target increased local participation as part of broader
efforts to improve the sector’s performance. The first was the Mining and Minerals
Policy Sessional Policy No. 7 of 2016. This policy calls for local content require-
ments for goods and services for the mining sector and in supporting industries.
The policy’s focus includes local equity participation in investment in the mining
sector as one of its objectives. It also provides for maximization of mining bene-
fits through use of local goods and services by promoting horizontal/lateral and
vertical/backward and forward linkages in the mining industry. Alongside these
efforts, the government passed the Mining Act, 2016. Its key highlights include
provisions for preference in local procurement and the employment of Kenyans. The
Mining Act also provides local content requirements for capacity building, equity
participation, research and development, and recognizes the local community in
areas where the mining industry is located. The government subsequently developed
supporting regulations through the Mining (use of local goods and services) Regula-
tion, 2016 and Mining (Employment and Training) Regulations 2017 (Employment
Regulations) 2016.

2.5 Draft Local Content Bill, 2018

In 2018, Parliament debated the Local Content Bill introduced as a Senators Bill in
the upper house. The bill is yet to be considered by the lower house. Some of its key
provision spell out the roles of the national and county governments in maximizing
development and implementation of local content, emphasizing that the national
government would ensure consultation with country governments in undertaking
its functions. Although it supposedly covers the oil, gas and mining sectors, the text
focuses only on oil and gas. It defines local content ‘ as the added value brought to the
Kenyan economy from extractive industry through systemic development of national
capacity and capabilities and investment in developing and procuring locally avail-
able workforce, services and suppliers, for the sharing of accruing benefits.’ The bill
Complexities of Local Content in Kenya’s Extractive … 287

also provides for the establishment of The Local Content Development Committee,
the proposed structure and roles of which are highlighted further below.

3 Institutional Frameworks

3.1 Energy Petroleum Regulatory Authority (EPRA)

The Energy Act, 2019 established the Energy Petroleum Regulatory Authority
(EPRA), which the Petroleum Act, 2019 empowers to do a range of important
things with respect to local content. The EPRA is an independent government agency
established as the successor to the Energy Regulatory Commission (ERC) with an
expanded mandate of inter alia regulation of upstream petroleum and coal. The func-
tions of the Authority also include the enforcement of local content requirements.
Specifically, Section 51 of The Petroleum Act 2019 mandates the EPRA to oversee,
co-ordinate and manage the development of local content and prepare guidelines in
setting targets and formats for local content plans and reporting; make appropriate
recommendations to the Cabinet Secretary for the formulation of local content regu-
lations; set minimum requirements for local content and undertake audit, monitoring
and enforcement.

3.2 Proposed Local Content Development Committee (LDC)

The Local Content Bill as stated above, proposes to establish the Local Content
Development Committee (LCDC). The Bill spells out the function of the committee
that include overall oversight and coordination of the management of local content
development in Kenya. The committee is tasked with making recommendations and
advising the Cabinet Secretary on policy and strategies for local content development
and implementation. The committee will appraise and approve annual local content
plans from operators and consult with county governments to ensure compliance.
The committee will also keep a register of all equipment and services required to
effectively service the industry. The chairperson of the committee with be appointed
by the Cabinet Secretary.

4 Challenges in Implementing Local Content Development

in Kenya

The first and most common challenge arising in local content development in any
country is in defining the ‘local’ in local content within the applicable policy and
288 S. N. Muyonga

legal frameworks. Some jurisdictions, for example, have made distinctions between
‘local content’ and ‘local participation’. In these cases, local content is defined as
the quantum or fraction of locally produced materials, personnel, goods and services
rendered to the oil, gas and mining industries, all of which can be measured in
monetary terms. Local participation, by contrast, is defined as the level of equity
ownership local citizens hold in these business or companies servicing the extractive
industry. This distinction has led to the emergence of numerous definitions for a local
company in different contexts (Esteves et al. 2013).
Defining the ‘local’ in local content has been problematic and a major source
of conflict in the Kenyan context. From the existing Kenyan legislation and the
draft Local Content Bill, it is apparent that ‘local’ is synonymous with ‘national
content,’ meaning that inputs and skills can be sourced from anywhere in the host
country as opposed to local sourcing from the resource-rich regions. The existing
legislation, i.e., the Petroleum Act 2019 and Energy Act, 2019, expressly speak of
systematic development of national capacity while also defining local community as
‘people living in a sub-county within which a petroleum resource under this Act is
situated and are affected by the exploitation of that petroleum resource.’ However,
neither Act in its respective local content provisions apply or make reference to ‘local
community’ in describing the requirements or obligations of operators in the sector.
In Turkana, there have been reported cases of conflicts involving local communi-
ties, government and oil companies in recent times. The conflicts have been linked
to issues around land compensation, the influx of people from areas outside Turkana,
oil exploration’s possible impacts on livestock grazing zones and water sources,
displacement of households and preferential recruitment of outsiders (Nanok and
Onyango 2017). A common factor in these disputes is dissatisfaction among local
communities, many of which already claim to feel disenfranchised and strongly
believe that they should be benefiting more from the oil produced from their lands.
They have expressed their concerns in the use of ‘local’ to mean ‘national’ appre-
ciating that their current capabilities would present limited opportunities in meeting
the product and employment standards met by the industry that will favor people
or businesses outside their community.4 This is definitely expected as Turkana is
Kenya’s third-poorest region. Official data indicates that more than half the local
economy relies on pastoral farming and the per capita income is less than one-fifth
of levels seen in Kenya’s capital. According to a Kenya National Bureau of Statistics,
around 55% of Turkana residents live below the poverty line.5
Despite these challenges, it is not clear that local content policies and legislations
would automatically resolve these issues and address the glaring gaps. Tullow Oil has
been at the receiving end of most of the conflict and has deployed many community
engagement strategies and programs to mitigate the challenges. In early November
2013, for example, Tullow’s operations in Turkana suffered a two-week shutdown due
to demonstrations by the local community, which was protesting against exclusion

4 Fourth Workshop Report of the Extractive Sector Forum: Local Content Development at the County

Level—Turkana (November 2016) Meeting Report.

5 Kenya National Bureau of Statistics, Kenya Integrated Household Budget Survey Report 2015/16.
Complexities of Local Content in Kenya’s Extractive … 289

from employment and supply of goods and services (Financial Times 2013). Tullow
has taken up the task of responding to community demands and has also embraced
voluntary public disclosures on its activities. To this end, they have published annual
reports including data and figures related to local content expenditure, employment
and social investment and other payments to government.
However, this approach outside clear and concerted efforts by government
in deploying appropriate strategies of addressing the glaring challenges seems
futile. Overseas Development Institute (ODI) introduces the concept of ‘commu-
nity content’ defining it as ‘the interface of community investment programs with
local content.’ ODI suggests that community content can be seen as ‘merit good,’
meaning they are not necessarily specific in nature but are targeted at those affected
by oil and gas development and this to some degree are exclusionary. They there-
fore differ from local content programs that are less exclusionary and a ‘public good’
(Warner 2007). Such arguments suggest that community content should be pursued as
a distinct policy from local content, even as community content would still be treated
as local content. Achieving community content would however require concerted and
conscious efforts in building the capacity of local skills to access the opportunities
in extractive sector, and strategies for community content should be designed differ-
ently from those of local content development.6 The Kenyan case needs to assess
the viability of this approach in dealing with some of the community-specific chal-
lenges. Partly in recognition of this, the County Government of Turkana developed
its Policy Framework for Extractive Industries in Turkana in 2018. If successfully
implemented, this document could help ensure the local government prioritizes in
its development plans, support in developing skills and business capacity of the local
community in becoming competitive to participate in the sector.
Another major challenge in implementing local content development in Kenya
is the lack of an overarching National Local Content Policy. Kenya seems to have
adopted a local content approach that consists of setting legally binding targets.
Although the existing laws have stipulated the relevant institutions under legislation
would set those the operators are obligated to comply. It is argued that setting these
kinds of targets implies that the government has sufficient human capacity in skills,
goods and services that the foreign operators require through the value chain (Youssef
2016). However, this is not the case as there is a limited pool of expertise and skills
in the sector both at the national and local levels.

5 Conclusion

Kenya has made some meaningful strides in the development of local content in the
extractive sector. In adopting a broader approach to the issue, it has adopted national
legislation for the same. The existing laws make a good attempt at harmonizing
the definition of local content as seen in The Petroleum Act, 2019 and its model

6 Ibid p. 6.
290 S. N. Muyonga

PSC, The Energy Act, 2016, the Mining and Mineral Policy, the Mining Act and
the Proposed Local Content Bill, 2018. All these policies and legislation offer some
guidelines for developing and enforcing measures that will ensure a competitive local
workforce, facilitate knowledge and skill transfer and promote the use of local goods
and services.
The regulatory frameworks have also adopted some good practices on local
content. Examples on these include the provision for the establishment of an Energy
Petroleum Regulatory Authority (EPRA) in the Energy Act, 2019 and the Petroleum
Act and its model Product Sharing Agreement in the Petroleum Act, 2019. The
EPRA is the independent upstream industry regulator tasked with enforcement of
local content requirements among other regulatory duties. The Act also introduces
a Training Fund to train Kenyan nationals in the upstream mainly guaranteeing a
funding for skills development.
At the same time, some serious challenges remain. Foremost among these are
the multiplicity of regulations and regulatory institutions, lack of clear distribution
of power and responsibilities between governments at national and county levels,
enormous development setbacks in extractives host communities, and the gaps in the
expectations of locals. In addition, a lack of requisite skills and competence continues
to limit employment opportunities and participation by host communities. The case
of Turkana, highlighted above, illustrates some of the conflicts in the region, which
has been a result of limited opportunities due to these gaps. It is therefore important
that government and company interventions on local content should not only tighten
the legislative and regulatory frameworks but also inquire into the social dynamics as
well as into governance and accountability structures at the community level, paying
special attention to community content.
One unique development is the proposed Local Content Bill that seeks to estab-
lish a Local Content Development Committee that would oversee, co-ordinate and
manage the development of local content in the country. While it is anticipated that
passage of the bill will be a step forward for local content development, it may not
necessarily address all the complexities. For instance, if the bill does not clarify the
functions of the Local Content Development Committee compared to those of the
already existing EPRA, it may create clashes of interest and overlapping roles. In
particular, special attention should be paid when developing the roles and functions
and appointments of this committee, to avoid too much bureaucracy and numerous
reporting requirements for companies that would create bottlenecks in contracting
and subcontracting and subsequently in the smooth running of the sector. The final
draft of the bill also needs to say more about its applicability to the mining sector, as
the current draft reads more like a Petroleum Sector Local Content Bill.
The country also needs to prioritize the development of an overarching, non-
sector-specific Local Content Development Policy that will define the focuses and
goals for local content in line with the country’s priorities, needs and specific contexts.
The policy needs to take into consideration the actual state of local industry, noting
that local content development is a long term goal that needs to be phased to adapt
to the demands of each stage of development of the resources. It should also reflect a
common understanding among all the stakeholders of what constitutes local content,
Complexities of Local Content in Kenya’s Extractive … 291

who is responsible for all actions and implementation—e.g., the national versus
county governments, companies, etc. The policy should state clear yet realistic targets
and goals that will provide a basis for Local Content Laws and Regulations and in
the case of Kenya, ensure a harmonized approach and timelines for implementation.
Consultations with wider stakeholders, including the community in the development
of the policy should ensure that local content is understood as part of a broader
policy approach and directly linked to broader economic development policies such
as Vision 2030. It should in essence Act as a springboard for additional economic
activities and facilitate a strong multiplier effect to achieve this vision. Clear moni-
toring and evaluation mechanisms to ensure compliance have to be established in
this context while assigning responsibilities for implementation and monitoring of
the policy.
Other important steps in the development of local content include prioritization
of physical development, improving the enabling environment for businesses and
targeting efforts at human capital development. The national and local governments
need to conduct an objective and comprehensive analysis of local capacities available
and develop a detailed plan, including the right institutions and funding support to
enhance the same. This process should involve a demand side value chain analysis
that will diagnose the company standards, operational requirements at each stage of
projects and identify opportunities for local skills, good and services. Equally, the
process should assess the supply side, i.e., the local skills and commodity capabilities
and conduct a baseline to establish the gaps. This will enable interventions to be
targeted at areas in ways that respond to existing demand and supply dynamics.
Funding arrangements and loan plans should be provided for Small and Medium
Enterprises to aid growth and competitiveness of locals. Moreover, targeted efforts
should be made in the Counties Integrated Development Plans to reduce capacity gaps
among locals in the resource-rich areas. Periodic social and economic assessments
of communities should be prioritized to understand local needs and aspirations.
For all these reasons, the government should prioritize data collection and analysis
to measure progress and inform development of future local content measures. In
addition, a robust conflict management strategy should be developed to help facilitate
better relations between locals, investors and the government. And critically, for the
success of all these efforts, the government should resist the urge to create processes
that will encourage patronage, corruption and rent seeking for those in power and
focus more on the growth of legitimate businesses and human capacities in the
extractive sector.

References

Business Today, May 8, 2019.

Esteves, A. M., Coyne, B., & Moreno, A. (2013). Local content initiatives: Enhancing the
subnational benefits of the oil, gas and mining sector (p. 6). NRGI
Financial Times, October 18, 2013.
292 S. N. Muyonga

KPMG (2016). Analysis of mining act 2016 (p. 1).

Nanok, J. K., & Onyango, C. O. (2017). A socioeconomic and environmental analysis of the effects of
oil exploration on the local community in Lokichar, Turkana County, Kenya. International Journal
of Management, Economics and Social Sciences (IJMESS), 6(3), 144–156. ISSN 2304-1366,
IJMESS International Publishers, Jersey City, NJ.
NRGI. (2015). The resource curse: The political and economic challenges of natural resource
wealth
Second Medium Term Plan. (2013–2017). Transforming Kenya: Pathway to devolution, socio-
economic development, equity and national unity (p. 67). www.vision2030.go.ke.
Tordo, S., Warner, M., Manzano, O. E., Anouti, Y. (2013). Local content policies in the oil and
gas sectors (pp. 2–3). Washington DC: The World Bank., Grossman, G. M. (1981). The theory
of domestic content protection and content preference. Quarterly Journal of Economics, 96(4),
583.
Torres, N., Afonso, O., & Soures, I. (2013a). A survey of literature on the resource curse: Critical
analysis of the main explanations, empirical tests and resource proxies (No 1302). Universidade
do Porto, Falcudade de Economia do Porto
Warner, M. (2007).Community content: The interface of community investment programmes with
local content practices in the oil and gas development sector (p. 5). Overseas Development
Institute (ODI) Policy Brief Note 9.
Youssef, E. H. (2016). Local content in the extractive sector: Exploring policy issues in new
producing countries’. Policy Centre for the New South, Blog posted November 11, 2016.
Local Content Policy in Indonesia Oil
and Gas Industry

Eko A. Prasetio and Elisabeth D. Kumalasari

Abstract As a net oil importer, the Government of Indonesia (GoI) put a lot of effort
into attracting new investment for oil and gas exploration and exploitation. The gross
split scheme was introduced in 2017 as an alternative to cost recovery. Meanwhile, the
GoI has been setting up various regulations and a road map to increase local content
to stimulate local manufacturers in the oil and gas supporting industries. How this
significant policy change affects the local content requirement and implementation
becomes the central focus of this chapter. In the cost recovery scheme, local content
requirement was enforced through various regulations with close supervision from
the government’s executive task force in upstream oil and gas business activities;
meanwhile, the gross split scheme uses an incentive approach by incorporating local
content as a part of variable split. The impact of new policy started to emerge in
the form of new investments in the gross split scheme as well as the corresponding
local content procurement. Challenges in the local content implementation include
concerns over the quality and price of locally produced goods. Some cases suggested
that locally procured goods are not yet up to the standard and specifications required
by the contractors of cooperation contract, and yet, the price is higher than imported
ones. As these challenges could hinder the target of local content realization, govern-
ment, local manufacturers of oil and gas supporting industries and the contractors
need to work together to overcome those.

Keywords Local content · Oil and gas · Cost recovery · Gross split · Indonesia
extractive resource

E. A. Prasetio (B)
School of Business and Management, Bandung Institute of Technology, Bandung, Indonesia
e-mail: [email protected]
E. D. Kumalasari
Ministry of Energy and Mineral Resources, Jakarta, Republic of Indonesia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 293
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_16
294 E. A. Prasetio and E. D. Kumalasari

1 Introduction

This chapter discusses the local content policy in Indonesia’s oil and gas sector
as part of the extractive resource industry. The overview and short history of the
Indonesian oil and gas industry are described, including the change in the scheme of
profit sharing, i.e., cost recovery vs. gross split.
The elaboration on how the change of sharing schemes affects the local content
requirements is presented. The goals and implementation of local content policy
are described and analyzed. The analyses will also include the challenges in the
implementation of local content requirement as well as the recommendation measures
required to overcome those challenges.

2 Background and Overview of Indonesia Oil and Gas

Industry

Indonesia is a net oil importer since 2004, due to decreasing oil production, which is
not balanced by the increasing domestic oil consumption. The production of crude
oil of 786 thousand barrels per day in 2015 is only 70% of its 2005 daily production.
The decline is caused by the natural maturation of producing oil fields as well as the
slow reserve replacement rate.
Consequently, the contribution of the oil and gas sector to state revenue decreases
significantly along with the decrease in production and reserve. In 2016, the oil and
gas sector contribution fell to 3% compared to 15% in the year 2010 (Fig. 1).
The Government of Indonesia declared several new upstream oil and gas projects
to boost production, e.g., Jangkrik field development, Tangguh Train-3, the Indonesia
Deepwater Development Project and Genting’s Kasuari block (source: Oil and Gas
in Indonesia, PwC, 2017).
High risk and uncertainty, huge amounts of investment and the requirement of
sophisticated technology characterize the upstream oil and gas business activities.
A production sharing contract (PSC) has been applied since 1966 in the upstream
oil and gas business activities, when PERMINA signed a PSC with Independence
Indonesian American Oil Company (IIAPCO).
As a metaphor in agriculture, we might think of the PSC model as the business
model between the owner of the paddy field and the farmer who manage the field.
The government acts as the owner of the field and the oil and gas company as the
farmer who provides all the investment and production equipment. The investment
by the “farmer” needs to be approved by the “field owner” since this investment will
be returned eventually at harvest time. This is how the cost recovery scheme works
in the oil and gas business. This scheme was considered the best model applied in
Indonesia, since this sharing model ensured the ownership and power of the country
upon its oil and gas resources and protected the country from the excessive risk and
uncertainty in the upstream oil and gas business activity.
Local Content Policy in Indonesia Oil and Gas Industry 295

Fig. 1 Indonesia oil production and consumption. Source Oil and Gas in Indonesia: PwC Report
(2017)

In 2015, however, the value of cost recovery was unexpectedly higher than the
state revenue coming from the oil and gas lifting. This of course became the contro-
versy (Fig. 2). This occurred because there was no obligation for the contractors of
cooperation contract to be efficient in their operational activities.
(https://money.kompas.com/read/2014/11/12/161158726/Mengenal.Kontrak.
Hulu.Migas.Indonesia).
The Government of Indonesia eventually issued the gross split scheme in the
beginning of 2017. The scheme is expected to encourage the contractor of cooperation
contract to be able to maintain the efficiency of operational expenses while contin-
uously improving the technology management, human resources and the system.
Unlike the cost recovery, the contractor of cooperation contract covers the overall
expense in the gross split scheme (Fig. 3).
The other difference between cost recovery and gross split lies in the share of split.
On one hand, in the cost recovery, after tax, the split is fixed with the government
obtaining 85% while the contractor obtains 15% for oil; whereas it is 70 versus 30%
for gas. On the other hand, the gross split scheme is dynamic where the split depends
on the variable split (Fig. 4).
The criteria of profit sharing in the gross split scheme include:
1. Reservoir depth;
2. Field location, whether the field is onshore, offshore or remote;
3. Reservoir condition;
4. Level of difficulty based on the geological condition;
5. Reservoir characteristics, i.e., whether the reservoir is categorized as conventional
or non-conventional oil and gas block, as well as the technology utilized by the
contractor.
296 E. A. Prasetio and E. D. Kumalasari

Fig. 2 Government income versus cost recovery

This policy started to show an impact as shown in Figs. 5 and 6. In 2019, 40 oil
and gas blocks have been using the gross split scheme. After the new scheme was
introduced, 5 and 9 blocks have been successfully bid in 2017 and 2018, respectively.

3 Target and Implementation Road Map of Local Content

Requirement

Indonesia uses local content requirement (Tingkat Komponen Dalam Negeri or TKDN
in Bahasa Indonesia) as part of its industrial policy in the oil and gas industry for
various reasons. According to Regulation No. 15/2013, the reason for using local
products and services for upstream oil and gas business activities includes: the multi-
plier effect for national economy, developing local innovation and technology, and
producing goods and services effectively and efficiently. Local content requirement
is also expected to ease the current account deficit due to imports of goods and
services.
The government believes that local content requirement policy would be able to
reduce import for basic industrial needs, including in the oil and gas sector, up to
USD 20 billion (source: Vice Minister of Finance, GOI, CNBC Indonesia interview
on 24th of July 2018). Therefore, the government established a road map and target
Local Content Policy in Indonesia Oil and Gas Industry 297

Fig. 3 PSC cost recovery versus the PSC gross split

Fig. 4 Gross split scheme and the local content as part of variable split
298 E. A. Prasetio and E. D. Kumalasari

Fig. 5 Gross Split Achievement until 2019, resulting in USD 895.4 million and Exploration Fund
worth USD 2.1 billion. Source Indonesia Ministry of Energy and Mineral Resources

Fig. 6 Impact of newly introduced gross split scheme. Source Indonesia Ministry of Energy and
Mineral Resources
Local Content Policy in Indonesia Oil and Gas Industry 299

Table 1 Road map of local content of goods in upstream oil and gas business activities
No. Commodities Target of local contents (%)
Short term Medium term Long term
2013–2016 2017–2020 2021–2025
1 Fuel 60 75 95
2 Lubricants 50 60 70
3 Drilling pipe
– Hi grade 25 40 55
– Low grade 15 25 40
4 Linepipe 50 65 80
5 Drilling mud, cement and chemical 40 55 70
6 Electrical submersible pump 15 25 35
7 Pumping unit 40 55 70
8 Machinery and equipment 20 30 40
9 Wellhead and X Mas Tree
– Onshore 40 55 70
– Offshore 15 30 40
10 Other goods 15 25 40
Source Annual Report of Energy and Mineral Resources Ministry of Republic of Indonesia 2013

of local content for short, medium and long term as shown in the table, as stated in the
Minister of Energy and Mineral Resources Regulation Number 15/2013 (Tables 1
and 2).
MoEMR issued a new regulation in the spirit to make Indonesia become more
investment-friendly. For example, MoEMR Regulation No. 14/2018 regarding Oil
and Natural Gas Supporting Business Activities simplifies the bureaucracy for oil
and gas supporting businesses in obtaining Supporting Business Capacity Certificate
(Surat Kemampuan Usaha Penunjang, or SKUP). The SKUP is classified into oil
and gas construction services, oil and gas non-construction services, and oil and gas
supporting industries. By issuing Reg 14/2018, the previous Regulation No. 27/2008
that requires the oil and gas supporting industries to acquire Registration Certificate
on top of SKUP is abolished and the issuance of SKUP that previously took 10 days
is shortened to 3 days.

4 Local Content Policy in the Indonesian Oil and Natural

Gas Sector

Indonesian local content requirements are spread across various laws, regulations
and decrees. The policy is based on the Constitution of the Republic of Indonesia
1945 and requires natural resources to be directly controlled by the state. The Law
300 E. A. Prasetio and E. D. Kumalasari

Table 2 Road map of local content of services in upstream oil and gas business activities
Services
No. Commodities Target of local contents (%)
Short term Medium term Long term
2013–2016 2017–2020 2021–2025
1 Chartering service EPCI
– Onshore 50 70 90
– Offshore 35 45 55
2 Drilling services
– Onshore 55 70 90
– Offshore 35 45 55
3 Shipping services 75 80 85
4 Airline services 80 90 95
5 Services survey, seismic and geological studies
– Onshore 60 75 90
– Offshore 15 25 35
6 FEED services 60 70 80
7 Other services 40 55 75
Source Annual Report of Energy and Mineral Resources Ministry of Republic of Indonesia 2013

No. 22/2001 on Petroleum and Natural Gas (“Law 22”) is the primary oil law. It is
amended before the legislature following a 2012 Constitutional Court Ruling that
found parts of the Law unconstitutional. Under Law 22, private companies could
carry out exploration, development and production as contractors to the government
under the profit-sharing contract (PSC) scheme.
The Regulation No. 35/2004 is on upstream oil and gas business activities (known
as “Reg. 35”). This regulation was last amended by Reg. No. 55 of 2009. Under this
regulation, companies must give preference to qualified Indonesian personnel and
train such personnel for staff positions including in administration and executive
management (Reg. 35, Art. 82). According to Law 22, Art. 40(4) and Reg. 35, Art.
79(2), business entities are required to prioritize local goods, services and technology,
as well as Indonesian design and engineering capabilities so long as they are of
comparable quality, price and availability. Goods, services, technology, and design
and engineering capabilities can be imported if they are not produced domestically
(Reg. 35, Art. 80).
SKK Migas, or Executive Task Force for Upstream Oil and Natural Gas Business
Activities, issued the Working Guidelines of the Implementing Body for Oil and Gas
Business Activities No. 007 Revision-IV/PTK/I/2011 or “PTK 007.” It is followed
by Regulation No. 15/2013 or “Reg. 15” that codifies Pedoman Tata Kerja or PTK
(Working Guideline) 007, abbreviated as PTK 007, which states a 5% pricing prefer-
ence for Indonesian companies, defined as companies with 51% of voting shares and
Local Content Policy in Indonesia Oil and Gas Industry 301

two-third of Board of Directors (BOD) seats held by Indonesian citizens (source:

SSEK Indonesian Legal Consultant, “Oil and Gas Procurement Amendment to PTK
007, Indonesian Insight, 16 May, 2013).
The Government of Indonesia established the regulations for oil and gas to increase
the domestic product competitiveness. Operational material and equipment is defined
as all the material and equipment required for upstream oil and natural gas operation
activities, including field processing activities, transportation, storage and sales of
production results. Contractor of cooperation contract may use the local or imported
operational material and equipment.
Ministry of Energy and Mineral Resources issued the Regulation No. 15/2013
on local content requirement in upstream oil and natural gas business activities with
goals in mind, i.e., encouraging the local products and services to be able to support
the upstream oil and natural gas business activities and providing value added for the
economy. The regulation also has a goal of creating jobs for locals, as well as giving
opportunity for local products and services to be able to compete at the national,
regional and international levels. The regulation of local content requirement is
intended to support and to develop innovation and technology of local products.
By applying this regulation, it is expected that the increase in the local content
of oil and gas upstream business activities maintains the effectiveness and efficiency
principle, as well as maintains the good governance of the implementation.
Meanwhile, government had to monitor the material and equipment that will
be used by the contractor of cooperation contract. It has to do with the exemption
of custom and import tax of material and equipment that will be required by the
contractors. The contractor of cooperation contract needs to acquire Import Plan
Document (Rencana Impor Barang, or RIB, in Bahasa Indonesia) before they are
allowed to import. According to Ministerial Regulation No. 17/2018 on the import
of material and equipment for the contractor of cooperation contract, usage of local
product is one of the important aspects for a contractor of cooperation contract to
obtain the RIB document. Contractors, under the cost recovery scheme, who import
goods without the Import Plan Document will bear the consequence, i.e., unable to
recover the costs borne by importing.
Indonesian MoEMR continually updates the list of products and services that
can be locally produced in a Master List of Local Goods and Services. This Master
List acts as a reference for the contractor of cooperation contract in the search for
required goods and services for their operational activities. In formulating opera-
tional equipment and materials, the contractor of cooperation contract has to prior-
itize locally produced goods, services, technology and engineering capabilities in a
transparent way, referring to the Master List of Local Goods and Services (or Buku
APDN in Bahasa Indonesia). (http://skkmigas.mic.ads2.kompas.com/post/30/men
genal.kontrak.hulu.migas.indonesia).
In the gross split scheme, the government considers local content as one of
the profit-sharing variables. In principle, the higher the local content used by the
contractor of cooperation contract in the upstream business activities, the more the
contractor has the opportunity to get the bigger split.
302 E. A. Prasetio and E. D. Kumalasari

5 The Elaboration of the Difference of Local Content

Requirement Under Cost Recovery and Gross Split

In the cost recovery scheme, the procurement of goods and services of the contractors
of cooperation contract refers to PTK 007 issued by SKK Migas (Executive Task
Force of Upstream Oil and Gas Business Activities), wherein the guidelines regulate
and supervise the prioritization of domestic or locally produced goods and services
to be maximized. PTK 007 Revision 04 and its operational guidelines govern the
provision of stronger use of domestic goods and services. In this revision, it is stipu-
lated that the use of domestically produced goods is an “obligation,” rather than the
previously used term “prioritize,” in the upstream oil and gas business activities.
Greater preference is given to the use of ships and domestic production drilling
rigs. This regulation also strengthens the multiplier effect in the area of oil and gas
operations because the implementation of tenders with a value of up to Rp. 10 billion
can only be followed by goods/service providers domiciled in the province where
the contractor operates.
While in Article 18 of the ESDM Ministerial Regulation No. 08 of 2017
concerning gross split profit-sharing contracts, it is stated that procurement of goods
and services is carried out independently by the contractor of cooperation contract.
The variable of local content in the gross split scheme is expected to be able to
encourage contractor of cooperation contract to better utilize domestic products.
Moreover, with the existence of this variable local content, the domestic oil
and gas supporting industries are capable of further developing their products. For
example, the way to increasing local content in the pipe industry in Indonesia is
by producing pipes from billets. Previously, the local pipeline manufacturer only
carried out heat treatment and threading facilities with a maximum local content of
25–30%. However, by adding the process of making green pipes from billets, the
local content could rise to more than 40%. Optimizing the use of domestic products
(goods and services) by the contractor of cooperation contract is expected to be able
to support the development of domestic industries and provide optimal share split
for contractor of cooperation contract. (Source: https://finance.detik.com/energi/d-
3585578/ini-aturan-baru-tender-barang-dan-jasa-hulu-migas.)

6 Implementation of Local Content Policy Under Cost

Recovery and Gross Split Schemes

Efforts taken by the Ministry of Energy and Mineral Resources are showing posi-
tive results. In 2006, the total expenditure of all contractor of cooperation contract
amounted to USD 8523.9 million. The local content of all goods and services procure-
ment was 43%. However, in 2013, the total expenditure of goods and services was
USD 12,553 million with USD 7030 million domestically sourced, or equivalent to
Local Content Policy in Indonesia Oil and Gas Industry 303

56%. The more recent local content value of procurement of goods and services in
the upstream oil and gas business is shown in Fig. 7.
The Ministry of Energy and Mineral Resources (MoEMR) delegates the over-
sight of the upstream oil and gas business activities to the Executive Task Force for
Upstream Oil and Natural Gas Business Activities (SKK Migas), including local
content compliance. Until 2012, that job was delegated to Executive Agency for
Upstream Oil and Gas Business Activities (BP Migas).
In terms of monitoring compliance with local content requirements, the responsi-
bility lay with the companies themselves since, under PTK 007, the government has
limited supervision. Reg. 35 increased the government’s monitoring and enforcement
authority including the ability to witness production processes, making verification
of local content levels compulsory and giving the Executive Task Force of Upstream
Oil and Gas Business Activities (SKK Migas) the ability to set the local content level
a company needs to achieve in its procurement plan.
In 2011, MoEMR issued the Ministerial Regulation No. 0982/2011 to form a team
of Enhancement of Local Production Use (Peningkatan Penggunaan Produksi Dalam
Negeri or P3DN) in the upstream oil and gas business activities. The team consists of
different stakeholders, e.g., government (directorate general of oil and gas, MoEMR
and Executive Task Force of Upstream Oil and Gas Business Activities), business
association of oil and gas, and Director of Metal Industry, Ministry of Industry.
However, this P3DN team is inactive at the moment although it has a very important
role in the implementation of local content policy in upstream oil and gas business
activities.
In the gross split scheme, the government considers local content as one of the
profit-sharing variables. According to the Regulation of Minister of Energy and

Local Content in the Upstream Oil and Gas

14000 80%

12000 68% 70%

61% 63%
60% 58% 60%
10000 57% 55%
54%
50%
8000
40%
6000
30%
4000
20%
2000 10%
0 0%
2011 2012 2013 2014 2015 2016 2017 Sep-18
Goods (mn US$) 3706 5082 4616 5548 2590 3699 1637 1034
Services (mn US$) 8109 11531 9304 11807 5319 6496 3999 2121
% Local Content 61% 60% 57% 54% 68% 55% 58% 63%

Fig. 7 Local content value for procurement of goods and services in the upstream oil and gas
business. Source Indonesia Special Task Force for Oil and Gas Upstream Business Activities (SKK
Migas) Report, 2018)
304 E. A. Prasetio and E. D. Kumalasari

Mineral Resources No. 52 Year 2017, for a contractor that achieves local content
of 30% or more up to less than 50%, the contractor will receive 2% more of the
split from gross revenue; from 50% or more up to less than 70%, the contractor will
receive 3% more; and from 70% or more up to less than 100%, the contractor will
receive 4%, respectively.

7 Opportunities and Challenges in the Implementation

of Local Content Policy in Indonesia

Local content requirements give an opportunity for the Indonesian oil and gas
supporting industry to develop. However, the challenges are plenty. The capability
of the domestic oil and gas supporting industries is still limited due to the low level
of research and development efforts. The other challenge is the lack of raw material
in the upstream industry, such as green pipe, seamless pipe, round bar, stainless steel
and steel plate. Also, the capacity of the domestic industry is still low for products
such as valve, stud bolt, pressure gauge, forging and mechanical seal (source: Annual
Report of Energy and Mineral Resources Ministry of Republic of Indonesia, 2013).
There is a lack of quality for some local products. Some cases in point are as
follows. A case related to the lack of quality of domestic-sourced goods occurred
in 2018 in the contractor of cooperation contract (Kontraktor Kontrak Kerja Sama,
or KKKS, in Bahasa Indonesia), which has a working area in the eastern part of
Java island. The products that have been domestically ordered were not produced
in accordance with the specifications in the purchase order. This eventually caused
damage to operating equipment in the contractor’s field.
Another challenge in the implementation of local content requirement is the price
of local product which is higher than imported products, especially the products from
China. In the case above, not only was the problem with quality, but also it turned
out that the price of local product is 35% more expensive compared to imports.
Goods produced by local vendors that did not meet the required quality and have
higher price compared to imported products caused poor experience for contractors
of cooperation contract. Consequently, the contractors are reluctant to procure the
local-produced goods and prefer the imported ones instead.
From the perspective of local oil and gas supporting industries, the chief
of the Indonesian Association of Energy, Oil and Gas Supporting Business
(Gabungan Pengusaha Penunjang Energi, Minyak dan Gas, or Guspenmigas in
Bahasa Indonesia) complained the practice in procurement by contractor of cooper-
ation contract who deliberately avoiding using local products or services. The chief
also complained about the dominance of expatriates in the decision-making process
in the contractor of cooperation contract, which makes the effort to further increase
local content ineffective.
(Source: https://pelakubisnis.com/2018/05/tkdn-migas-meningkat-tapi-tetap-
kompetitif/).
Local Content Policy in Indonesia Oil and Gas Industry 305

8 Policy Measures to Overcome the Challenges

in the Implementation of Local Content Requirements

Contractors of cooperation contract hesitate to procure locally manufactured products

since there are still problems in quality and delivery. The local products fail to match
the required specification. In addition, there can be lateness in product delivery that
has a negative impact on the completion of the contractor’s project. Furthermore,
considering the fluctuation of oil and gas prices, the gross split contract demands
for local players to be more efficient and competitive. Recommendations for policy
measures to address these challenges include, the government:
1. Coaching and support for local manufacturers that involve the contractor of coop-
eration contract in matching the quality requirement of operational needs. An
initiative such as a joint assessment program—between the Directorate General
of Oil and Natural Gas, MoEMR, Executive Task Force for Upstream Oil and
Gas Business Activities (SKK Migas) and contractors of cooperation contract
that has taken place—needs to be maintained and even strengthened. Investment
is often an obstacle for local manufacturers. The input and advice given on the
results of the joint assessment often cannot be carried out due to constraints on
the amount of investment that must be spent, and there is no guarantee that their
products will be used by the contractor.
2. Plans to formulate the list of the needs of operational goods and equipment for
the next 5 years. In so doing, local participation in the provision of operational
goods and equipment can be well prepared. Local manufacturers might be able
to anticipate the needs of operational goods and equipment well ahead and plan
for a timely product development, production and delivery.
3. Has to provide information transparency regarding the price and availability of
supply of locally manufactured products.
4. Should encourage and build positive communication between contractor of coop-
eration contract and local companies by giving opportunity for qualified local
companies to promote their products and achievements to the contractors.
5. Needs to consider changing the formulation of local content. The current formula,
which is based on “Cost-to-Make,” is considered problematic from several
aspects, i.e., the calculation, the verification, the application as well as the super-
vision aspect. A new formula that is simpler and based on the depth of upstream
industry might be preferable. Since the authority to determine the new and simpler
formula is in the hands of the Ministry of Industry, the smooth coordination
between MoEMR and the Ministry of Industry requires no further explanation.
6. In this case MoEMR, should reactivate the Team of Enhancement of Local
Production Use (Peningkatan Penggunaan Produksi Dalam Negeri or P3DN) to
further coordinate, monitor and evaluate the implementation of the enhancement
of local production use in the upstream oil and gas business activities.
306 E. A. Prasetio and E. D. Kumalasari

9 Conclusion

Local content in the oil and gas industry is regulated through various regulations and
amendments. The recent introduction of the gross split scheme in production sharing
contract, as an alternative to cost recovery, changes how local content is promoted and
enforced. Unlike the cost recovery scheme, in the gross split scheme, local content
becomes part of variable split, which means the higher the local content, the bigger
the split for the contractor.
The government set up a target and road map of local content for short-, medium-
and long-term periods for local manufacturers. However, the implementation of the
local content policy faces several challenges including the quality of locally manu-
factured products, the delivery of locally manufactured products, and the high price
compared with imported products. Since these challenges might hinder the target of
local content, the government needs to work together with local companies in the oil
and gas supporting industries as well as the contractors of cooperation contract.
In this chapter, the discussion is focused on the local content policy change
according to different PSC schemes employed by the Indonesian Government. Under
the previous cost recovery scheme, local content requirement was enforced through
regulation; however under the new gross split scheme, local content becomes an
incentive for contractors as it is part of variable split. The lessons learned of local
content policy formulation and implementation in Indonesia are as follows:
(1) New local content policy under the gross split scheme accommodates local
content increase in the Indonesian oil and gas sector.
(2) In an effort to match the locally manufactured products with contractors’ opera-
tional needs and to improve the quality and availability of locally manufactured
products, MoEMR of Indonesia is cooperating with contractors of coopera-
tion contract and the Executive Task Force for Upstream Oil and Gas Business
Activities (SKK Migas) in a joint assessment program.
(3) Despite those encouraging efforts discussed above, in reality, contractors
of gross split cooperation contract have difficulty achieving even 30% of
local content. The reasons vary from inability of local manufacturers in
providing high-tech products according to contractors’ operational needs to
the insufficiency of local product quality and/or uncompetitive price.
(4) The results of the joint assessment program in point (2) regarding the suggestions
for improving product quality are seldom followed up by local manufacturers
due to required high investment.
Local Content Policy in Indonesia Oil and Gas Industry 307

References

Annual Report of Energy and Mineral Resources Ministry of Republic of Indonesia. (2013).
Minister of Energy and Mineral Resources Regulation No. 0982/2011 concerning the National
Team of Enhancement of Local Production Use in oil and gas business activities.
Minister of Energy and Mineral Resources Regulation No. 15/2013 concerning the Use of Domestic
Products in Upstream Oil and Gas Business Activities.
Minister of Energy and Mineral Resources Regulation No. 17/2018 concerning Import of
Operational Goods for Upstream Oil and Gas Business Activities.
Nurdin, Y. T. (2018). TKDN Migas meningkat Tapi tetap Kompetitif . https://pelakubisnis.com/2018/
05/tkdn-migas-meningkat-tapi-tetap-kompetitif/. Accessed May 2018.
Oil and Gas Guide in Indonesia, PwC Report. (2017).
Vice Minister of Finance, GOI, CNBC Indonesia interview on 24th of July, 2018. https://www.
cnbcindonesia.com/market/20180724154249–17-25124/ini-strategi-pemerintah-tekan-impor-
barang-migas.
Local Content and Extractive Industry
in Brazil

Israel Lacerda de Araújo and Hirdan Katarina Medeiro da Costa

Abstract Local content clause is the obligation of hiring a share of national goods,
employment, as well as services in the exploration, development and production
processes. If companies do not comply with this clause, they will incur a fine applied
by government agents. The Brazilian oil and gas industry has used the local content
clause since 2003. The clause and regulation is long, and the details allow the
contractor to know each parameter before the bidding round, to be prepared, and
to be aware of the penalty in case of disobeying. This chapter answers the following
questions: (i) What are the main obligations related to local content in Brazil within
the extractives resources industry? Are there any peculiarities? (ii) What are the main
challenges that extractives resources are facing with regards to local content prac-
tices and local involvement? (iii) What are the best and worst experiences with local
content requirements in the extractive resources sector in Brazil?

Keywords Local content · Oil industry · Market failure · Effective protection

1 Introduction

During the second half of the last century, how developing countries, mainly those
rich in natural resources, have performed economically (income per capita) worse
than the other country group, those countries without much resources. Auty (2001)
wrote about these patterns, well known as the “resource curse” phenomenon, where
the relationship between a nation’s natural resources and its long-term economic
growth is negative. The limited spillover effect of natural resource sector and the
rest of the economy that occur when legal regimes fail to determine fair rules to
share the benefits of their resources sector explains weak economic growth in that

I. L. de Araújo · H. K. M. da Costa (B)

IEE, University of São Paulo, São Paulo, Brazil
e-mail: [email protected]
I. L. de Araújo
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 309
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_17
310 I. L. de Araújo and H. K. M. da Costa

period (Torres et al. 2013). The extant literature conveys different causes for the
resource curse, ranging from structural factors such as a lack of productivity growth
in the extractives sector, governance issues such as weak property rights in resource-
rich economies, or else macroeconomic factors such as resource price volatility that
impact fiscal stability (Kakanov et al. 2018).
In order to avoid the resource curse, many resource-rich nations, especially in oil,
started to implement local content policies as a way of promoting national indus-
trialisation (technological transfers) for sustainable economic growth, to maintain
sectorial employment rates and qualified workers in the country, as well as transfer-
ring economic demand through supply chain as a spillover effect of natural resource
activity (Malcolm 2013; Costa and Santos 2013; Lucas et al. 2015; Araujo et al.
2018a, b; Costa 2018).
In general, mineral and oil sectors involve capital-intensive activities (Costa and
Santos 2013), which require governments to adopt policies to increase national partic-
ipation beyond the “government take” (royalties and taxes) (Pascal 2013; Araujo
et al. 2018a, b). Hufbauer et al. (2013) provide examples and suggest it is possible
for governments to provide not only training for the workforce within the natural
resources sector, but also build infrastructure unrelated to the main activity (hospitals,
schools and roads).
Brazil historically is a natural resource-rich country but with resource-poor char-
acteristics. After the 1950s, the country experienced a huge growth on mining sector
(particularly in iron and manganese) and began its oil exploration programme of
onshore sedimentary basins. However, since 1930, the national economy has devel-
oped in strategic sectors and remained as a world-class agricultural producer (Furtado
2007; Bresser-Pereira 1985; Araujo et al. 2018a, b). In other words, despite the growth
of its natural resources sector, the country maintained other industrial and agricul-
tural sectors as a way to counterbalance its mining and oil growth. This resulted in a
economy being less exposed to the resource curse compared with other developing
countries with a high dependency on commodities exportation.
During this period, local content was not an explicit local content policy. Nonethe-
less, a large number of private natural resources companies were created down-
stream supply chains including petrochemical, fertilisers, petroleum refining and
the respective sale to the domestic market and exportation (Araujo et al. 2018a;
b). More recently, since 1995, the government has promoted structural reforms that
included extractives industry and changed patterns of national development policy
made through local content requirements.
In respect to this, our goal in this chapter is to answer the following questions:
• What are the main obligations related to local content in Brazil within the
extractives resources industry? Are there any peculiarities?
• What are the main challenges that the extractives resources sector faces with
regards to local content policies and local uptake?
• What are the best and worst experiences with local content requirements in the
extractives resources sector in Brazil?
Local Content and Extractive Industry in Brazil 311

• As an introduction, we may think that the mechanisms of local content undertaken

by the Brazilian government sought the development of the national economy;
however, they do not resemble those made by other countries highly dependent
on extractives. Thus, this chapter sets out to explore these issues.

2 Energy Law and Local Content Policy

Heffron and Talus (2016a: 189) point out that “energy law and policy plays a vital role
in the energy sector in the twenty-first century. It aims to ensure that societies meet
their energy targets whether that is about the provision of increased energy security
and/or economic benefits, and/or environmental goals.” In addition, we highlight the
need to reflect on distributive justice, an important issue for the energy sector, in
order to assure sustainable development within resource-rich nations (Heffron and
Talus 2016b; Heffron 2018; Heffron and Mccauley 2017). This chapter explores the
extractives industry, mainly the new energy law field, as well as its set of guiding
principles (Heffron et al. 2018) presented in Table 1 and includes an overview of
local content policy in Brazil.
According to Heffron and Talus (2016a: 191) “energy law concerns the manage-
ment of energy resources. This is a simple definition, and disguises that it is arguably
one of the more complex areas of law. It demands that a scholar in the area engage
with other disciplines to some degree, such as politics, economics, geography, envi-
ronmental sciences and engineering.” The pros and cons of energy law can be used as
argument by decision-makers regarding development strategies and for local content
policies (Krugman et al. 2015). The most important is the infant industry case, which
advocates that new industries are not able to be competitive at the same level as mature
industries. Looking for solutions, countries create trade barriers through a myriad of
instruments well known in the academic literature, such as import quotas and subsi-
dies. The main point about infant industries is the protection they need to improve
income and growth given the initial profits are low.

Table 1 Principles of Energy

Principles of energy law
Law
1. The principle of natural resource sovereignty
2. The principle of access to modern energy services
3. The principle of energy justice
4. The principle of prudent, rational and sustainable use of
natural resources
5. The principle of the protection of environment, human
health & combatting climate change
6. Energy security and reliability principle
7. Principle of resilience
Source Heffron et al. (2018)
312 I. L. de Araújo and H. K. M. da Costa

Energy policy, national development strategy and local content policies commonly
appear intertwined in discussions concerning the role of the State in certain sectors
of the economy, especially in the extractives sector. Energy policy is aimed at the
rational use of available energy resources, in order to guarantee supplies nationally,
attract investments (national or international), increase the competitiveness of the
domestic industry against foreign counterparts and promote free competition (Brazil
1997). National development, in a broad sense, includes actions, guidelines and poli-
cies aimed at building the necessary infrastructure for private enterprise to generate
employment, income and taxes, while observing the dictates of social justice (Malard
2006). It also seeks to increase the industrial and technological capacity, directly or
indirectly, of companies under national jurisdiction.
Obligations of local content can be understood as a mechanism for national devel-
opment as well as a way to assure distributive justice. In Brazil, this is referred to as
local content clause; it is the obligation of hiring a share of national goods, employ-
ment, as well as services in the exploration, development and production processes
of the extractives sector. If companies do not comply with this clause, they incur
government-imposed fines. The Brazilian oil and gas sector has used the local content
clause since the first concession under the Energy Policy, but the turning point was
2003, when detailed clauses were imposed by the State in new concessions. The
clause is lengthy in order to provide comprehensive details to allow the contractor to
understand each parameter before the bidding round and to be aware of the penalty
in the case of non-compliance.

3 Local Content Obligations Related to the Extractives

Resources Sector in Brazil

Local content requirements (LCR) necessitate that in the manufacture of a specific

product, a certain amount of the inputs, parts or raw materials used are produced
within the country. Examples are the use of local labour, the development of manage-
rial and operational skills, the acquisition of goods and services provided by compa-
nies established in the host country, the obligation to form compulsory partnerships
with local enterprises and the increase of local technological capacity (IPIECA 2011;
Franklin 2013). This requirement may be a prerequisite for the marketing of the
respective goods or services, or a condition for producers’ access to some advantage
or benefit, whether of a fiscal, credit or other nature. Sometimes, the minimal local
content is quantified as a percentage of the product or service’s value, sometimes by
reference to physical units. As a rule, taxes are not considered as local content due
to the variations in time and space, which can result in distortions.
Among the various forms used to benefit those who observe the local content
rules, we can mention
(i) Granting of tax incentives: legal rules that exempt certain sectors from the
payment of taxes or reduce their tax burden, depending on compliance with
Local Content and Extractive Industry in Brazil 313

local content requirements established by law or contract. A recent example is

the Inovar-Auto programme, which reduced the amount to be paid as an indus-
trialised product tax (IPI) for cars whose production had a minimum national-
isation rate. These rules had to be adapted to conform to trade agreements of
which Brazil is a signatory, such as Mercosur, but they generated international
protests for violating World Trade Organisation (WTO) agreements.
(ii) Allocation of financing lines with local content clauses: the Brazilian Bank
for Economic and Social Development (BNDES), which since its inception
has been earmarking funds that, although without due legislative discus-
sion, contain implicit subsidies. On the other hand, the beneficiary companies
generally have to comply with local content obligatory clauses.
(iii) Preferences in concessions or government purchases: one of the Executive
Branch’s actions is the determination of local content obligation in costing and
investment expenses under oil contracts, such as concession and production
sharing agreements, or the determination to contract with a national company
overpaid to the detriment of an international competitor.
An alternative to stimulate production of certain goods or services within the
country is the creation of State-Owned Enterprises (SOE). For sectors in which
direct intervention is desired, companies whose shareholding control is held by the
State were created. Consequently, some of these companies gain relevant positions
in certain sectors, sometimes reaching the position of monopolies. This mechanism
can be used when the private sector, at an initial moment or due to market failure,
has no interest in the development of the activity. In addition, they can act in the
transfer of technologies of interest for the development of the national industry,
contracting national goods and supply chain’s companies, which, indirectly, is a way
of stimulating local content.
The Brazilian extractive industry has used SOEs since the industrial period, over
the last century. PETROBRAS has been the major SOE on exploration and produc-
tion of oil and natural gas since its foundation in 1953 and the company compel
downstream supply chain’s to develop technology and to improve local content. In
contrast, Vale do Rio Doce Company (VALE), an SOE in the mining sector and a
key stakeholder in regional development and building the infrastructure needed for
the iron ore sector, such as the mine-railroad-port complex, does not have a local
content policy.
Among such instruments, three are worth highlighting for the purposes of this
chapter: subsidised financing lines with clauses of local content, the use of SOE to
direct demand to domestic companies and the determination of local content obliga-
tion through concession contracts. The main financial agent has been the Brazilian
Investment Bank (BNDES), through a specific budget directed to capital costs
(machines and equipment) called FINAME. BNDES was responsible for providing
credit to the extractives industry from the second half of the last century until finan-
cial scarcity reached Brazil during the 1980s. Second, SOEs may, by virtue of their
relevant market power, direct contractors to execute national contracting policies
rather than cheaper imported ones. If the resale price of the product does not change,
314 I. L. de Araújo and H. K. M. da Costa

the higher cost ends up being transferred to the shareholder, who transfers it to
the taxpayer. If the price of the product is increased due to the higher costs resulting
from LCR, consumers will be penalised. Finally, some contractual obligations related
to public service concessions impose high fines for non-compliance with national
content clauses or LCR. This is the case of the Brazilian oil sector.
Industrialised countries have adopted some type of policy in order to allow the
new segment of industry to grow. Auty (1994, 2011) highlights nascent industrial
protection policies implemented not only in Brazil, but also in Mexico, China, India,
Taiwan and South Korea that can be linked to huge industrial facilities in their terri-
tories. It is possible to list some tools available to benefit those who meet the local
content requirements. There are states that have been using, for example, tax incen-
tives mechanism as a way of reducing the necessary investment costs for the devel-
opment of a particular economic sector (Mullins 2010). In Brazil, Law nº 13,586, of
28 December 2017, introduced a huge fiscal incentive applied just to the oil sector
in order to reduce this sector’s costs.
The establishment of LCR is a form of protectionism. It is one of the instru-
ments that, along with import and export taxes (also called tariffs), quotas, volun-
tary export restrictions (voluntary export restraint) and sanitary barriers represent a
means of trying to protect the national economy from external competition, aiming
to encourage local production, internal tax generation and jobs. This does not neces-
sarily mean that the imposition of any of these instruments represents an effective
protection of the economy as this will depend on the interaction between the measures
taken. In addition to verifying whether, in practice, the adoption of some specific
protectionist measure has the power to produce the initially intended goals, it would
be necessary to evaluate whether these goals, generally sectoral, bring advantages for
the economy as a whole. In other words, it would be necessary to weigh if the adopted
measures actually protect and, second, whether protection confers some advantage
to the national economy.

4 Challenges Faced by the Extractives Sector Regarding

Local Content Practices and Local Participation

The adoption of protectionist measures is usually discouraged in economic literature

based on arguments such as the distortions it causes in international trade and in the
international division of production, which results in companies in disagreement with
the principle of comparative advantage, since unilateral protectionist measures tend
to stimulate retaliation, which in the aggregate does not create more jobs but only
an inefficient redistribution of employment across the planet. Protectionism, when
motivated by macroeconomic reasons, is classified as a “neighbour-impoverishment
policy” or beggar-thy-neighbour policy (Varsano et al. 2015), and it is reasonable
to suppose that this neighbour will react to the protectionist initiative. For these
Local Content and Extractive Industry in Brazil 315

reasons, protectionist measures have also been discouraged within the framework of
the World Trade Organisation (WTO) and by regional integration initiatives.
However, according to the new theories of international trade developed around
the 1980s and the Dutch disease phenomenon, the use of protectionist measures is
advisable in some specific and often temporary situations:
(i) Learning curve: The first reason to encourage the protection of a given sector is
the possibility of creating development conditions through “learning”. Because
certain comparative advantages are innate and others are acquired, a productive
sector with a high average production cost may, under certain circumstances,
benefit from an average cost decline over time, provided that the companies are
given the time needed to develop, absorb or adapt production techniques and
technologies. In other words, provided they have the opportunity to learn how to
produce more cheaply, which is why it is necessary that these companies receive
some protection, without which they would not resist external competition.
However, this protection, known as the infant industry argument, is necessarily
temporary and must be extinguished as soon as its effects are felt or as soon as
its unfeasibility has been diagnosed.
(ii) Economies of scale: The second reason that would support the protection of
a sector is the possibility of a fall in production costs over time due to simple
production increases. It matters little if this increase in production occurs within
each company (the so-called internal economies) or by the expansion of the
number of companies (through the external economies); the protection applied
to industry should be temporary.
(iii) Abundance of natural resources: The third reason to justify the use of some form
of protectionism is the episodes of sudden discovery of natural resources or of
sudden appreciation of already known reserves that gave rise to Dutch disease.
The most well-known cases are those involving the discovery of hydrocarbon
deposits. When the volume of deposits or the rise in price induces a massive
inflow of foreign currency, either through export revenue or capital attraction,
there is a tendency towards exchange appreciation and therefore the loss of
competitiveness of goods subject to international competition, especially those
of industrial nature. In these cases, the literature supports the adoption of trade
defence measures, not necessarily for a limited time.
Dutch disease is often associated with institutional deterioration and education
quality loss. The second effect would be job loss vacancies to most qualified profes-
sions, due to the expansion of extractives activity. The first would be the reflection of
the expansion of activities linked to the mere dispute over the surplus value created
by natural wealth (rent-seeking behaviour). There is no consensus among researchers
if in fact the Brazilian economy suffers from Dutch disease (Bresser-Pereira 2017,
2013; Strack and Azevedo 2012). It is remarkable that the use of protectionist instru-
ments also creates opportunities for the development of “business counters” and the
growth of corrupt practices, as a way of influencing political decisions in favour of
specific interest groups.
316 I. L. de Araújo and H. K. M. da Costa

Any protectionist solution creates a tension between sectoral development and

national development. Protection implies the sacrifice of cheaper and more efficient
sources of production, which represents a cost to the country. This cost can be tempo-
rary or permanent, depending on the duration of the measures. Moreover, protec-
tionism has different effects along the production chain. If the protection covers the
final stage of the chain, the trend will be the growth of this final step, with or without
the induction of the previous stages (since the raw materials, parts and components
can be imported). If however an initial or intermediate stage of the production chain
is protected, the advantage it will receive will have a higher production cost in subse-
quent stages, including the final. Protection of the initial and intermediate steps tends
to deprotect the following steps.
If the final product is not under international competition, the result of protecting
the national element will be the increasing on merchandise prices, thus, transferring
production costs to consumers. However, if the industry is subject to competition
from abroad, either because the import of the final product competes in the domestic
market, or because at least part of the production is exported, the increase of the
national product as a result of the protection probably cannot be passed on to the
market, and the product will lose competitiveness.
This happens regardless of the protection instrument used. In the specific case of
LCR, the increase in cost is a function of the difference between the prices of imported
goods and the prices of goods produced in the country and the fraction of the total
value that should be reserved for local production. This tension between each of the
sectors along the production chain of a product subject to LCR, which means the
protection granted to one phase implies a greater lack of protection of the following
phases, is the reason why it could be used as an indicator of effective protection.
Granting protection to certain stages of production may result in the deprotection of
other steps. Therefore, it is important to assess the final effect of protection measures
along the production chain.
It is possible that LCRs in the Brazilian oil and gas industry have created an
effective deprotection situation, as oil is a commodity traded in the international
market, and Brazilian production does not have the power to affect international
prices. The fall of the oil price in the international market, insofar as it reduced the
margin of the extractives industry and thus the space for absorbing higher costs,
may have exposed the difficulties created by the local content policy. In that case, it
would be advisable to withdraw these requirements as a way to encourage or boost
investments in the oil and gas sector.
There are reasons to believe that assessments favouring local content creation do
not apply to Brazil. First, because currently the Brazilian economy is not suffering
from Dutch disease and it does not seem likely that this problem will arise in the
foreseeable future. The oil and gas sector is not relevant in terms of balance of
payments to affect other sectors. The loss of industry space, for example, is more
easily explained by the expanding effects of the Chinese economy, a phenomenon
that has affected the industrial sector worldwide. Second, it is necessary to check
carefully whether the application of protection strategies to an infant industry would
Local Content and Extractive Industry in Brazil 317

be justified. It does not appear that LCR protection responds to studies that identify
potential gains with local capacity development or economies of scale.
Before concluding this section, we will deal briefly with two questions. The first
concerns the establishment of local content rules in which the percentage of local
content can be satisfied by acquisitions and expenditures with any good or service
(LC rule). When the rule is not individualised, that is, if it does not refer to minimum
percentages in specific sectors, the objective of protecting the domestic industry,
even if it has no prospects of productivity gains, is apparent. It would make more
sense that a policy aimed at harnessing these potential gains would be based on the
individualised indication of the most promising sectors. As it is modelled, the current
policy seems to be an attempt to prevent Dutch disease.
The second is the dilemma between eliminating the previous LC rules (i.e.
contracts already signed) or just from now on (i.e. only contracts to be signed). This
is a real dilemma, because eliminating or smoothing LCR retrospectively involves
rewriting bidding rules, which had specific winners and losers that by the revised
rules could have been victorious at the time; and because eliminating the require-
ments just for future contracts places the various companies under different compet-
itive conditions. It must be recognised that these LCRs were explicitly accepted by
the companies who voluntarily undertook to comply with them, obtaining on the
other hand, a reduction of the amount to be paid as a signature bonus.

5 Lessons Learned from Local Content Requirements

in the Extractives Sector in Brazil

Local content has been the object of public policy since industrialisation processes
over the last century. Both the mining and oil sectors were the centre of national
development, despite only the latter showing prominent LCR. Mining directive was
linked to rational use of limited natural resources in order to provide foreign exchange
reserves and budgetary resources to the country. On the other hand, local content
policy, even in the mining SOEs, was not among the priorities of the mining sector.
Regarding the oil sector, since the establishment of PETROBRAS as monopoly,
LCRs have been the object of concern for decision-makers. As a leader, before
the break of the monopoly of oil and gas exploration and production granted to
PETROBRAS, industry development was stimulated by financing lines offered for
State-Owned Banks through tax incentives. This was to substitute similar goods
produced in Brazil and by the use of the state-owned company’s purchasing power
to direct the sector’s demand to companies under national capital stock control. Both
strategies were widely used by other countries during their industrial maturation
periods. The results, however, were not favourable to all those who did, as was the
case in Brazil.
Amendment 9 to the Brazilian Federal Constitution allowed private companies
to conduct research and development of hydrocarbons. Law nº 9,478 of 6 August
318 I. L. de Araújo and H. K. M. da Costa

1997 regulated the new constitutional provision. Companies with legal, technical and
economic qualification became able to carry out the activities, under the trusteeship
of a concession agreement preceded by a specific bidding for this purpose. However,
the Act does not regulate local content obligations. The closest of this would be,
at the time, the objectives of the National Energy Policy contained in Article 1,
such as promoting development and increasing the country’s competitiveness in the
international market (items I and XI). However, both objectives may conflict with
that of promoting free competition (item IX).
LCR appeared in the bidding documents and in the concession contract for succes-
sive rounds of exploratory block bidding. Local content criteria were used since the
first rounds as an object of classification of bidders for a particular block, despite
just a small percentage of the note corresponded (15%, with 3% referring to explo-
ration phase and 12% to the development of production, in case of discovery of a
new oil field), the signing bonus—value offered and paid at the time of signing the
concession agreement, with a greater weight.
Prior to the year 2000, there was no need to prove compliance with local content
clauses, since the reporting was purely declaratory. This failure is due to the adap-
tation period of the Petroleum, Natural Gas and Biofuels National Agency (ANP)
to its legal attributions. Until 2002, the concessionaires had to classify the expenses
by origin (national or foreign) in quarterly reports. The improvement was progres-
sive. In 2003, it was necessary to require a minimum percentage of local content,
which varied depending on the location of the block (land, shallow water and deep
water) and gave greater weight to this item for classification purposes in the bidding
process. In that period, the grade was weighted according to three criteria: signature
bonus (30%), minimum exploratory programme (30%) and local content (40%). As
of 2005, the weight of the criteria was redefined, with local content having a weight
of 20% to the final note of the bid.
This system, however, began to incorporate several sub-items that made up the
global obligation of local content. Oil companies were operationally obliged to have
specific sectors to monitor and perform activities related to the compliance with
contractual clauses of local content: this is called transaction cost. For instance, oil
companies had to demonstrate by certificates emitted by third parties whose reliance
to inspect and certify local content adherence was conceded by ANP, according
to published regulations on inspection and certification methods. Those independent
entities verified whether enterprises accomplish the minimum of national expenditure
as local content in each sub-item, item and global obligation, and the process was
repeated in each concession contract.
In 2013, the rules aforementioned were simplified to make it easier to understand
and apply after the oil industry complained about regulations which made it difficult
to deliver assets within the required quality into the budget and when they needed to.
Although the requirements were minimal, companies began participating in block
auctions by considering the availability of cash and the prospect of high local content
compliance. As a result, successful bids were those with heavy contractual local
content obligations that would only have significant impact years after the contract
was signed at the production stage (the one with the largest financial outlay). This
Local Content and Extractive Industry in Brazil 319

behaviour demonstrates at least two different explanations. It may be the effect of

calculating the present value of the additional costs that LCR would imply, from a high
discount rate, due to the risk involved, which would make immediate expenditure
more relevant in financial terms. Or it may be the effect of a perceived temporal
inconsistency of government, which as the likely bidders believed at some future
time would give up LCR. This expectation would justify the acceptance of high
local content rates, which would be eliminated in the future as a means of lowering
immediate financial expenses. This factor can be observed today. The concessionaires
are probably not willing to comply with the local content commitment offered but
would show willingness to comply with the minimum bidding requirements.
At the same time that concession contracts started to be changed, in terms of
LCR, the State has established a specific institution for better implementation of
public policy. The National Program for Oil and Natural Gas Industry Mobilisation
(PROMINP) was coordinated by the Minister of Mines and Energy and promotes
Brazilian industry of goods and services, in competitive and sustainable terms, not
only in Brazil, but in the global oil sector. Through an Executive Order, also called
Presidential decree no. 4.925 (Brazil 2003), it was proposed an institutional frame-
work to coordinate and promote projects and actions to maximise the spillover
effect in the national economy and was attended by public sector representatives,
oil industry associations and mainly PETROBRAS.
PROMINP was the focal point and the main arena for discussion and bargain
between the State, PETROBRAS, suppliers and others associations involved, and it
was focused on diagnosing and proposing solutions to prevent a lack of economic
resources for growth of the national oil sector. Into this programme, instruments were
developed to offer low interest funds (more competitive than those offered to the
general Brazilian economy) for the supply chain of the oil industry, and mechanisms
were established with major banks to allow using Goods and Services Purchase
Agreements (GSPA) between PETROBRAS and suppliers as guarantee of payment
(BNDES 2009).
Labour training was one of the most important components of PROMINP with
investment in R&D resources (an obligation linked to concession contracts) paying
for technical education scholarships to provide qualified human resources for the
whole oil sector, from exploration to downstream. Over ten years, the programme
has trained approximately 100,000 people. Despite this, less than 18% were employed
in the oil industry (BNDES 2009; FIRJAN 2015).
This experience brings important lessons to bear on LCR. The main observation
was how capable agents were to organise themselves in order to attain and improve the
common good from the extractives sector. In general, the result was positive; however,
some odds can be pointed out. First, PROMINP, despite a ministerial coordination,
PETROBRAS was responsible for operational coordination, and the enterprise placed
its interest above those of Brazil when conflicts arose between them. Second, as an
SOE and the most important company in Brazil, it used its influence to superimpose
its interests over the other agents of the oil industry. Finally, industrial policy was
commonly divergent to energy policy, and the decision-making body was under the
aegis of the Ministry of Mines and Energy.
320 I. L. de Araújo and H. K. M. da Costa

It should be remembered, however, that the whole rule was established on an

under-registered basis and under concession contracts with stability clauses in the
Federal Constitution of 1988 (article 5, item XXXVI). Discussions about possible
changes to the local content clause have started. In terms of private sector participa-
tion in the oil and natural gas industry, private investors typically see the local content
clause as a barrier because of its difficult fulfilment. Even PETROBRAS faces diffi-
culties in this issue: the company was fined more than R$200 million in 2015. After
that, policy makers started to discuss mechanisms to solve energy-industrial policy
conflicts caused by local content issues and created another governmental framework.
Presidential decree no. 8.637 instituted a programme to stimulate competitiveness
of the productive chain and development and improvement of oil industry suppliers,
called PEDEFOR (Brazil 2016). The Executive Order changed part of the local
content rules and added investments in research and development and innovation to
meet the demands of concession contracts and production sharing agreements. The
new Directive Committee was responsible to propose bonus for local content inter-
changeable between concessions and to offset strategic technological gains for the
oil industry, but of small value compared to expenses related to the whole conces-
sion contract. Moreover, PEDEFOR determined that the main coordination had to
be transferred to the minister responsible for the industrial sector.
There are even directions for the application of research resources, but without
interfering in the regulation promoted by governmental regulatory office. This decree
turned fine into investments, which is an improvement of the policy considering, the
purpose of local content other investment results, as the export of Brazilian items
and technology development, for example.1
According to the decree, companies can use a committee to consider local content
crediting, named local content units (LCU). Those LCUs may be obtained when
the company facilitates the installation of new suppliers in the country, promoting
the expansion of production capacity and technological innovation process from
suppliers, purchase goods and systems here to export pioneers and acquire lots of
goods and systems developed in the country (OMS 2016).
In 2016, an ANP’s Resolution focused on the inclusion of deduction of the amounts
of national plots of items classified as materials, of the imported parcels values when
these are incorporated into goods and systems of foreign origin manufactured in
Brazil under the special customs regime for export and import of goods intended
for research activities and exploitation of petroleum and natural gas (REPETRO).
These items are included in ANP Directive 19 of 14 June 2013, which deals with
local content certification.
In the short term, this easing of the requirement of local content clause brings
economic benefits for oil companies because they will only buy a product or hire a
service when they have better proposals. In addition, with those changes, the compa-
nies have greater contractual freedom, including reducing transaction costs with the

1 According News from R7 (2016), authorities informed that the local content attendance was not
be used as a metric in order to evaluate proposals in the coming bidding rounds for petroleum
exploration areas.
Local Content and Extractive Industry in Brazil 321

possibility of incorporating major economic gains in their budget. For instance, new
rules for local content may benefit the relationship between PETROBRAS and Sete
Brasil, with a reduction in the loss of State investment in the company created to
enable the construction of the pre-salt probes—especially in shipyards dedicated
exclusively to Sete, as the Paraguaçu, Bahia, whose shareholders are Odebrecht,
OAS, UTC and Kawasaki. If the oil operator facilitates the installation of new ship-
yards or encourages the export of components for Brazil, for example, it can earn
credits and make a smaller acquisition of local content in other sectors. PETRO-
BRAS would have at least part of the injury compensated because it would have to
rent these probes at prices above the international market. Prices of probes belonging
to Sete did not follow the decrease of general costs of the oil industry in the world,
resulting from decrease in the price per barrel in recent months.
Foreign operators in Brazil may have advantages with this decree, as it aims to
stimulate multinationals to bring suppliers to Brazil, which are located in other parts
of the world and provide not only for operations in the country but also as a global
platform of production.
The criteria were used in granting under concession only. For those areas in the
pre-salt tendered under a production sharing modality, the auctions will count only
one item to determine the winner: the surplus in oil for the Union. This modification
is recent and delegates to the National Council of Energy Policy (CNPE) the assign-
ment to determine the local content indexes for each round under the sharing mode.
Although not ideal, it is more doable than the model previously applied.
There are favourable arguments to these obligations. At the time of the opening
of the oil sector, it was expected that the international companies of the sector would
contract goods and services in their host countries. Several countries have set up their
own companies and, since their maturation in their territories, started to develop activ-
ities abroad, but directing the demand for goods and services of their contracts for the
exploration and production of hydrocarbons to subsidiaries or affiliated companies.
This is the case of Equinor, for instance, which started to contract mainly Norwe-
gian suppliers in those activities where they had the capacity to export, regardless of
availability on competitive bases in the host territory of the contract.
These content clauses aim to prevent such behaviour from companies. However,
using such an instrument as a way of developing the industry has a significant delete-
rious factor: the clauses may fall on a link that does not have the expertise to perform
the role of industry inductor. On one hand, the Public Power demands investments
and attraction of technological poles. On the other hand, suppliers of goods and
services want to obtain market reserve so that they can make gains beyond what
would be economically achieved under free market logic. In the middle of both, the
oil companies end up being burdened, having to play the role of industrial policy
enforcer, when their locus of action is to search for hydrocarbons and to tillage them.
The balanced solution for these clauses is one that would not allow foreign state-
owned companies to direct their oil sector demands to their suppliers of the same flag
without economic criteria advantageous to both sides, nor would affect them to the
point of sterilising the activities of the petroleum sector with impacts on the Gross
Domestic Product (GDP).
322 I. L. de Araújo and H. K. M. da Costa

Looking to the positive lessons, it is possible to highlight the certification system

by third party. Neither government nor oil companies could evaluate without trends
how much local content was achieved in each agreement. In order to improve confi-
dence in the institutional framework, specialised companies authorised by a regula-
tory agency started to perform as local content certifiers avoiding being captured by
both parties involved.
Therefore, Brazil’s best experience was building normative and institutional
frameworks that allowed attempts to upgrade LCR in future bidding rounds in order
to protect partially internal demand to local supply chains. On the opposite side,
mistakes made during past decades are not easily repaired because of the inflexi-
bility of LCR regulation and rules under concession contracts, which could sterilise
the whole oil industry.

6 Conclusion and Policy Implications

In Brazil, the extractives sector along with agriculture and livestock is an important
component of the trade balance and regional development linked to local content.
The mining sector has not employed local content policy so far, although it may in
the long term. Thus, the Brazilian experience we report here is with the oil sector.
The question remains, is local content policy an effective protection measure or
market reservation? It is possible to affirm that LCR are a form of protection of
the local industry and, as such, is a practice generally condemned in the economic
literature. However, there are three situations in which protectionism is defensible:
the learning curve, the economies of scale (internal to the company or external to it)
and to fight against Dutch disease. Of these three, learning curve and economy of
scale are justified only on a temporary basis. Their implementation should be based
on rigorous diagnoses as to the possibilities of productivity gains and give space
to negotiations whose results are not always aligned with the collective or national
interest. There are no studies that point out the technical and economic viability of
the implantation of supplier industries for the oil exploration sector in the country in
similar conditions to the external ones, which suggests that this is not a classic case
of protection to infant industries.
The third case, in turn, may last as long as the effects of the extractives industry
are felt on the trade balance, the exchange rate and other sectors of the economy. It
does not seem to be the case, least in the current situation, that the Brazilian economy
might suffer from Dutch disease, either because the Brazilian economy is large and
diversified, or because the oil markets and their substitutes do not point to a situation
where Brazilian exports will have such a profound influence on the exchange rate
and the economy.
It seems that the lack of protection created by LCRs, coupled with falling inter-
national oil prices, appears to have contributed to reduced investment in the sector,
one of the reasons contributing to the current recession and, indirectly, to the fiscal
crisis.
Local Content and Extractive Industry in Brazil 323

Moreover, the main instrument applied in the Brazilian oil sector was oil conces-
sion contracts and production sharing agreements to impose obligations linked to
LCRs, but without State coordination capable to deal with the complexity of inter-
ests related to oil companies, industries, suppliers for whole oil supply chain, and
also the State. Therefore, there were many instruments of rent seeking into local
content policy. Given that the main protagonist was an SOE, PETROBRAS, outcomes
became dependent on its performance, and board decisions influenced significantly
how the national sector has behaved.
Finally, looking to the future, with the increasing number of major operators
beyond PETROBRAS doing exploration in the pre-salt oil province, policymakers
will be less dependent on national oil company’s decisions, and they will have more
freedom to implement realistic local content policies.

Acknowledgements We gratefully acknowledge support of the RCGI—Research Centre for Gas

Innovation, hosted by the University of São Paulo (USP) and sponsored by FAPESP—São Paulo
Research Foundation (2014/50279-4) and Shell Brasil, and the strategic importance of the support
given by ANP (Brazil’s National Oil, Natural Gas and Biofuels Agency) through the R&D levy
regulation.

References

Araujo, I. L., de Medeiros, H. K. C., & Musarra, R. M. L. M. (2018a). As cláusulas de conteúdo

local e seus efeitos em contratos na área do pré-sal: Precisa-se de um Novo Marco Legal? In
Proceedings of Rio Oil & Gas 2018, 2018, Rio de Janeiro. Rio Oil & Gas 2018 (pp. 1–10). Rio
de Janeiro: Instituto Brasileiro de Petróleo—IBP.
Araujo, I. L., Costa, H. K. M, & Musarra, R. M. L. M. (2018b). Breve análise do marco regulatório
das Cláusulas de Conteúdo Local. Rev do Direito da Energia.
Auty, R. M. (1994). Industrial Policy reform in six large newly industrializing countries: The
resource curse thesis. World Develepment, 22, 11–26.
Auty, R. M. (2001). Introduction in resource abundance and economic growth. Oxford: Oxford
University Press.
BNDES—Banco Nacional de Desenvolvimento Econômico e Social. (2009). Desenvolvimento da
cadeia produtiva de petróleo e gás e investimentos em E&P. São Paulo: Bain & Company/Tozzini
Freire Advogados.
Brazil, (1997). Lei nº 9.478, de 6 de agosto de 1997, e alterações. Publicada no Diário Oficial da
União de 7.7.1997. Available at www.planalto.gov.br/ccivil_03/leis/L9478.htm. Accessed June
22, 2019.
Brazil, (2003). Decreto nº 4.925, de 19 de dezembro de 2003. Publicada no Diário Oficial da
União de 22.12.2003. Available at https://www.planalto.gov.br/ccivil_03/decreto/2003/D4925.
htm. Accessed June 22, 2019.
Brazil. (2016). Decreto nº 8.637, de 15 de janeiro de 2016. Publicada no Diário Oficial da União
de 18.1.2016. Available at https://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2016/Decreto/
D8637.htm. Accessed June 22, 2019.
Bresser-Pereira, L. C. (1985). Desenvolvimento e crise no Brasil 1930–1983. São Paulo: Brasiliense
S.A.
Bresser-Pereira, L. C. (2013, July–September). The value of the exchange rate and the Dutch disease.
Brazilian Journal of Political Economy, 33(132), 371–387.
324 I. L. de Araújo and H. K. M. da Costa

Bresser-Pereira, L. C. (2017). How to neutralize the Dutch disease notwithstanding the natural
resources curse. Texto para Discussão nº 452. Escola de Economia de São Paulo da Fundação
Getulio Vargas Brasília. São Paulo.
Costa, H. K. M. (2018). Royalties de Petróleo, Justiça e Sustentabili-dade (1 ed.). Synergia, Rio de
Janeiro.
Costa, H. K. M., & Moutinho, S. E. (2013). Institutional analysis and the-resource curse-in
developing countries. Energy Policy, 63, 788–795.
FIRJAN. (2015). A Política Brasileira de Conteúdo Local para o Setor Petróleo e Gás Análise e
Sugestões de Aperfeiçoamento. Rio de Janeiro: Federação das Indústrias do Estado do Rio De
Janeiro.
Franklin. B. (2013). Types of local content policies. In Local content policies in the oil and gas
sector (Chap. 3). Washington D.C.: International Bank for Reconstruction and Development (The
World Bank).
Furtado, C. (2007). Formação econômica do Brasil (34th edn). São Paulo: Companhia das Letras.
(1st ed. 1959).
Heffron, R. J. (2018). The application of distributive justice to energy taxation utilising sovereign
wealth funds. Energy Policy, 122, 649–654.
Heffron, R. J., & Mccauley, D. (2017). The concept of energy justice across the disciplines. Energy
Policy, 105, 658–667.
Heffron, R. J., & Talus, K. (2016a). The evolution of energy law and energy jurisprudence: Insights
for energy analysts and researchers. Energy Research and Social Science, 19, 1–10.
Heffron, R. J., & Talus, K. (2016b). The development of energy law in the 21st century: A paradigm
shift? Journal of World Energy Law and Business 9(3),189–202.
Heffron, R. J., Ronne, A., Bradbrook, A., Tomain, J. P., & Talus, K. (2018). A Treatise for Energy
Law. Journal World Energy Law Business, 11(1), 34–48.
Hufbauer, G. C., Schott, J. J., Cimino, C., Vieiro, M., & Wada, E. (2013). Local content requirements:
A global problem. Peterson Institute for International Economics.
IPIECA. (2011). Local content strategy: A guidance document for the oil and gas industry. London.
Kakanov, E., Blöchliger, H., & Demmou. L. (2018). Resource curse in oil exporting coun-
tries: Economics department working papers no. 1511. OECD Working Paper. Avail-
able at https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP
(2018)59&docLanguage=En. Accessed February 2020.
Krugman, P., Obstfeld, M., & Melitz, M. (2015). Economia Internacional: Teoria e Política – 10ª
edição (pp, 198–221). São Paulo: Pearson.
Lucas, L. J. R., Costa, H. K. M., & Santos, E. M. (2015). Engenharia de Projetos e aumento da
participação do Conteúdo Local. Revista Petroquímica, Petróleo, Gás & Química, 1, 52–54.
Malard, N. D. (2006). O desenvolvimento nacional: objetivo do Estado nacional (Vol. 3, pp 255–
282). Direito, Políticas Públicas e Mundialização, Prismas.
Malcolm, F. (2013). The case for (and against) local content policies in the petroleum sector. In
Local content policies in the oil and gas sector (Chap. 2). Washington D.C.: International Bank
for Reconstruction and Development (The World Bank).
Mullins, P. (2010). International tax issues for the resources sector. In The taxation of petroleum and
minerals: Principles, problems and practice (Chap. 13). New York, NY: International Monetary
Fund (IMF).
Oms, C. (2016). Valor Econômico. Decreto do governo facilita regra de conteúdo local de petróleo.
18/01/2016. Available at https://www.valor.com.br/empresas/4396662/decreto-do-governo-fac
ilita-regra-de-conteudo-local-de-petroleo. Accessed October 2016.
Pascal, B. (2013). Defining local content. In Local content policies in the oil and gas sector (Chap. 1).
Washington D.C.: International Bank for Reconstruction and Development (The World Bank).
R7. (2016). Notícias. Governo aliviará regra para conteúdo local antes do leilão de áreas de petróleo.
Available at https://noticias.r7.com/brasil/governo-aliviara-regra-para-conteudo-local-antes-do-
leilao-de-areas-de-petroleo-17102016. Acessed October 2016.
Local Content and Extractive Industry in Brazil 325

Strack, D., & Azevedo, A. F. Z. (2012). A doença holandesa no Brasil: Sintomas e efeitos. Revista
Economia E Desenvolvimento, 24(2), 2012.
Torres, N., Afonso, O., & Soares, I. (2013). A Survey of Literature on the Resource Curse: Critical
analysis of the main explanations, empirical tests and resource proxies (p. 2013). Faculdade de
Economia do Porto: Universidade do Porto.
Varsano, R., Ferreira, S. G., & Afonso, J. R. (2015). Fiscal competition: A bird’s eye view. Discussion
Paper nº 114. Brasilia-DF.: Instituto de Pesquisa Econômica Aplicada (IPEA).
Local Content Requirements in Iran

Zoha Abdolalizadeh

1 Introduction

With the fourth largest reserves of oil and second largest reserves of gas in the world,
Iran is one of the resource-rich Gulf countries in the Middle East. The oil and gas
industries dominate and overshadow all its other resources. This chapter surveys and
examines how the country is increasingly introducing local content requirements
(LCRs) into its legal system. This is being done through various means, such as
legislation, regulations, policies, guidelines and industry contracts.
The study of legal, economic, political and social aspects of Iran’s extractive
resources requires the examination of a complicated system, which contains different
beneficiaries, a huge number of laws and regulations, parallel policies and contra-
dictory practices. Socio-political issues as well as international relations need to be
considered, and to get a clear picture, an explanation of Iran’s extractive resources
is also necessary. The country’s dependency on the oil industry, as well as its inter-
national geopolitical situation, makes oil its most important asset. Increasing its
capacity to produce crude oil, as well as natural gas, directly affects Iran’s role in
international relations and consequently, its foreign exchange earnings.
Part One discusses the most important organization in Iran’s oil industry, the
National Iranian Oil Company. This study will be followed by scrutinizing its finan-
cial structure. The second part of Chapter Two looks into the structural framework
of oil contracts. Until the government nationalized the oil industry, there had been
several mandatory contractual frameworks. This section explores the most recent and
common agreements: Buy-Back contracts and Iran Petroleum contracts (IPCs). This

Z. Abdolalizadeh (B)
Senior Legal Specialist, Dana Energy Company, Tehran, Iran
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 327
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_18
328 Z. Abdolalizadeh

analysis shows there are various limitations in providing a precise understanding of

the country’s key resource industries.
Part Three then reviews the Sixth Development Plan (2016–2021) pertinent to
the country’s oil industry. Iran’s legal system allows different authorities to pass
legislation and regulations which brings the power-based hierarchical arrangements
and assigned duties lead to a mélange of precedents, and various interpretations of
the regulations. In addition, some of the main challenges—such as the incomplete
process of privatization and underdeveloped management in extractive resources—
will be investigated.
In conclusion, it will be clear that Iran’s integration of local content require-
ments into legal practices around extractive resources has great potential; however,
regressive policies, paradoxical laws and a lack of rule of law, together with
mismanagement, have moved the country away from effectively valued LCR.

2 Part One: Main Obligations Related to LCR in Iran

Within the Extractive Resource Industry: The National
Iranian Oil Company (NIOC)

The control of domestic oil has been a significant feature in Iran’s national, economic
and political independence.1 In April 1951, the newly elected Prime Minister,
Mohammad Mosaddegh, led a movement in the country’s parliament that resulted in
the nationalization of oil. Until then, the industry had been run by private companies,
mostly controlled by foreign interests. The Anglo-Iranian Oil Company (AIOC) was
founded in 1908 and mainly extracted petroleum from the south of the country. With
nationalization, it was displaced and renamed the National Iranian Oil Company
(NIOC). It became the sole governmental national oil and gas producer, distributed
under the supervision of the Ministry of Petroleum. Since its very beginning, the
NIOC has been in the spotlight as the sole organization in charge of the develop-
ment of Iran’s two key industries. It manages all activities regarding exploration
and production of crude oil, natural gas and condensate, as well as the drilling and
development of hydrocarbon reservoirs.2
Revenues from oil exploration first entered Iran’s economy in 1908. From then
till now, the importance of these revenues has grown rapidly, with the country’s
economy becoming increasingly dependent on these earnings. Almost 70% of Iran’s
budget in 2006 came from the proceeds of oil, and all Development Plans have
been passed and executed on the basis of these revenues. Iran’s dependency on the
oil industry instituted an economic structure with specific limitations that impacted
socio-political decision-making and policy implementation, as well as creating an
organizational framework for the private sector. As “oil export earnings are high,

1 Noreng (1994).
2 For more information, see the document “Nationalization of the Oil Industry of Iran.” 1951. Middle

East Journal 5(3): 353–354.

Local Content Requirements in Iran 329

totaling roughly $60 billion in 2007 and constituting 35% of GDP, it’s unavoidable
that many aspects of the relationship between oil and Iran’s macro economy are
classic examples of the symptoms displayed by the so-called resource curse or Dutch
disease.”3
Iran is among 15 countries with the world’s most resource reserves and is estimated
to have 7% of the planet’s extractive resources. Aside from the main energy sources,
oil and gas, the country holds 70 types of minerals including copper, coal, aluminum,
alumina, iron ore, zinc and crude steel. The country’s citizens make up almost 1.08%
of the global population.
NIOC’s production totals 4% of the world’s total crude oil production, and 5%
of total gas production.4 According to Petroleum Intelligence, the company is the
second largest globally5 after Saudi Arabia’s state-owned ARAMCO, but there is a
significant gap. Although the NIOC holds almost 9.3% of the world’s liquid hydro-
carbon reserves and 18% percent of gas reserves, there are a number of reasons to
explain the big difference, besides the size of its reservoirs:
(a) Laws and regulations related to the NIOC have not changed significantly since
its establishment. There is a dire need to amend and evolve regulations and
practices affecting the performance of the company.
(b) The Islamic Republic of Iran puts an undue burden on the symbolic sovereignty
of the NIOC by giving it sovereign immunity. This gives the company consider-
able privileges, special facilities and exemptions by artificially reducing the risk
exposure. Granting such exemptions results in a lack of transparency in actual
performance, and an increase in its monopoly power, thereby reducing the accu-
racy of assessing its profitability and performance. It is therefore necessary that
the government seriously revises and implements limits on these privileges,
such as tax and customs exemptions.
(c) Financing is another factor that explains the huge gap between ARAMCO and
the NIOC. In recent years, discussions around funding NIOC’s projects have
gained attention. It is obvious that any delay or shortfall in the required invest-
ments primarily leads to the reduction of production capacity of oil, natural
gas and other derivatives. Sanctions by the United States play a huge role in
discouraging and limiting foreign investments in Iran, as well as impeding the
country’s ability to sell oil. At the same time, sanctions caused Iran to stay
out of international competition with Saudi’s Aramco and the Russian state-run
company, Gazprom.
Laws and regulations in Iran on extractive resources are one of the most perplexing
and troublesome areas. First of all, it should be noted that legal points of extractive
resources are reflected in different kinds of laws, which include the Constitution,
the civil code and specific laws. Here, the discussion will begin with contradictory
articles in the Constitution and the civil code related to the matter of local content.

3 Green and Wehrey (2008).

4 Ebrahim-Fathabadi (2014).
5 https://www.energyintel.com/pages/top100-2018.aspx.
330 Z. Abdolalizadeh

The issue of local content and making use of existing domestic capacities have
been always concerned Iranian officials. Because, after a hundred years of commer-
cial exploration of Iran’s oilfields, the most part of a project involving oil technology
and equipment still relies on IOCs. And the improvement of domestic companies in
the field is negligible, and in most cases, operations are costly and take more time.
In addition, following the revolution and the withdrawal of foreign specialists and
experts, and subsequently the imminent war and serious damage to oil and gas equip-
ment, efforts were made to improve local content. But for reasons such as the priority
of oil production and the exploitation of wells, maintaining the level of production,
the lack of technical and technological know-how and the lack of sufficient capital to
finance, these efforts have not been successful. This trend continued until previous
sanctions and problems arose, therefore, some national actions have been taken, most
notably the construction of ten priority groups of commodity families and equipment
for the oil industry.
Apart from the general laws and constitution, the Petroleum Law (1987–amended
2011) is considered as the most important existing legal text on the oil and gas
industry that explains the principles governing it. One of these principles is the
requirement of local content stating in article 10 as “The Ministry of Petroleum is
committed to continually training and equipping human resources and accessing
advanced technology, growth and development in the various fields of the petroleum
industry…. by designing training programs and training centers and establishing
research and laboratory complexes. Ministry shall continually strive to take effective
measures to increase the level of knowledge and scientific and practical information
of staff and experts and to create an environment conducive to the recruitment and
encouragement of efficient and committed experts6 ”.
In addition, three laws have been passed after revolution to strengthen domestic
industries including oil and gas industry. The first one was “The law of maximum
utilization of technical, engineering, production, industrial and executive power of
the country in the implementation of projects and creation of facilities for exporting
services” passed in 1996. It took six years to formulate its executive directives
by Management and Planning Organization, though subsequently, the law was
suspended due to the merger of the Economic Council with the State Economic
Commission, the dissolution of the Management and Planning Organization, and the
establishment of the Vice President of Strategic Planning and Supervision, which
had a structural difference with the Management and Planning Organization. Later,
in 2012, another law was passed called “Law on the maximum use of production
and service capacity to meet the needs of the country and strengthen the production
and service capacity in exports and amend article 104 of the direct tax Law” which
repealed the previous one. The last one was ratified in 2019 titled “Law on maximum
Use of production and service capacity to meet country’s needs and strengthen the
production and service capacity in exports”.
The main indicator that underpins all three laws is the move in the direction of
the “domestic production”, with at least a 51% share of domestic production in the

6 Petroleum Law, ratified 1987-amended 2011.

Local Content Requirements in Iran 331

total project value. The latest law adds this point that 51% share should be calculated
regardless of the value of land, buildings and general utilities. The “capacity” is not
defined in any of these laws; however, some other concepts such as “work refer-
ring”, “domestic production”, “Iranian company” and “working inside the country”
which are related to the concept of capacity are defined and explained. The concept of
“capacity” is defined in appendix N of Buy-Back Contract (2008 model) titled “Max-
imum Utilization of Iranian Content” stating that “Iranian content means the total
value of work performed and services provided by Iranian natural persons, Iranian
companies and JVCs/Iranian partnerships to carry out a part of the project that will be
fully calculated as Iranian content”. In this regard, the methods of employing Iranian
manpower, engineering capability, manufacturing capability, equipping capability,
materials and services are all separately identified as some of the key constituents of
local content.7
In this regard, Buy-Back contract model is silent about mandatory application or
wavier of the requirement for minimum use of local content; however, its appendix
indicates that the contractor shall be obliged to comply with the requirement for the
use of local content when the required goods, equipment and services of the project
are sufficiently available at a reasonable price and quality in the domestic market.
Otherwise, the contractor may import items from abroad in the case that they are not
available, or of poor quality or not competitively priced with their foreign similar
goods in the Iranian market. It is noteworthy that in practice, it has not adopted
a uniform procedure regarding the conditions of use of local content and different
criteria have been applied in different contracts. For example, the contract for the
development of Phase 12 of the South Pars gas field specifies some requirements
for using domestic potentials including quality, quantity, proportion of the project
objectives and the delivery period, while does not mention the price criterion.
Following the initiating IPC framework, specific terms and conditions regarding
local content have been determined including:
1. Presentation of technology transfer and development plan by foreign contractor,
2. IPC contracts are subject to “Law on the maximum use of production and service
capacity to meet the needs of the country and strengthen the production and
service capacity in exports”,
3. rotation of executive management positions in production period,
4. establishing a joint operation company for the development and operation of the
fields (contractor is required to be a joint venture (incorporated or unincorporated)
with an Iranian partner approved by NIOC),
5. 51% of the value of the contract be awarded to Iranian entities,
6. training obligation for foreign contractor.8
A critical issue is the legal approach to the distribution of wealth that originates
from natural resources. At the end of Article 45 of the Constitution, the government

7 Ebrahimi and Ghsemi Moghaddam (2018).

8 Mohammadi et al. (2016).
332 Z. Abdolalizadeh

is obligated to treat the mentioned resources “in accordance with the public inter-
est”. The said public interest has never been clarified by officials. In recent years,
many interpret it as a social justice issue that includes equal opportunities for devel-
opment, such as access to decent jobs, affordable and trustable health systems and
environmental protection. These matters are raised because the cities and provinces,
such as Khouzestan—where major and valuable reserves are located—are severely
marginalized and underdeveloped. They also suffer from environmental degrada-
tion, and in recent years, the communities have faced air, water and soil pollution.9
In December 2019, for instance, the air pollution indicator rose to 400 in the city of
Ahvaz in Khouzestan province.
As a matter of fact, Article 48 of the Constitution originated from justice-based
ideologies which prevailed among revolutionists. This article states that “there should
be no discrimination among various provinces and regions in the country in extracting
natural resources and using national incomes, and in allocating economic activities
to them. Each area according to its own needs and aptitude for growth should have
access to the necessary capital and provisions.”
The related Act obligates the government to undertake specialized studies and
assessments to implement relevant policies that were passed in 1982. The government
must undertake spatial planning studies to establish which measures are required,
including the elimination of all kinds of discrimination in the exploitation and use
of resources, and to provide proper infrastructure for development in all regions
and provinces according to their needs. It must also appropriately distribute financial
resources and economic activities and find opportunities and comparative advantages
in each region to optimize development. The Government Obligation to Indem-
nify Underdeveloped Regions Act was passed in 2001, though it does not mention
equitable distribution of revenues from oil and gas production.
Later, the government made efforts to amend the current precedent and to improve
conditions in underdeveloped provinces. The special budget under the Fifth and Sixth
Development Plan (2011–2021) was allocated to such provinces with oil and gas
reservoirs, and the Fifth Development Plan indicated that 2% of revenues from crude
oil and gas sales should be proportionally disbursed in constructive plans to them.
This trend continued in the Sixth Development Plan, in which the Petroleum Ministry
was obligated to allocate 3% of its revenues from oil and gas contracts to improve
infrastructure, reduce environmental damage and compensate the regions around the
oil and gas fields.
Given LCR, and despite these plans and regulations, the situation in these cities is
getting worse. They do not receive direct revenues from resources, neither do other
regions with significant reserves. A clear instance is Zanjan province in which 472
mines are located, including the Angooran mine, Iran’s biggest reserve of zinc and
lead. According to a recent study, Zanjan province is the most underdeveloped region
in Iran, confirmed by social and economic inequality indicators.10

9 Khavarian-Garmsir et al. (2018).

10 Nazmfar et al. (2018).
Local Content Requirements in Iran 333

The Research Center of the Iranian Parliament reports that current financing
undertaken by the Ministry of Petroleum is mainly limited to a few sources: the
internal resources of the Ministry of Petroleum, the National Development Fund,
oil contracts and corporate bonds.11 The current financing strategies are different
from those in previous annual budgets and in the Five Year Development Plans. The
2018 budget required banks to issue corporation bonds. Banks were also required to
grant different kinds of facilities to the Ministry of Petroleum as well as investors in
private, cooperative and non-governmental entities for upstream oil and gas devel-
opment plans. The budget emphasized only the provision of banking facilities to
investors in the petroleum industry, and the issuance of bonds; no other financing
revenue was discussed. Private, cooperative and public companies were allowed to
establish oil and gas industrial units, including refineries and petrochemical plants.
They could also participate in the exploration, production and operation (not owner-
ship) of oil and gas fields—especially joint fields. Although these measures are not
nearly sufficient to secure and ensure the structure of the industry’s financing, they
are important steps in shaping the financing structure of the oil industry outside the
domestic financial market.12
In June 2015, the general policies of the Sixth Development Plan, set out in 80
paragraphs, were put forward by President Rouhani. The Sixth Development Plan
offered some similar policies to those in the budget. It also provided a changed notion
on oil and gas to develop the energy market, and the supply of crude oil and petroleum
products on the energy stock exchange.
In 2018, NIOC reported “the first consignment of Iranian light crude was presented
at the International Energy Bourse in November 2018”, and it consisted of “oil of
eight shipments of 35,000 bpd of crude oil on the same day, at $74.85 per barrel,
through three brokerage firms”.13

3 Part Two: Contractual Framework of Oil Industry

3.1 Historical Context

Since its establishment in 1951, the National Iranian Oil Company has experienced
five main periods. The first was when Mossaddegh, the Shah’s political adversary,
became prime minister, and the nine-points law was enacted by parliament, passed by

11 Report by The Research Center of Parliament “Requirements for Upstream Oil and Gas Financing

Under Sanctions”, 2018, No. 16163.

12 Article 12 of The Sixth Development Plan https://www.rrk.ir/Files/Laws/%D9%82%D8%A7%

D9%86%D9%88%D9%86%20%D8%A8%D8%B1%D9%86%D8%A7%D9%85%D9%87%
20%D9%BE%D9%86%D8%AC%D8%B3%D8%A7%D9%84%D9%87%20%D8%B4%D8%
B4%D9%85%20%D8%AA%D9%88%D8%B3%D8%B9%D9%87.pdf.
13 “A look at the National Iranian Oil Company’s report in 2018”, Edited by NIOC Public Relations,

Accessible at: https://www.nioc.ir/portal/file/?321174/NIOC-En.pdf, p 22.

334 Z. Abdolalizadeh

the senate and received royal assent. The nine-points law covered the implementation
of nationalization and the necessary arrangements for continuing to sell oil to the
former customers of AIOC.14
The Churchill–Truman Proposals shaped the second period of the NIOC which
fully acknowledged that the management and control of oil industry in Iran would
be held by Iranians, and the settlement offers did not include foreign management
and control of oil operations in Iran. Although the US government and Mosaddegh’s
initial response to these proposals in February 1953 was positive, he rejected them
in March 1953 and failed to make nationalization beneficial for Iran.
In 1954, we entered the third period in the history of the NIOC as a result of the
1954 Consortium Oil Agreement. A memorandum was provided for the establish-
ment of a consortium in which the shares would be as follows: 40% for AIOC; 14%
for Royal-Dutch-Shell; 8% for Standard Oil; 8% for Socony, 8% for Socal, 8% for
Texas and Gulf and 6% for Compagnie Francaise des Pétroles (CFP). The consor-
tium was incorporated in England where the headquarters were based at the time. It
effectively controlled Iranian oil operations and shared the profits equally with the
Iranian government.15 Mosaddegh wanted to put an end to British control over Iran’s
oil. However, the supporters of nationalization lacked a plan or strategy on how the
industry would be managed.16 This disorganization within the NIOC provided the
Shah with an opportunity to accumulate huge personal wealth from the oil reserves
and to generate a new kind of authoritarianism, mixed with his developmental plans.
The fourth period began in early 1973 when, the NIOC presented the consortium
with an ultimatum: to hand over all management and control over Iran’s oil, or to give
up all privileged access to the country’s oil, and be treated like any other customer.
External rights were passed by law in the same year. The 1974 Petroleum Act and
Risk Service Contracts stated:
… [T]he Petroleum resources and the Petroleum industry of Iran belong to the
Nation. The experience of sovereignty right of Iranian Nation over the Petroleum
resources of Iran with respect to the exploration, development, production, exploita-
tion and distribution of Petroleum throughout the country and its continental shelf is
entrusted exclusively to the National Iranian Oil Company who shall act thereupon
directly, or through its agents and contractors.17
In late 1978, the consortium and other foreign companies left Iran because of the
violent turn of the revolution against Shah. At that time, the NIOC possessed four
offshore joint ventures (JVs) in the golf producing oil. This action prompted foreign
companies to sue the government and resulted in a halt on exploration activities a year
later. In 1980, the NIOC established the National Iranian Drilling Company (NIDC),
whose main task was to explore new sites. Eight years later, Asaluye became one of
the NIDC’s discoveries, alongside Darkhovin and Azadegan.

14 Elm (1992).
15 Heiss(1994).
16 Minutes of Persia Committee Meeting February 2, 1954.
17 Yong (2013).
Local Content Requirements in Iran 335

The correlation between politics and oil industry in Iran became more complicated
after the Islamic Revolution in 1979, when any relations between oil and foreigners
were interpreted as dependency. As a result, Iran reduced its oil production in 1980
and 1981. As the most principal body in power and in a failed attempt to avoid this
dependency by reducing its revenues from foreigners, the Revolutionary Council
terminated most of external oil-related agreements. All these revolutionary deci-
sions inflicted heavy losses on the country and created confusion in the relationship
between oil and Iran’s political structure.

3.2 Buy-Back and IPC Models:

The five periods mentioned briefly examined the historical context of petroleum
agreements and will be discussed in greater detail in the next section. The pattern
of oil contracts in Iran began with Darcy’s concession contracts and evolved from
consortium to corporate and service contracts. The main two current approaches
were Buy-Back contracts and Iran Petroleum contracts (IPCs).
The Buy-Back approach was one of the contractual models for oil implementa-
tion projects.18 Despite the fact that it is legal for foreigners to have properties in
Iran, establishing a company by a foreigner is prohibited by Article 81 of Consti-
tution. However, if the company is established outside of Iran, it is allowed to have
a legal representative or to register a branch office in Iran, after obtaining relevant
authorizations according Registration of Companies Act 1931. There is an essential
condition to obtain these approvals indicating that the foreign company should “have
a contract with the Iranian government or one of its state-controlled institutions”.19 In
fact, the foreign company is allowed to establish a branch or have a representative to
perform the contract with Iranian party. Furthermore, Foreign Investment Promotion
and Protection Act was ratified in 2002 in which it is asserted that foreign investors
are treated the same as domestic investors. Thus, IOCs do not face any obstacle to
invest in Iran, while the specification of oil and gas contracts shall be met by them.
The Constitution of the Islamic Republic does not allow the granting of conces-
sion which is why the government came up with a Buy-Back formula, where foreign
companies that develop oil or gas fields are repaid their costs and given a rate of return
on the initial production. It also includes extended access to hydrocarbons. Buy-Back
contracts are “a kind of service contract with unique features” struck between the
NIOC and an international oil company. “Therefore it is sometimes regarded as a
separate kind of agreement. Buy-Back contracts might be concerned only with the
development of discovered oil fields, or with both their exploration and develop-
ment.” With these contracts, foreign investors, as contractors, conduct oil and gas
field development operations with their own capital and financing over a specified
period of time. With the commencement of production, the contractor transfers all

18 Bahmaei and Zere (2018).

19 Kakhki (2008).
336 Z. Abdolalizadeh

field operations to the NIOC and receives up to 60% of the project’s product output
as depreciation of cost and reimbursement for a specified period of time, such as five
to seven years. It can be concluded that the focus of the Buy-Back oil contracts is the
exploration and description of the oil and gas fields, the development of these fields
and the transfer of related services. Once these operations have been completed, the
contractor agrees to be paid the price in full or in part, by purchasing the product
produced from the oil and gas fields. Eleven field projects were offered in 1989,
but the response was not as promising as planned, so in 1995, the rate of return
was increased to attract more companies. In 1997, during Mohammad Khatami’s
presidency, total signed a $2 billion deal for South Pars Phases 2 and 3. The Buy-
Back formula was used for a second term in 1998, when the NIOC presented four
categories of projects: exploration; offshore fields for further development; onshore
fields for urther development and three projects for the Abadan oil refinery expan-
sion.20 Although the NIOC is responsible for the development of oil and gas industry
in Iran, it lacks the capacity and sufficient financial resources to develop all energy
resources without cooperating with international oil companies (IOCs).

3.3 Iranian Petroleum Contract Model

Until 2015, Iran practiced only Buy-Back contracts that presented several risks for
IOCs. These included the effects of the fluctuation in the international price of oil and
gas; higher capital expenditure requirement than agreed upon; short-term contracts
and short trial periods for project delivery; inadequate distribution over the construc-
tion period and lack of advanced technology. Moreover, under Buy-Back contracts,
IOCs are involved only for exploration and development, which basically reduces
their role to technology service companies,21 as when full production is achieved,
the NIOC takes over the operation.
The evidence of these shortcomings suggests that Buy-Back contracts did not
convince foreign investors to participate in the upstream sector. Also, the impacts of
sanctions, alongside a reduction in oil prices, cutbacks on loans and bank lending,
and other strict international regulations related to banking and climate change, have
led to a decrease in the tendency of foreign and domestic oil companies to invest in
Iran’s oil projects.
The government felt the need to amend the contractual framework through which
it might be able to dispel doubts investors may harbor. In 2012, the Parliament passed
the “Rights and Duties of Petroleum Ministry Act”, by which the ministry enters into
production—sharing contracts. Pursuant to this Act, the Cabinet adopted a regulation
titled General Conditions, Structure and Pattern of Upstream Oil and Gas Contracts,
which ultimately outlined the overall framework of these new contracts.

20 Shammas (2001).
21 Mazraati and Groenedaal (2006).
Local Content Requirements in Iran 337

The Iranian Petroleum Contract model was drafted as a result of problems associ-
ated with Buy-Back method. In 2017, government passed a resolution called “Gen-
eral conditions, structure and pattern of upstream oil and gas contracts” in which the
requirements of new model of contracts named Iranian Petroleum Contract (IPC)
have been specified. The client is defined as NIOC or its subsidiaries on behalf of
NIOC and contractor is defined as qualified oil companies that have contracted for
each exploration, characterization, development and operation and implementation
of well optimization or recovery projects, or all of them continuously, together with
all necessary funding, through the legal process. The following principles apply to
all contracts made pursuant to this resolution:
1. Exercising sovereignty and public ownership over the country’s oil and natural
gas resources and reserves through the Ministry of Petroleum on behalf of the
Islamic Republic of Iran.
2. All risks and costs shall be borne by the contractor if no commercial field or
commercial oil tank is discovered.
3. Risks of failure to meet the intended contractual objectives or the inadequacy of
the field or reservoir product for the depreciation of financial liabilities is incurred
by the contractor.
Three key elements of IPCs are as follows: an emphasis on collaboration through
incorporated or unincorporated joint ventures to facilitate the transfer and upgrading
of national technology in the field of upstream business, empowering national compa-
nies, establishing and strengthening oil companies; a focus on technology transfer
and the dissemination of the technology-related knowledge into oil and gas industry;
and prioritizing the enhancement of oil recovery for developed and undeveloped
fields.22 IPCs can be defined as a combination of production sharing and Buy-Back
contracts.23 Like production sharing contracts, they are “prepared for long-term use
and cover a significant portion of a field’s lifespan”,24 and also retain the exact
ownership feature of the Buy-Back model.
In this new arrangement, Iranian exploration and production companies deemed
qualified by the Ministry of Petroleum act as a partner to a reputable foreign oil
company. This requirement is set to fulfill the need for technology transfer. First, the
foreign contracting party must annually submit a technology transfer and a devel-
opment plan. Second, operational measures and enforcement policies are attached
to the contract as a “contract technology attachment". Given that the annual opera-
tional financial plan must be approved by the Iranian party—either the NIOC or its
subsidiaries—it has the authority and opportunity to incorporate the principles and
procedures of the technical knowledge transfer into the contracts. Unlike the Buy-
Back model, the contractor is permitted to be part of the production and operational
stages.

22 Formore information see: James et al. (2020). Tagliapietra (2016).

23 Sahebonar et al. (2016).
24 Kohan Hoosh Nejad et al. (2018).
338 Z. Abdolalizadeh

4 Part Three: Sixth Development Plan (2016–2021)

After the 1979 revolution, the NIOC experimented with several budget plans. Three
main financial systems have been implemented throughout the 40 years of the
Islamic Republic. The first period lasted for 20 years. It started when the Ministry
of Petroleum was established according to the Act passed by The Council of the
Islamic Revolution in 1980. Under this Act, three important companies, the National
Iranian Oil Company, the National Iranian Gas Company and the National Iranian
Petrochemical Company became subsidiaries to the newly established Ministry of
Petroleum, which procured their budgets from the public sector treasury.
The budget plan of 1980 ratified that all oil agreements should be signed by the
NIOC on behalf of Iranian government, and its revenues deposited into the treasury.
The Central Bank was obliged to sell as much foreign currency to the NIOC as it
required. It meant that all of the NIOC’s revenues were considered part of the public
budget, which would also provide it with funds to invest in resource exploration.
Meanwhile, the Iran-Iraq war broke out, and public budget was unable to provide
funds to invest in the oil and gas fields anymore.
Budgeting for the NIOC in the Third Development Plan (2000–2005) was the
preface of the second period. From 2000 onwards, the Iranian government tried to
provide infrastructure in order to improve the mining industries and increase a share
of production. It passed a law to establish the Iranian Mines and Mining Indus-
tries Development and Renovation Organization (IMIDRO) as a holding company
with several subsidiaries that included some of the key businesses working to
extract resources, such as the Al-Mahdi Aluminum Company, the Mobarakeh Steel
Company and the Esfahan Steel Company. The goal was to optimize the country’s
economic system through the mining sector and related industries, as well as to
supervise the use of mineral reserves and their proper and effective exploitation.25
Yet it took five years after its establishment before this organization could participate
in decisions that involved mining development plans. According to Article 120 of the
Third Development Plan, all revenues from oil and gas were considered as a means
to develop the oil and gas fields and downstream sections. The failure of this system
soon became apparent as the NIOC needed revenues from oil and gas product sales
to invest in upstream and downstream sections, and it could not change the existing
refinery patterns.26 It was necessary to reduce furnace oil production and increase
production of distillery products; however, such changes resulted in a fall in NIOC’s
revenue, and it was unable to replace the funds immediately. Also, under this system,
increasing crude oil production had no impact on NIOC’s revenues. Therefore, the
NIOC lacked any incentives to make an amendment or reform its products.

25 https://www.tejaratefarda.com/%D8%A8%D8%AE%D8%B4-%D8%A7%DB%8C%D8%B1%

D8%A7%D9%86-%D8%B5%D9%86%D8%B9%D8%AA-16/22360-%D8%B3%D8%A7%
D9%84-%D8%B1%D8%A6%DB%8C%D8%B3. Accessed on 2nd of November 2019.
26 “A Review of the Financial System of National Iranian Oil Company and its Impacts on Oil and

Gas Production” 2009, Economy and Energy, No. 116–117: 46–49.

Local Content Requirements in Iran 339

The Fourth Development Plan (2005–2010) ratified that the NIOC could receive
a share from crude oil and gas production which heralded the beginning of the third
period. It also ratified that domestic refineries and their products had to purchase
crude oil at the international price (Persian Gulf FOB price), and the government
would pay the price difference as a subsidy. These changes had significant effects:
the production of light petroleum and distillery products with higher values resulted
in an increase in total revenue, as well as boosting efficiency and proficiency.27 In
addition, the rise in crude oil production boosted the NIOC’s revenue, as it benefited
from oil and gas production. All these variations led to increased investment in both
upstream and downstream sections.
The Fifth Development Plan (2011–2015), which was delayed by a year, had not
performed well during the tough international conditions and hardship of country’s
economy (particularly in the oil and gas sector). This was the most unsuccessful of all
the Plans, though its failing was not entirely due to the difficult international condi-
tions and sanctions. Proper policies and measurements could have prevented a consid-
erable portion of its shortcomings. From the outset,28 it could have been predicted that
the Plan’s goals were overly ambitious. Added to this, specialized and non-specialized
duties were imposed on the oil and gas sector, plus tasks mismatched to the country’s
technical and national capacity. Targeting the $2 billion-dollar foreign investment in
the upstream sector of the oil industry was clearly at odds with government policies
at the time.
The Fifth Plan had 15 articles on the oil and gas industry. Article 125 indicated
that the goals were set to achieve a daily production capacity of 5.1 million barrels
of crude oil and 1470 million cubic meters of natural gas. These figures should be
compared to daily production of 4 million barrels of crude oil and 620 million cubic
meters of natural gas in 2010 (the last year of the Fourth Plan). Article 126 empha-
sized the need for Buy-Back contracts to explore and develop new fields in all parts
of the country. However, due to international restrictions (sanctions), development
projects were suspended. International oil companies announced their withdrawal,
leaving Iran with the remaining projects focused on exploration in the border areas.
Article 129 focused on the issue of exploration licenses, and the development and
production of oil and gas fields. The performance indicated the issuance of more
than 80 such licenses, but invitations to the private sector and promoting competi-
tion and productivity did not take place. Five years after the Fifth Plan was imple-
mented, a total of $70 billion was invested in the petroleum industry, with the NIOC
contributing $55 billion. However, this fell short of the predicted $226 billion invest-
ment in the upstream oil and gas sector. Also, 75% of this actual amount came from
domestic sources, which, given the limited resources, put additional pressure on the
oil industry.
The Sixth Plan aimed to increase the NIOC’s daily production capacity to 4.7
million barrels, its daily gas production capacity to 1.3 billion cubic meters and its
liquids and condensate production capacity to 1.1 million barrels per day. The Plan

27 Modarresi (2009).
28 Mostaghel (2016).
340 Z. Abdolalizadeh

aims to achieve new technologies, localize and commercialize these technologies

in the oil and gas industry and support the NIOC’s corporate social responsibility
endeavors. The program also aims to increase oil export potential, as well as the
amount of gas and water injected into the fields.29 This Plan was revised with Iran’s
Nuclear Deal in mind, and estimates were made under the assumption that foreign
investors would be eager to take part in Iran’s oil industry.
Four years after this Plan, domestic mismanagement and corruption were not the
only impediments to production and development; sanctions imposed by Trump after
withdrawing from the Nuclear Deal forced foreign investment to pull out of Iran and
prevented the country from engaging in oil and gas, or other business transactions. As
a result, Iran experienced its lowest production rate in the past 20 years. The country
is located in an oil-rich region, which means it has “11% of proven global oil reserves
and 16% of the world’s natural gas resources, amounting to 133 billion barrels of
oil (17 billion tons) and 27 trillion cubic meters of gas, which totals to $4000 billion
by current price of oil and gas”.30 Even though these reserves rank fourth among
oil-rich countries, and first among gas producers, its energy production was severely
reduced, and foreign pressure also deprived Iran from achieving development. This
has hit its economy, which includes an impact on the mining industry and the export
of raw materials.
As with its predecessors, the Sixth Plan has not been successful in fulfilling
the potential of oil industry and achieving the desired prosperity. The Plan Sixth
was unrealistic, and its anticipated goals were not in line with existing capabilities
and capacities. These ambitious and unrealistic plans were turned into useless and
irrelevant documents that were seriously affected when they coincided with several
frequently occurring international crises and conflicts.

5 Conclusion

This chapter discussed the main challenges that Iran’s extractive resources face with
regard to both local content practices and involvement. As the most important gas
and oil organization, the NIOC’s history is intrinsically rooted in the strict connec-
tion between the energy resource industry and Iranian politics. The establishment is
responsible for sovereign as well as operational duties. In addition, complex inter-
national relations and an authoritarian political system have an extreme effect on
the integration of local content resources on extractive resources at every stage of
its processing, from discovery (where foreign investment and sufficient funding is
inaccessible), to the final stages that results in the sale of raw and processed material.

29 Daneshjafari and Karimi (2016).

30 2nd Iran Mines and Mining Industries Summit, IMIDRO Projects, 2016, https://imidro.gov.
ir//parameters/imidro/modules/cdk/upload/content/general_content/216/14844805897047ber9qj6
malrg2rb07lnbenom7.pdf.
Local Content Requirements in Iran 341

Lack of access to high-tech equipment and up-to-date technical knowledge makes

precise reporting on LCR near impossible.
Another challenge for integrating LCR is that the NIOC is a state-owned entity
whose budgeting and development plan is designed by government and has to be
officially ratified by parliament. The complexity and ambiguity of the gas and oil
industry’s legal documents create several contradictions between laws that have
different beneficiaries and can cause confusion. Iran also faces the problem of an
accumulation of laws and regulations passed by different competent authorities that
increases rather than resolves the chaos. Another challenge is that most laws are not
applied as predicted, and even if they may be efficient, appear useless. This also
applies to those regarding the development of regions that are rich in reserves but
remain marginalized, and where the local communities have not been considered or
involved.
Iran has practiced different kinds of contracts since it began oil production. Apart
from concessions and consortiums that were in operation till the mid-1900s, Iran
has insisted on unrevokable ownership of its oil and gas reserves. This approach
strengthened after the revolution when the government designed a definite contractual
structure based on service agreements. The first were Buy-Back contracts, which
remained in operation for 20 years. This kind of service contract was only used for
the exploration and development of oil fields and brought bounded revenues. It could
not meet the demands of the oil industry. To overcome its limitations, the the Iran
Petroleum contract (IPC) was introduced, a new model that combined features of
the Production Sharing contracts (PSC) with some characteristics of the Buy-Back
contracts. The unveiling of IPCs coincided with a new round of US sanctions that
resulted in discouraging foreign company investments. As a result, the strengths and
weaknesses of the IPC model have yet to be examined, especially with regard to
LCR.
All in all, local content resources have had to confront many challenges, both as
a result of domestic inefficiencies as well as international events. To overcome these
problems, Iran has to find ways to finance its projects and to provide a platform on
which it can expand the integration of LCR into its gas and oil industry. If principle
rules and structures remain unchanged, the 40 years of experience under the current
regime indicate a worse outcome for the future.

References

Bahmaei, M., & Zere, S. D. (2018). Iran’s new oil order and its reflection in designing contractual
patterns of upstream oil industry projects. Legal Studies, 10(3), 29–65.
Daneshjafari, D., & Karimi, S. (2016). Oil, sixth socio-economic development plan and resilient
economy. Strategic and Macroeconomic Policies Quarterly, 8(2), 1–35.
Ebrahim-Fathabadi, H. (2014). A look at the international position of the National Iranian Oil
Company. Oil and Gas Exploration and Production Journal, 129, 14–20.
342 Z. Abdolalizadeh

Ebrahimi, N., & Ghsemi Moghaddam, S. (2018). Investigating the legal requirements for the use
of local content in the upstream oil and gas industry. Journal of Public Law Research, 20, 59,
63–95.
Elm, M. (1992). Oil, power, and principle: Iran’s oil nationalization and its aftermath. Syracuse
University Press.
Green. J. D., & Wehrey, F. (2008). Wolf, Charles “Understanding Iran”. RAND Corporation.
Heiss, M. A. (1994). The United States, Great Britain, and the creation of the Iranian oil consortium,
1953–1954. The International History Review, 16(3), 511–535.
James, D., Black, A., Wood, C., Christopher M.-O., Hariri, R., Humphrey, D., Nadir, G., Cheung,
A. (2016, February 6). New Model Iranian Petroleum Contract. Mondegh. https://www.mondaq.
com/Energy-and-Natural-Resources/481064/New-Model-Iranian-Petroleum-Contract.
Khavarian-Garmsir, A. R., Pourahmad, A., Hataminejad, H., & Farhoudi, R. (2018). A comparative
assessment of economic and physical inequality between shrinking and growing cities: A case
study of Khuzestan province, Iran. International Journal of Urban Sciences, 22(1), 104–122.
Kohan Hoosh Nejad, R., Manzoor, D., & Amani, M. (2018). Economic evaluation of fiscal regime
of buy back contracts in comparison with production sharing contracts (case study: Azadegan oil
field). Iranian Economic Review, 22(2), 579–598.
Mazraati, M., & Groenedaal, W. (2006). A Critical Review of Iran’s Buyback Contract. Energy-
Policy., 34(18), 3709–3718.
Modarresi, M. (2009). Budgeting at the National Iranian Oil Company and its effects on oil and gas
production. Exploration and Production Journal, 58, 18–21.
Mohammadi, S., Asghari Agh Mashhadi, F., & Haji Hosseini, M. J. (2016). Investigating the specific
rules of upstream oil contracts with emphasis on the new IPC oil contract. Administrative Law
Quarterly, 3, 9, 113–135.
Mostaghel, B. (2016). Sixth five year socio-economic development plan from the perspective of oil
industry. Oil and Gas Exploration and Production Monthly, No. 124, Introduction.
Nazmfar, H., Mohammadi H. S., & Akbari, M. (2018). The inequality of development in the
provinces in order to achieve sustainable development. 25(10), 297–340.
Noreng, Ø. (1994). National Oil Companies And Their Government Owners: The Politics Of
Interaction And Control. The Journal of Energy and Development, 19(2), 197–226.
Sahebonar, H., Taherifard, A, Farimani, F. (2016, August 28–31). Economic analysis of New Iranian
Petroleum Contract (IPC): the case study of caspian sea fields. Presented at: Energy Economics
Emerging from the Caspian Region: Challenges and Opportunities, Baku Azerbaijan.
Shammas, P. (2001). Iran: Review of petroleum developments and assessments of the oil and gas
fields. Energy Exploration & Exploitation, 19(2/3), 207–260.
Tagliapietra, S. (2016). Energy Relations in the Euro-Mediterranean: A Political Economy
Perspective. Springer.
Yong, W. (2013). NIOC and the state. Oxford Institute for Energy Studies.
The Development and Implementation
of Local Content in the Extractive
Industries in Trinidad and Tobago
and Guyana

Alicia Elias-Roberts

Abstract This chapter discusses the main features of the legal framework regulating
local content in Trinidad and Tobago and Guyana within the extractive industries.
It also discusses the role that local content can play in the development of the two
countries under review. The problem of illegal quarrying in Trinidad and Tobago and
the incident where a major oil company in Trinidad and Tobago decided to withdraw
a major project are discussed to demonstrate some of the problems associated with
local content. A case study from Guyana concerning the dissatisfaction with the
draft local content policy is reviewed as well as general pitfalls that Guyana needs to
avoid in its implementation of local content policies and laws. Further, the potential
for local content policies and law to conflict with international and regional trade
obligations are briefly discussed.

Keywords Local content · Extractive industries · Sustainable development · Oil

and gas law · Production sharing agreement

1 Introduction

The development and implementation of local content in the extractive industries

in Guyana and Trinidad and Tobago is a topic which is often bantered about by
politicians in these two jurisdictions, but the discussions often lack depth and critical
analysis. This chapter offers a comprehensive comparative analysis of the legal and
regulatory framework of local content development in both countries. Guyana and
Trinidad and Tobago, two countries in the Commonwealth Caribbean, make for an
interesting comparative analysis because the two jurisdictions have very different
experiences in their extractive industries’ history. Trinidad and Tobago has over
100 years of experience in oil and gas exploration and production, and from that
perspective, we can review lessons learnt in that jurisdiction. On the other hand,

A. Elias-Roberts (B)
Faculty of Law, University of the West Indies, St. Augustine, Trinidad and Tobago
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 343
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_19
344 A. Elias-Roberts

Guyana is a new frontier with the first major announcement of a significant discovery
of oil in 2015 and therefore, we can discuss lessons to be learned and pitfalls to
avoid in the context of Guyana.1 Interestingly, both countries have over 60 years of
experience in other extractive industries, with Guyana2 having experience in bauxite,
stone, sand, gold and diamond mining and Trinidad and Tobago3 having experience
in quarry operations in sand and gravel, blue limestone, yellow limestone, clay,
porcellanite and sand.
This chapter will begin by briefly discussing the main legislative and regulatory
framework related to local content in Trinidad and Tobago and Guyana within the
extractive industry. It will also discuss the role that local content can play in the
development of the two countries under review. Next, some experiences and practices
with local content requirements in the extractive industries in Trinidad and Tobago
and Guyana will be discussed. Before concluding the problem of illegal quarrying
in Trinidad and Tobago and the incident where a major oil company in Trinidad and
Tobago decided to withdraw a major project, from that, jurisdiction will be discussed
as two case studies. A case study from Guyana concerning the dissatisfaction with
the draft local content policy in that country will be discussed as well as general
pitfalls that Guyana, a new frontier in the petroleum industry, needs to avoid in its
implementation of local content policies and laws. Also, in both jurisdictions, the
obligations that each State has under several bilateral investment treaties4 and the
CARICOM regional agreement5 will be highlighted to discuss how these obligations
may conflict with or relate to local content laws and policies. The final section will
conclude and make a few suggestions about how Trinidad and Tobago and Guyana
can implement and maximise the benefits from local content policies and laws.

1 ‘ExxonMobil Announces Significant Oil Discovery Offshore Guyana,’ press release, May 20,
2015 at https://news.exxonmobil.com/press-release/exxonmobil-announces-significant-oil-discov
ery-offshore-guyana accessed Feb. 19, 2019.
2 Guyana Extractive Industries Transparency Initiative (GYEITI) report for 2017 Fiscal Year (April

2019).
3 See Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries,

‘White Paper on National Minerals Policy,’ June 2015 https://www.energy.gov.tt/wp-content/upl

oads/2014/01/White-Paper-on-National-Minerals-Policy-June-2015.pdf accessed 4 July 2019; See
also Trinidad and Tobago Extractive Industries Transparency Initiative Report 2016 https://www.
tteiti.org.tt/wp-content/uploads/TTEITI-Report-2016.pdf accessed 4 July 2019.
4 For instance, the Government of Guyana has entered into bilateral investment treaties with

China, Cuba, Germany, Indonesia, Korea, Kuwait, Switzerland and the United Kingdom https://inv
estmentpolicy.unctad.org/international-investment-agreements/countries/89/guyana. Accessed 11
July 2019.
5 See Chap. 3 on the Establishment, Services, Capital and Movement of Community Nationals in the

Revised Treaty of Chaguaramas establishing the Caribbean Community including the CARICOM
Single Market and Economy, 2259 UNTS 293 (Nassau, Bahamas 05/07/2001).
The Development and Implementation of Local Content … 345

2 The Main Obligations Related to Local Content

in Trinidad and Tobago and Guyana Within
the Extractive Industry.

2.1 Trinidad and Tobago

Trinidad and Tobago is currently the largest oil and natural gas producer in the
Caribbean, and since the early 1960s, its economy has been characterised by its heavy
dependence on the production and export of oil and gas.6 Between 1973 and 1982,
high oil windfall afforded rises in income, expansion of public sector employment
and improvement in physical infrastructure and living conditions. However, a large
share of expenditure was not sustainable, including subsidies and high public sector
salaries.7 When international oil prices declined in the 1980s, the economy was
deeply affected. Again in 2014, when oil prices declined, Trinidad and Tobago went
into a recession soon after. The country still faces a wide range of socio-economic
challenges, including sustainable development beyond the petroleum sector.
The petroleum sector in Trinidad and Tobago is dominated by subsidiaries of large
international oil companies. Exploration and production activities are carried out
under the terms of production sharing agreements or contracts (PSAs or PSCs). The
Petroleum Company of Trinidad and Tobago Limited (Petrotrin), wholly owned by
the government, was incorporated in 1993 and was mandated to engage in petroleum
activities along the sector value chain. For several years, Petrotrin owned and operated
the only refinery in the country, but in late 2018, the government made a decision
to close it down due to financial and other reasons.8 The National Gas Company of
Trinidad and Tobago (NGC) was established in 1975 and is engaged in the purchase,
transportation and distribution of natural gas to industrial users. NGC is still in
operation. In addition, it participates in the Atlantic LNG company. Approximately
50% of natural gas production is used locally, mainly by the petrochemical industry
and for power generation.
Even though Trinidad and Tobago’s first commercial oil production in south-west
Trinidad started in 1908, it was only in the 1960s that the island’s energy sector took on
a national identity. In 1963, a commission of enquiry was set up by the government
to review the oil industry and to recommend a legal framework for the industry
among other things. Today, there are several laws, regulatory instruments, contracts
and policy documents that channel the government’s local content policy in Trinidad
and Tobago. Under the recent Public Procurement and Disposal of Public Property
Act (2015), local content is defined as: “the local value added to goods, works or
services measured as the amount of money or percentage of each dollar of expenditure

6 See, The Oil & Gas Year Report (2019), Pawan G Patil, John Virdin, Sylvia Michele Diez, Julian
Roberts, Asha Singh, ‘Toward A Blue Economy: A See also, Promise for Sustainable Growth in
the Caribbean; An Overview’ (Report No: AUS16344 The World Bank 2016) 70.
7 Silvana Tordo et al. (2013) supra n. 6 at 116.
8 See Ghourlal (2018), Sant (2018).
346 A. Elias-Roberts

remaining in Trinidad and Tobago after the production of the good or the performance
of the work or service”.9 The outdated Petroleum Act of 1969 and implementing
regulations from 1970, while not expressly using the term “local content”, makes
reference to local content indirectly.10 Regulations 42 (2) (f) provides that a licensee
shall perform such of the general obligations specified in sub-regulation (2) in his
licence and a licensee shall:
minimise the employment of foreign personnel, ensure that such employees are engaged
only in positions for which the operator cannot, after reasonable advertisement in at least one
daily newspaper circulating in Trinidad and Tobago, find available nationals of Trinidad and
Tobago having the necessary qualifications and experience; determine the rules of employ-
ment including salary scales in such manner as to ensure that all employees in the same
category enjoy equal conditions irrespective of nationality….11

Investment incentives for local content are granted by the Government of Trinidad
and Tobago and are coordinated through the Industrial Development Division of the
Tourism and Industrial Development Company of Trinidad and Tobago Limited
(TIDCO). These may include training subsidies for developing new skills, export
credit insurance and exemption from value-added tax on inputs for companies
exporting 80% of production. The Fiscal Incentives Act 12 allows for the granting
of a tax holiday (or partial holiday) for periods up to ten years for the manufacture of
approved products by approved enterprises. These fall into separate classifications
including the highly capital intensive enterprises investing in excess of TT$50 million
(US equivalent $7.38 million)13 ; export enclaves, where products are manufactured
exclusively for export; and enterprises using a significant portion of local inputs.14
These concessions are discretionary and require applications to the Ministry of Trade
and Industry via TIDCO.15
Other legislation related to local content includes the Unemployment Levy Act 16
that provides for training and relief employment for the unemployed and the
Petroleum Production Levy and Subsidy Act 17 used to fund subsidies on petroleum
products. The Income Tax Act 18 provides for several special classes of companies
that are entitled to a tax credit of 15% of their chargeable income for seven years.

9 Public Procurement and Disposal of Public Property Act, (No. 1 of 2015), Laws of Trinidad and

Tobago, sec. 4.
10 Petroleum Act (no. 46 of 1969), Cap. 62:01, Laws of Trinidad and Tobago; see also the Petroleum

Regulations (Legal notice 5 of 1970), made pursuant to section 29 of the Petroleum Act, Laws of
Trinidad and Tobago.
11 Ibid., regulations 42(2)(f).
12 Fiscal Incentives Act, Cap. 85:01, Laws of Trinidad and Tobago, as amended, which grants fiscal

incentives to qualified companies in areas that are considered important to economic development.
13 Currency conversion done at xe.com.
14 Fiscal Incentives Act, supra n. 14, sections 2, 5 and 9.
15 See Government of the Republic of Trinidad and Tobago Ministry of Finance (2019).
16 Unemployment Levy Act (no. 16 of 1970), Cap. 75:03, Laws of Trinidad and Tobago.
17 Petroleum Production Levy and Subsidy Act (no. 14 of 1974), Cap. 62:02, Laws of Trinidad and

Tobago.
18 Income Tax Act, Cap. 75:01, Laws of Trinidad and Tobago.
The Development and Implementation of Local Content … 347

This reduces their effective tax rate to 20% from the statutory rate of 35%. These
special classes of companies include approved small companies, approved compa-
nies trading in a regional development area and approved activity companies. Special
companies must be locally incorporated and owned.19
In addition to the various laws quoted above, the Model Production Sharing
Agreement (2012)20 provides for local content and stipulates that the contractor shall
provide for the maximum utilisation of services and facilities available from Local
Enterprises. The model PSA also provides that the contractor shall also employ the
following obligations in all aspects of Petroleum Operations:
39.1 Contractor shall comply with the Government’s Local Content Policy in force and as
modified from time to time.
39.2 Contractor shall maximise to the satisfaction of Minister the level of usage of Local
Goods and Services, businesses, financing and the employment of nationals of the Republic
of Trinidad and Tobago…
39.8 Contractor shall ensure the development of people by imparting to nationals technology
and business expertise in all areas of energy sector activity including but not limited to:
39.9 Contractor shall ensure that nationals are selected and trained consistent with
Contractor’s performance standards in relation to activities referred at 39.8….21

As shown above, the government has formulated policies to increase the number
of national workers, where priority will be given to the employment of national
workers. The PSAs mandate the contractor to provide training to national workers in
line with the contractor’s performance standards and contractors must also develop
and implement training programmes that enable nationals to replace foreign workers.
Production sharing agreements require the contractor to maximise the use of local
goods, services and financing. Interesting, the PSAs stipulate that seismic processing
work shall be undertaken in-country, and in the award of subcontracts, reasonable
preference will be given to qualified local contractors or suppliers who meet the
quality, cost and schedule requirements. Note, however, that there is no explicit
margin of domestic preference.
Turning to institutional responsibilities, the current Local Content and Local
Participation Policy and Framework was launched in 2004, and by 2006, the govern-
ment appointed the Permanent Committee on Local Content to “monitor the various
activities in the energy sector to ensure that, as far as possible, all energy projects
include opportunities for the development of the expertise of nationals and maximise
the level of local content and local participation”.22 The committee is tasked with
developing policies and strategies to ensure the transfer of knowledge and technology
that improve local capabilities, in addition to business and the capital market; update

19 Ibid.
20 Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries,

Model Production Sharing Contract (2012), Article 39.

21 Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries,

Model Production Sharing Agreement (2010).

22 Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries

(2004).
348 A. Elias-Roberts

local content and participation policies, as required; and ensure compliance with the
set policies.
The goal of the policy framework was not to simply capture value through fiscal
measures in the form of taxation and the direct participation by Government but
to incorporate other measures such as the maximisation of the depth and breadth of
local control and financing, maximisation of the usage of local goods and services and
local capability development. The Trinidad Offshore Fabrication Company (TOFCO)
Fabrication Yard, as well as the significant level of local input into the Atlantic LNG
project stands out as major achievements coming out of the Local Content and
Local Participation Policy and Framework. It was reported by the government that
domestic investment in these projects came from both the government and local
private sectors through the building of the fabrication yard at La Brea, the devel-
opment of training institutions, training of the nationals in Trinidad and procure-
ment by local businessmen of equipment, technology, facilities and know how.23
Despite the significant levels of domestic and foreign investments, however, the
model failed to create a sustainable local service industry, notwithstanding Trinidad
and Tobago’s globally competitive local capabilities. More recently, the Permanent
Local Content Committee was re-established with a detailed mandate.24 However,
according to a former Minister of Energy in Trinidad and Tobago, in recent times, in
spite of obligations in Production Sharing Contracts and under the existing Petroleum
Act and Regulations, such signature successes have not been pursued or repli-
cated, and the Permanent Local Content Committee has in fact become inactive
and non-functional.25

3 Guyana

Local content is critical to the development of Guyana’s extractive industry and

its oil and gas economy in particular. It must be highlighted that even before the
announcement of oil in 2015, Guyana had laws concerning local content in the
extractive industries, and Guyana has several laws that make reference to local content
implicitly and allows foreign investors to engage in extractive activities, such as
mining. However, like many other new oil and gas producing countries, Guyana
sought to develop a local content policy specifically for the petroleum sector after the
first announcement of oil in 2015. In May 2018, the Government of Guyana published
a second draft of the Local Content and Value Addition Policy Framework.26 The new

23 See Speech by the Honourable Nicole Olivierre, Minister Of Energy And Energy Indus-

tries at the Energy Chamber’s 3rd Local Content Form, Trinidad and Tobago, November 18,
2015 https://www.energy.gov.tt/wp-content/uploads/2015/11/Speech-Local-Content-by-Minister-
Olivierre-16-Nov-2015.pdf, accessed August 23, 2019.
24 Ibid.
25 Ibid.
26 Local Content and Value Addition Policy Framework https://doe.gov.gy/published/document/5af

7293bdc677720ccdc33ba accessed 11 August 2019.

The Development and Implementation of Local Content … 349

policy stated that it aims at delivering benefits beyond the payment of royalties and
taxes and will provide a full definition of the local content. The policy also delineates
the framework by which local content will be understood, developed, measured and
secured.
The Guyana Geology and Mines Commission Act (1979),27 as amended in 198728
created the Guyana Geology and Mines Commission (GGMC), and it sets out its
functions and roles. GGMC provides effective stewardship of all mineral resources
by ensuring that opportunities for mineral resources development (exploration and
extraction) increase, by promoting and supporting investment in the mining sector.
The Forest Act, Cap 67:01, which was repealed by Forest Act (no. 6 of 2009) s.83
also provides for exploratory permits, and section 6(2)(c) provides for proposals for
the employment and training of Guyanese.29
The Mining Act, Cap. 65:01 (1989)30 is the principal Act regulating the mining
sector in Guyana. It provides the legal basis under which mining exploration, develop-
ment and production are to be conducted. It defines the rules for granting exploration
licences or permits. The Mining Act (1989) provides for the grant of prospecting
licences under section 30(2)(c) and mining licences under section 46(1)(d) and spec-
ifies obligations concerning the employment and training of Guyanese nationals as
well as the procurement of goods and services that can be procured locally. This
Act provides that all subsurface mineral rights in Guyana are owned by the State
and authorises the Guyana Geology and Mines Commission (GGMC) to manage
these resources. Section 30 of the Act concerning the granting of prospecting licence
provides as follows:
“30. (1) Subject to this Act, on application duly made, the Commission may, with the approval
of the Minister, grant on such conditions as it determines, or refuse to grant, a prospecting
licence in respect of any parcel or parcels.
(2) No prospecting licence with respect to any mineral shall be granted to an applicant unless
the Commission is satisfied that…
(c) his proposals for the employment and training of citizens of Guyana are satisfactory, or,
if the Commission is not so satisfied, in the opinion of the Commission there are special
circumstances which justify the granting of the prospecting licence and the Minister approves
of the grant thereof to the applicant”.

With regard to the grant or refusal of mining licence, the Mining Act also places
certain provisions relating to local content. Section 46 provides as follows:

27 Guyana Geology and Mines Commission Act (1979), Cap 65:09, Laws of Guyana, subsequently
amended by the Guyana Geology and Mines Commission (Amendment) Act no. 3 of 1987, available
at https://www.guyaneselawyer.com/lawsofguyana/Laws/cap6509.pdf accessed 11 July 2019.
28 Guyana Geology and Mines Commission (Amendment) Act no. 3 of 1987, Laws of Guyana, avail-

able at https://parliament.gov.gy/documents/acts/8163-act_no._3_of_1987_guyana_geology_and_
mines_commission_(amendment)_act_1987.pdf accessed 11 July 2019.
29 Forest Act, Cap 67:01 Laws of Guyana, subsequently repealed by Forest Act no. 6 of 2009

available at https://www.doe.gov.gy/published/document/5ae8f275b4d000153ca57a90 accessed 11

July 2019.
30 Mining Act, (no. 20 of 1989). Cap. 65:01, Laws of Guyana, available at https://parliament.gov.

gy/documents/acts/8532-act_20_of_1989_mining.pdf accessed 11 July 2019.

350 A. Elias-Roberts

46 (l) A mining licence in respect of any mineral shall not be granted to an applicant therefor
unless the Commission is satisfied that—
… (d) the applicant’s proposals for the employment and training of citizens of Guyana are
satisfactory;
(e) the applicant’s proposals with respect to the procurement of goods and services obtainable
within Guyana are satisfactory….

Turning to the Petroleum (Exploration and Production) Act (1986),31 which is

similar to the Petroleum Act of Trinidad and Tobago, it too is generally outdated.
Similar to the Mining Act, the Petroleum (Exploration and Production) Act includes
general obligations concerning the employment and training of Guyanese nationals as
well as the procurement of goods and services that can be procured locally. Note that
the Petroleum (Exploration and Production) Act and the Petroleum (Exploration and
Production) Regulations 198632 do not mention the term “local content”. Section 36.
(1) of the Act provides as follows:
A petroleum production licence shall not be granted to an applicant therefor unless—…
(iv) the applicant’s proposals for the employment and training of citizens of Guyana are
satisfactory;
(v) the applicant’s proposals with respect to the procurement of goods and services obtainable
within Guyana are satisfactory….

4 The Main Challenges that the Extractive Resources Are

Facing with Regards to Local Content Practices
and Local Involvement

4.1 Case Study 1—The Incident Where BPTT Decided

not to Have a Major Platform Fabricated in Trinidad
and Tobago

Media in Trinidad and Tobago reported that protests by the Oilfields Workers’ Trade
Union (OWTU) and delays in the negotiation of a new BP/National Gas Company
(NGC) contract were to blame for BP’s decision not to build the Angelin platform
in La Brea.33 That was included in a statement made by former Minister of Energy,
Kevin Ramnarine, who also said that the country and the community of La Brea had

31 The Petroleum (Exploration and Production) Act (no. 3 of 1986), Cap. 65:10, Laws of Guyana
available at https://parliament.gov.gy/documents/acts/8170-act_no._3_of_1986_petroleum_(exp
loration_and_production)_act_1986.pdf accessed 11 July 2019.
32 The Petroleum Regulations (Legal notice 5 of 1986), made pursuant to section 70 of the Petroleum

(Exploration and Production) Act, (no. 3 of 1986), Cap. 65:10, Laws of Guyana.
33 “Union protests, delay in agreement causes of BP’s decision on Angelin,’ Loop, Trinidad and

Tobago (April 6, 2017) https://www.looptt.com/content/union-protests-delay-agreement-causes-

bps-decision-angelin accessed August 23, 2019.
The Development and Implementation of Local Content … 351

lost out, along with many families, contractors and suppliers. Ramnarine said that
while the decision taken by BP is disappointing, it should come as no surprise.
The former Minister noted that there are two issues that led to the current situation.
“Firstly, the energy sector’s ability to deliver projects has been severely impacted by
industrial relations unrest and increasing red tape. Angelin’s predecessor the BP
Juniper platform endured no end of stoppages and protests”.34 He stated that the
OWTU played a major role in these events, which led to schedule slippage. “As a
result of the loss of time on Juniper, BP decided to move to jacket component to
Texas in mid-2015. This was done to preserve the project timeline. The topside was
completed in La Brea in January 2017”.35 The second issue, Ramnarine said, lies in
the length of time taken to negotiate a new BP/NGC contract, which is reportedly
nearing completion. He explained that these negotiations should have been completed
in December 2016 if the target of first gas from Angelin was to be achieved (January
2019), as it takes two years to develop a project like Angelin. To account for the loss
of time due to the late agreement, BP will now have to compress its timelines which
means building the platform where it can be completed faster, Ramnarine noted.36

4.2 Case Study 2—The Problem of Illegal Quarrying

in the Extractive Industry in Trinidad and Tobago

The problem of illegal mining (quarrying) has long plagued the Government of
Trinidad and Tobago.37 Despite the fact that in the past several persons were brought
before the courts in Trinidad and Tobago charged with offences related to illegal quar-
rying the practice continues. These illegal quarrying activities have led to destruction
of the environment and depletion of the nation’s natural resources. Large areas of
forests have been destroyed without any provision for restoration or rehabilitation.
Illegal quarrying can result in detrimental impacts on citizens of the country, both
directly or indirectly. Quarrying produces raw materials that are utilised in all facets of
life, especially in the construction industry, communities and in various businesses
in Trinidad and Tobago. Quarrying operations have significant impact on various
sectors of the economy and play a major role in sustaining the livelihood of a large
percentage of persons in rural and semi-rural areas, such as Sangre Grande and its
environs. It is therefore important that this sector is properly regulated, so that high
quality and returns are derived from extracted resources, and the country benefits
from the best possible earnings. The reasons illegal quarrying occurred include the

34 Ibid.
35 Ibid.
36 See also ‘BPTT confirms Angelin platform will not be fabricated in T&T’ Loop, Trinidad and
Tobago (April 6, 2017) https://www.looptt.com/content/bptt-confirms-angelin-platform-will-not-
be-fabricated-tt, accessed August 23, 2019, where BPTT’s spokesperson said in a statement that
though the decision was difficult, it was necessary to preserve Angelin’s project schedule.
37 See, Alicia (2016).
352 A. Elias-Roberts

fact that it is lucrative and there are deficiencies in national enforcement mecha-
nisms, as well as the regulatory and legislative mechanisms. The conclusion of a
White Paper on the National Minerals Policy of 201538 stated that “given the current
trends and challenges, especially illegal quarrying, in the minerals sector of Trinidad
and Tobago, it is imperative that legislative amendments be made which will allow
the proper functioning of the Minerals Act and its Regulations”.39
As such, there is recognition that there is the need for the legislative framework
for mining to be amended. However, like many areas of the law, while there is a
general recognition of a need for law reform, there is delay in effecting the necessary
changes. Chief among the pieces of legislation that must be amended is the Minerals
Act. The amendment must provide for the effective prosecution of offences relating
to illegal quarrying, powers of arrest without warrant, powers of forfeiture of illegally
quarried minerals, as well as attaching liability to the directors of mining companies.
There should also be a requirement for rehabilitation to be undertaken by quarrying
operators.
Currently, the Environmental Management Authority (EMA) in collaboration
with the Ministry of Energy and Energy Industries (MEEI) along with the assis-
tance of police officers work towards eradicating illegal quarrying. The EMA also
collaborates with the Minerals Advisory Committee (MAC), especially in streaming
and reinforcing the Certificate of Environmental Clearance (CEC) decision-making
process. There are other stakeholders that are also involved because a multidisci-
plinary, multi-stakeholder approach is necessary to eliminate illegal quarrying.
Both the Minerals Act,40 and the State Lands Act 41 make quarrying without a
licence illegal. The fine and imprisonment for a person who conducts quarrying
without a licence were increased. Previously, the penalty for illegal quarrying under
section 45(1) of the Minerals Act was a fine of TT$200,000.00 and imprisonment
for a term of 2 years. Now, the fine is TT$500,000 and 5 year terms of imprisonment
upon first conviction. For repeat offenders, upon a subsequent conviction, previously
the fine was TT$300,000.00 and a term of imprisonment 3 years, and now, the fine
is TT$700,000.00 and a term of 7 years imprisonment for this category of repeat
offenders.
Offences under the State Lands Act, Chapter 57:01 were also amended by the
Finance Act of 2014.42 Under the amended section 25 of the State Lands Act a person
who digs, wins or removes material from any State Lands without a licence is liable
to a fine of TT$300,000.00 and imprisonment for 3 years upon a first conviction and
a fine of TT$500,000.00 and imprisonment for 5 years upon a subsequent conviction
where the material is asphalt. Where the material is other than asphalt, the fine and
imprisonment are lesser. Upon a first conviction, the fine is TT$120,000.00, and upon
a subsequent conviction, the fine is TT$300,000.00 and imprisonment for 3 years.

38 See White Paper on the National Minerals Policy of 2015, supra n. 3.

39 Minerals Act, Cap. 61:03, Laws of Trinidad and Tobago.
40 Ibid.
41 State Lands Act, Cap. 57:01, Laws of Trinidad and Tobago.
42 Finance Act, (no. 4 of 2014), Laws of Trinidad and Tobago, sec. 6.
The Development and Implementation of Local Content … 353

4.3 Case Study 3—Dissatisfaction with Draft Local Content

Policy in Guyana

As stated above, in April 2017, a draft local content policy to regulate the new oil
and gas industry, was prepared by the Ministry of Natural Resources, and released
by the Government of Guyana.43 This policy intends to guide or set the stage for the
quantum of locally produced materials, personnel, financing, goods and services that
are to be rendered to the oil industry. Unfortunately, however, the policy was greeted
by severe criticisms from the local business community. The Georgetown Chamber
of Commerce (GCCI), a non-governmental organisation in Guyana, is of the opinion
that the Local Content Policy leaves much to be desired.44 The GCCI is of the view
that the draft local content policy makes little provision for local business owners
and Guyanese in general. There are several areas where the GCCI found the draft
policy to be lacking. GCCI stated that its discontent with the draft policy is because
it appears there will be no regulations for local content and little provision is made
for jobs for locals, as well as it not having enough objectives.
The Chamber said that the objectives should include scalable development in
priority areas in order to have local personnel and goods and services supplied to
operators by a local business. The Chamber thinks that the policy should also set out
to ensure operators and contractors from abroad have partnering systems to enable
local companies and investors to learn about oil and gas industry and its supply
needs. In response to the criticisms, the government responded that the policy will
be developed over time, and in tandem with the growth of the industry and said:
“At present, regulations will not be promulgated, but may become necessary as the
industry unfolds and expands, and impetus is needed to steer the process or to solidify
gains”.45 In contrast to the government’s position, the GCCI thinks that regulation on
local content should be promulgated earlier in the life cycle of oil and gas capacity
development.
The GCCI said that the language used in the policy tapers expectation and felt
that it failed to reflect the job opportunities, both directly and indirectly that can be
obtained from the new petroleum sector. Further, the GCCI is of the opinion that the
policy’s entire implementation strategy needs to be re-worked. “It does not spell out
priority areas, near term initiatives, medium-term GAP development areas, long-term
structural improvement of the state and programs to enable private sector to function
as a core network of the suppliers to serve the industry”. The GCCI, in its response to
the Ministry of Natural Resources noted that the private sector companies either in
supply of goods and services, wharfing onshore facilities, etc., can be beneficiaries
in the early stages of seismic testing, drilling, well development and pre-production
set up. It said too that after production starts, the government benefits from royalties.

43 Ministry of Natural Resources (2017).

44 Abena (2017).
45 Ibid., statement by the Hon. Minister Raphael Trotman, Minister of Natural Resources.
354 A. Elias-Roberts

The government can benefit from tax revenues once routing of supplies and services
are done via Guyana and not anywhere else.

4.4 Regional and Bilateral Obligations that May Conflict

with Local Content Laws and Regulations

As mentioned in the introduction, both Guyana and Trinidad and Tobago have entered
into several bilateral investment treaties that create obligations, which may conflict
with local content laws and policies. Local content policies are also at odds with
the CARICOM treaty46 that requires the inclusion of CARICOM nationals in local
content policies. Both Guyana and Trinidad and Tobago are also WTO members and
that treaty regime grants most-favoured-nation treatment to all its trading partners.
Trinidad and Tobago and the United States are party to a bilateral agreement on the
Encouragement and Reciprocal Protection of Investment that the Ministry of Energy
and Energy Affairs47 acknowledged would need to be partially renegotiated to be
consistent with the government’s local content policy. Under the bilateral investment
treaty between the Government of the United Kingdom and Guyana Article 3 on the
National Treatment and Most-favoured-nation Provisions and provides as follows:
(1) Neither Contracting Party shall in its territory subject investments or returns of nationals
or companies of the other Contracting Party to treatment less favourable than that which
it accords to investments or returns of its own nationals or companies or to investments or
returns of nationals or companies of any third State.
…
(3) The provisions of this Article relative to the grant of treatment not less favourable than
that accorded to nationals Of Companies of either Contracting Party shall not prevent either
Contracting Party from according special incentives to its own nationals or companies in
order to stimulate the creation of local industries, provided those incentives are consid-
ered carefully on each occasion by the Contracting Party concerned, which shall in partic-
ular, ensure that they do not significantly affect the activities or investments of nationals or
companies of the other Contracting Party.48

As the above highlights, States need to be aware that they can confront significant
problems posed by local content laws and regulations under private international law.
As part of a strategy to attract investment, in the formative years of industrialisation
by invitation, many developing countries entered into bilateral investment treaties
with developed countries. Also, the economic might of multinational corporations

46 See Chap. 3 on the Establishment, Services, Capital and Movement of Community Nationals in

the Revised Treaty of Chaguaramas supra n. 5.

47 Treaty between the Government of the United States of America and the Government of the

Republic of Trinidad concerning the Encouragement and Reciprocal Protection of Investment,

https://www.sice.oas.org/bits/triusa_e.asp, accessed August 23, 2019.
48 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland

and the Government of the Co-operative Republic of Guyana for the Promotion and Protection of
Investments (London, 27 October, 1989) entered into force 1990.
The Development and Implementation of Local Content … 355

led to the inclusion of many of these clauses in contracts with host governments and
producer states, particularly in the oil industry.
Additionally, a common feature of the contractual and legal relationship between
host governmental and multinational investment companies is resort to international
arbitration to protect the foreign investor. The International Centre for the Settlement
of Investment Disputes (“ICSID”), which was established in 1966 in Washington DC
under the auspices of the World Bank, is such an international arbitral tribunal. It
seeks to promote an atmosphere of mutual confidence between States and foreign
investors conducive to increasing the flow of private international investment for
development. The ICSID is established under the Convention of the Settlement of
Investment disputes between States and Nationals of Other States, which entered
into force on October 14, 1966. Eight Caribbean states have ratified the conventions,
including Guyana and Trinidad and Tobago49 and two others have signed.50

5 Conclusion

Currently the laws regulating local content in Trinidad and Tobago and Guyana can
be considered outdated. The main Petroleum Act in Trinidad and Tobago was drafted
in the 1960s and the Guyana Act, which has less details than the Trinidadian Act,
was enacted in 1986. As mentioned above, both the Guyana Petroleum (Exploration
and Production) Act 1986 and the Guyana Petroleum (Exploration and Production)
Regulations 1986 do not mention the term “local content”, but the laws and regula-
tions imply local content and make general reference to the employment and training
of nationals as well as the procurement of goods and services that can be procured
locally. We saw that in both jurisdictions, they have several pieces of legislation and
various policy documents, which fill the gaps and help to augment the legislative and
regulatory framework governing the local content policies in the various extractive
industries.
While there are various tools that a State can adopt to implement local content
such as quotas, training programs, employing local work force and fiscal incentives,
it is posited that there are lessons to be learnt from various jurisdictions that have
legislated very specific local content requirement and others that have very vague
local content policies. For instance, there are very specific local content requirements
in the Indonesian Bill on Mineral and Coal Mining of 2008 which requires all compa-
nies to process and refine mining products in Indonesia and the Nigerian Oil and Gas
Content Development Act of 2010 has provisions to enhance local participation in all
aspects of oil operations, including the following: 65% of divers in offshore energy

49 The Convention entered into force for the following countries on the dates indicated: Bahamas,

November 18, 1995; Barbados, December 1, 1983; Grenada, June 23.1991; Guyana, August 10,
1969; Jamaica, October 14, 1966; St Kitts & Nevis, September 3, 1995; St Lucia, July 4, 1984
Trinidad and Tobago, February 2, 1967.
50 The Convention was signed by the following countries on the dates indicated: Belize, December

19, 1986; St. Vincent and the Grenadines, August 7, 2001.

356 A. Elias-Roberts

projects must be Nigerian; 60% of steel ropes used in projects must be made locally;
all contracts awarded in excess of $100 million must include a “labour clause”,
mandating the use of minimum percentage of Nigerian labour or the use of indige-
nous companies of a minimum size, etc. On the other hand, some jurisdictions have
more relaxed provisions, which give more discretion to the contractors. The Afghan
Amu Daya Basin contract requires that the “contractor agrees to as far as possible
train and employ qualified Afghan nationals…and…will undertake the schooling
and training… The contractor will require the contractors and subcontractors to do
the same”, and the Timor-Leste’s production sharing contract for Area A stipulates
that “the Contractors shall draw to the attention of suppliers based in Timor-Leste,
in such a manner as the Ministry agrees, all opportunities for provision of good and
services in petroleum operations”.
The legal and regulatory framework in Trinidad and Tobago and Guyana fall
somewhere in the middle of the two examples cited above. They have laws that are
very general, and then, the contractual arrangements and various policy documents
tend to lay out more details. While this is understandable, the problem with having
very specific legislation is that the countries may not have the capacity to fulfil the
requirements, which can lead to delays in projects and might deter investments. The
Trinidad and Tobago’s Vision 2020 Energy Subcommittee Report51 recognises the
importance of local content and outlines specific objectives and initiatives to achieve
local content goals. Nevertheless, it is recommended that governments must have
clear communication with investors and the public regarding the bodies responsible
for implementing and undertaking various obligations in this area. Further, with
regard to law reform and policy reform in these areas, it is recommended that the
implementation of the new local content laws and policies must not be left mostly to
the private sector. It is submitted that local content policy and law must be based on
certain core principles and has to be linked to the wider national economic develop-
ment goals of the country. It is also submitted that governments must seek to establish
policies, which are easily adaptable and procurement strategies must be integrated
early in the development and planning stages of extractive projects.
From the first case study concerning the incident where BPTT decided not to
have a major platform fabricated in Trinidad and Tobago amid protest and delays,
many lessons can be learnt. It must be highlighted while the Government in some
jurisdictions may pass laws or issue regulations on the local content requirements for
major construction and infrastructural development relating to oil and gas exploration
projects to help improve domestic production; however, the government must also
ensure that the necessary skilled persons and workforce are available. In these types
of situations, the government must also ensure that there is the supply of various
goods to ensure that projects are completed in a timely manner in accordance with
international standards.
The second case study on illegal quarrying demonstrates that apart from the energy
sector, other extractive industries are in need of legislative reform and support from

51 Vision 2020 Energy Sub-committee (2004) Vision 2020 Energy Report, Trinidad and Tobago.
The Development and Implementation of Local Content … 357

the government to ensure that laws are implemented to safeguard sustainable manage-
ment practices. Indeed, the time is ripe for amendments to be made to the Minerals
Act and regulations to help to effectively eradicate illegal quarrying in Trinidad and
Tobago. This will also support the proper management and regulation of the mining
sector and help to promote sustainable development of the nation while ensuring that
the State receives its revenue due from the exploitation of its natural resources.
The third case study concerning the reaction to local content policy in Guyana
illustrates that clear communication with the public is critical. The energy sector and
other extractive industries does not have the capacity to create the volume of jobs
required to make significant changes to employment demographics in Trinidad and
Tobago and Guyana. Hence, public expectations must be carefully managed. The
expectations of the GCCI are unrealistic. While they have general dissatisfaction
with the draft policy and regulatory framework for local content development, the
reality is that many of the extractive industries are not a great direct employer. The
oil and gas sector in particular is not a great direct employer. For instance, in Nigeria,
employment in the sector is less than 1% of direct employment, in Namibia the mining
sector is about 1% and in Trinidad & Tobago it is about 3.3% of the workforce, before
the closure of the national oil refinery company (Petrotrin).52
A final important factor which must be highlighted is that the local content laws,
policies or regulations that the government decides to adopt and implement must
not be developed in isolation but must be streamlined to enhance the countries’ ease
of doing business and develop its international portfolio. From the point of view of
international investors, Guyana is ranked 134, and Trinidad and Tobago is ranked 105
out of 190 countries surveyed and ranked on the World Bank’s Ease of doing business
ranking.53 The report compares the business regulation for domestic firms in 190
economies against some international benchmarking standards. Having clear local
content laws and policies as well as relevant data on local content implementation
publicly available could enhance a country’s raking in this survey.

References

Abena, R.-C. (2017, June 14). Oil and gas development…Draft local content policy offers little
or nothing to Guyanese—GCCI. Kaieteur News. https://www.kaieteurnewsonline.com/2017/
06/14/oil-and-gas-developmentdraft-local-content-policy-offers-little-or-nothing-to-guyanese-
gcci/. Accessed February 19, 2019.
Alicia E.-R. (2016, July 5). Illegal quarrying. The Trinidad Express. https://www.trinidadexpr
ess.com/news/local/illegal-quarrying/article_c4ae11d5-f431-50d9-b8db-5207af4786eb.html.
Accessed June 14, 2019.

52 These figures were reported before the collapse of the national oil company, Petrotrin, in Trinidad

and Tobago. See Ramdass (2018).

53 Doing Business 2019—Training for Reform, A World Bank Group Flagship Report, 16th edition

(2019); See also Stedman and Green (2018).

358 A. Elias-Roberts

Ghourlal, D. (2018, November 30) Petrotrin closed; $2.7 billion paid out to workers. Loop,
Trinidad and Tobago. https://www.looptt.com/content/petrotrin-closed-27-billion-paid-out-wor
kers. Accessed August 23, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy Industries.
(2004). Local content and local participation policy and framework’ (2004). https://www.ene
rgy.gov.tt/local-content-local-participation-framework/. Accessed August 23, 2019.
Government of the Republic of Trinidad and Tobago Ministry of Finance. (2019). Major Invest-
ments Incentives in Trinidad and Tobago. https://www.finance.gov.tt/wp-content/uploads/2017/
08/MOF-Investment-Incentives-in-Trinidad-and-Tobago-web.pdf. Accessed August 23, 2019.
Ministry of Natural Resource. (2017, April). Making the most of our oil and natural gas—
Maximising benefits and value retention from guyana’s petroleum resources through capacity
development, local content and value addition: A policy framework—Working draft for discussion
and input. https://www.doe.gov.gy/published/document/5af7293bdc677720ccdc33ba. Accessed
October 11, 2019.
Ramdass, N. (2018, 29 August). Petrotrin’s refinery shutdown explained (and why it was done).
Loop, Trinidad and Tobago. https://www.looptt.com/content/petrotrins-refinery-shutdown-explai
ned-and-why-it-was-done. Accessed July 11, 2019.
Sant, R. (2018, September 28). Petrotrin to shut down November 30. Trinidad and Tobago
Guardian Newspapers. https://www.guardian.co.tt/news/petrotrin-to-shut-down-november-30-
6.2.678617.781afbbf9e. Accessed August 23, 2019.
Stedman, A., & Green, K. P. (2018). Fraser Institute Global Petroleum Survey. Available at https://
www.fraserinstitute.org/sites/default/files/global-petroleum-survey-2018.pdf. Accessed July 11,
2019.
The Oil & Gas Year Report. (2016). Trinidad and Tobago 2019: The oil & gas year: Information is
power. At https://www.theoilandgasyear.com/market/trinidad-and-tobago-2/. Accessed February
19, 2019.
Local Content Within Extractive
Resources Industry in the Russian
Federation

Olga S. Kirillova

1 Introduction

The Russian Federation (the “RF”) is considered to be a non-OPEC oil producer,

which actually influences the oil market significantly due to high oil production
volumes. It is possible to conclude that the oil and gas industry plays a great role
in the Russian Federation economy. It is a well-known fact that the RF is rich in
natural resources and the federal state budget relies heavily on the sale of oil and gas.
According to the RF Prime Minister Dmitri Medvedev (2017), the Russian budget has
reduced its reliance on the sale of oil and gas, and its revenues from other sectors now
account for more than half. Nevertheless, obviously, with such a strong dependency
on the tax earnings from the export of raw materials significantly influences state
policy and places a special role on the companies operating in the oil and gas industry
sector.
Taking this into account, it is no surprise to conclude that the largest Russian
companies operating in the energy sector are: Rosneft Oil Company, Gazprom JSC,
Novatek JSC, Transneft JSC, Lukoil JSC, Zarubezhneft JSC, Surgutneftegas JSC,
SIBUR JSC. According to a report from Skolkovo Energy Center (2018), the RF
oil and gas companies are very dependent on foreign technologies and therefore
sanctions applied by the USA and EU during 2014–2018 significantly influenced
the development of the Russian energy market. Nevertheless, despite the sanctions,
international cooperation between the Russian energy companies and international
corporations is still happening, but not within the area of sanctioned projects (i.e.
shale, deep water and Arctic projects).

O. S. Kirillova (B)
ZN Vostok, Ltd, Lukinskaya Street, 8, 119, Moscow, Russia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 359
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_20
360 O. S. Kirillova

Nevertheless, despite all the above-mentioned restrictions imposed by the USA,

EU and even the Russian state authorities, joint projects are still considered to be
one of the most attractive ways for cooperation between the major Russian oil and
gas companies and their foreign counterparts. The main reasons for Russian compa-
nies to enter into joint projects with foreign partners include: technology transfer,
experience sharing, new difficult project execution, local staff development and
education, production localisation, capital intensity, risk sharing (Ernst and Young
report 2017). Hereinafter, the chapter reviews the RF peculiarities regarding the
local content requirements (“LCRs”) from theoretical and practical perspectives as
they significantly influence foreign investor operations in the RF extractive resources
industry.

2 Local Content Requirements Within the Extractive

Resources Industry in the Russian Federation

The Russian energy sector consists of the following subsectors: oil industry, gas
industry coal industry and electric power industry (atomic, hydropower). The main
legal framework for the extractive resources centre on the following documents:
1. Civil Code of the RF;
2. RF Federal Law N 69-FZ dated 31.03.1999 “On gas supply in the RF”;
3. RF Federal Law N 147-FZ dated 17.08.1995 “On natural monopolies in the RF”;
4. RF Federal Law N 135-FZ dated 26.07.2006 “On the protection of competition”;
5. RF law N 2395-1 dated 21.02.1992 “On subsoil”;
6. RF Federal law N 225 dated 30.12.1995 “On production-sharing agreement”.
There is no specific legislation regarding the LCRs in the Russian Federation.
Nevertheless, usually the LCRs mean the requirements expressed in the percentage of
the local goods, local employees, local raw materials to be used in the manufacturing
process for the purpose of creating value addition to the local economy.
It is necessary to note that sometimes the LCRs are mixed with the import substitu-
tion industrialisation (“ISI” or localisation) model. Due to the absence of the specific
legislation and normative acts regarding the LCRs in the oil and gas industry, it is
possible to assume that localisation can also be considered part of LCRs.
It is interesting to note that the value and importance of the LCRs (including
localisation) can be illustrated by the experiences of Rosneft Oil Company and
Gazprom. Since 2014, each annual report of Rosneft Oil Company contains a chapter
devoted to equipment and technology localisation. Gazprom has also developed a
set of measures, which are intended to replace foreign procurement of goods, works
and services. This reflects the willingness of oil companies, on the one hand, and
growing opportunities of domestic engineering enterprises, on the other hand, to
build a long-term relationship (Semykina 2017).
Analysis of the latest joint projects indicates that the majority of the onshore
projects have being implemented in the area of tight oil exploration. Actually, Russian
Local Content Within Extractive Resources Industry … 361

oil and gas companies are able to develop the usual (light oil) fields by themselves on
the bases of the corresponding licences and using available resources and technolo-
gies. On the contrary, possibility of exploration and production of the difficult-to-
extract hydrocarbons projects depends on specific technologies and know-how that
are used by international oil and gas companies worldwide but not available to the
Russian market.
As it was stated by the US Energy Information Administration (2015), the majority
of Russia’s current oil production (nearly two thirds) comes from the Western Siberia
field and Volga-Urals region. Nevertheless, due to the fact that these oldest fields have
been producing since 1940s, presently they are declining even with the new technolo-
gies and focus on secondary recovery and hydrofracturing. Therefore, Russian oil
companies are very interesting in the drilling and completion techniques used in the
USA for the purpose of development of their unconventional oil and gas resources.
The RF unconventional oil reservoirs are huge and still not developed due to the
lack of experience and technologies. For example, such technological solutions as
hydrofracturing and coiled tubing are necessary for tight oil exploration but well-
known only to international companies (i.e. Weatherford, Baker Hughes, Halliburton,
Schlumberger). Russian companies do not have enough experience in such opera-
tions (Skolkovo Energy Center 2018). For example, at Vankor field (one of the
largest oil fields in West Siberia), five years ago most components and equipment
used in the project came from abroad: top drive drilling by Canrig or Varco (USA),
chisels by Hughes Christensen (USA), solutions for horizontal wells of MI-SWACO
(USA), logging technology MWD and LWD (USA) (Semykina 2017). Horizontal
drilling is performed by Schlumberger Company, which has its own repair base for
the maintenance and restoration of drilling systems on Vankor. Local procurement
mostly comes from the so-called industrial upstream including building materials,
metalwork, electric poles, sawmill products, cement and so on (Semykina 2015).
Therefore, it is logical that Russian companies are interested in cooperation with
international corporations with respect to joint project implementation in the area of
tight oil exploration. As it was stated by the Russian Council on International Affairs
(2018), the foreign service companies have about 25% of the corresponding Russian
market of oilfield services (e.g. they have significant market share in such critical
areas as fracture stimulation (90%), seismic interpretation (50%) and horizontal
drilling (25%)).
Taking into account all above-mentioned, it is possible to summarise that the
main areas of cooperation regarding the local content usage by foreign investors are
creation of the joint ventures with the local partners and localisation process (R&D
and production of goods).
It is also necessary to mention the production-sharing contract (hereinafter—the
“PSA”) as a way of cooperation between the foreign investors, the RF and Russian
companies. There is a special law “On production-sharing agreements” as of 1995.
According to this law, for the purpose of PSAs implementation the Russian compa-
nies have the prevailing rights to be the contractors, Russian citizens have prevailing
rights to be hired as employees and locally manufactured goods shall be used (article 7
of the mentioned law). Nevertheless, PSAs as a form of cooperation with the foreign
362 O. S. Kirillova

investors are not very popular in the RF (the most famous PSAs implemented in
the RF are the following: “Sakhalin-1” signed in June 1995, “Sakhalin-2” signed
in June 1994 and “Kharyaga” signed in December 1995). According to the PSAs,
the specific tax regimes shall be applied for the participants. For example, partici-
pants of “Sakhalin-1” shall pay profit tax in the amount of 35%. Nevertheless, the
RF Ministry of Finance does not consider the PSAs as beneficial for the Russian
economy (Kozlov and Zanina 2018).

3 Experience of Local Content Requirements

in the Russian Federation

3.1 Localisation Aspects in the RF

At present, the RF Government has implemented a strict policy for the purpose of
encouraging foreign investors to localise R&D and production of their goods in
the RF and for the purpose of stimulation of Russian companies to develop their
competences. For example:
(i) The Ministry of Industry and Trade of the Russian Federation has adopted
special rules regarding recognition of the goods produced in the RF;
(ii) The special Centre of the competences for the technological development of
the import substitution was established by the Ministry of Industry and Trade
of the Russian Federation in December 2018.
(iii) The special Fund of Industrial Development was established for the purpose
of soft financing. For example, the RF Chamber of Commerce together with
the Fund of Industrial Development supports municipal and regional investors
(i.e. 351 projects were financed). The loans for such projects are provided for
7 years under 2–5% annual interest with the minimum initial financing required
from the municipal and regional investors.
There are also several special programmes developed for the purpose of coop-
eration between foreign investors and local companies [i.e. preferential taxation,
single source procurement for the purpose of special investment contracts (“SICs”)].
The most active and positive dynamic in the area of localisation is in the automo-
bile industry in the RF. About 85% of cars are produced in the RF. The power
plant industry also has several examples of localisation (i.e. the manufactory for the
purpose of turbine blade repair based in Siemens technology opened in 2018).
The SICs can be offered to foreign investors for the purpose of localisation of
the production of their goods. According to the available information, about 25
SICs have been signed for the purpose of localisation stimulation (6—in phar-
macy industry, 4—in automobile and chemical industries, 3—in oil-and-gas machine
Local Content Within Extractive Resources Industry … 363

building, 2—in agricultural machinery industry and metallurgy, 2—in power engi-
neering industry, machine tool manufacture, aircraft construction and pump equip-
ment manufacturing). It is expected that realisation of the above mentioned SICs will
gain about 410 billion RF Rubles in the budget, creating about 9900 new working
places and the volume of the produced goods exceeding 4 trillion and 177 billion of
the RF Rubles.
A special plan regarding localisation purposes was developed by the RF Govern-
ment and according to this plan the dependence from the foreign goods and equipment
in the industrial area shall decrease to 43% by 2020. According to the information
available from the RF Ministry of industrial trading (2018), the level of dependence
from the foreign technologies has already decreased from 56 to 52% in industrial
manufacturing. It was planning to achieve the zero level of the dependency from the
foreign technologies in the oil and gas industry by 2020, but this goal was unrealistic.
According to the opinion of the RF expert Arkhipov (2018), the purpose of local-
isation is to push foreign investors to incorporate R&D centres in the RF, to launch
local production of goods and equipment, to implement the technology transfer and
experience sharing; only such an approach could guarantee localisation rather than
just assembly plants. Therefore, on the basis of the above mentioned, it is possible
to illustrate the following successful samples of the localisation process in the RF:
1. Localisation samples in Upstream areas

1.1. Creation of the joint R&D centres and local manufacturers

It is possible to mention the “AETC Sapphire” Limited Liability Company (LLC)

and “Advanced Research and Technology Centre” LLC, the joint ventures created by
Rosneft Oil Company and General Electric for the purpose of conduction research
and development operations and local production in the RF:
(i) On 21 June 2013, Rosneft Oil Company and General Electric entered into
a Strategic Cooperation Agreement pursuant to which the parties agreed,
inter alia, to pursue a multifaceted, strategic cooperation relationship for the
purposes of leveraging existing technologies of the General Electric Company
and its affiliates to help Rosneft improve efficiency and yields in its assets, and
exploring opportunities to jointly develop, manufacture, test, assemble, sell and
market equipment for use in the oil and gas industry in the Russian Federation;
(ii) the joint ventures and its subsidiaries shall conduct, among other things, certain
business activities and initiatives in the Russian Federation in any areas that
may be agreed by the shareholders of the Joint Venture through a process to
be agreed by the parties. Specifically, the parties intend to mutually develop a
project that contemplates the production of wellhead equipment and Christmas
trees (flowing wellhead equipment) for specific exploitation conditions in the
territory of the Russian Federation;
(iii) Parties shall consider and explore the possibility of investing in a project
that would comprise construction of a plant for production and/or assembling
364 O. S. Kirillova

of wellhead equipment and Christmas trees on the territory of the Russian

Federation;
(iv) The Parties intend to reach the level of the equipment production with a target
of localisation seventy per cent (70%) by 2025.
1.2. Local production of the machineries

The special road map was developed by the RF Ministry of Foreign Trade according to
which the level of dependency from the foreign machines has to decrease significantly
in the nearest years. Since 2015 until 2019, about 90 projects in the area of localisation
of equipment production were supported by the RF Government for the total amount
of approximately 14 billion RF Rubles (Uchenov 2018).
1.3. Local producing of proppant

One of the examples of the localisation of the production process is manufacturing

of the proppant for the completion operations in the well. It is interesting to note that
this did not exist in the RF 10 years ago; all proppant was bought from the foreign
companies. Nevertheless, for now due to Gazproneft’s efforts, proppant has been
successfully produced in the RF and used during the completion process in the RF
and even abroad.
1.4. Development of local software

Usage of the high-quality software is critical in the Upstream area. For many years,
Russian companies had to use foreign software due to absence of the levant local one.
Nevertheless, as of today, there is available local Russian software for 3D modelling
of the hydro-fracking operations that is actively being used by Russian companies.
The RF Security Council stated in 2018 that development of the local software and
decreasing dependency on foreign companies are extremely important for the RF
and even influence the country’s security.
2. Localisation samples in the refinery area

Local production of the catalysts and additions can be considered as successful

examples of the localisation of the goods’ manufacturing in the refinery area. Earlier
most of the catalysts and additions were bought from foreign suppliers. As for today—
Rosneft Oil Company has been successfully producing its own catalysts at Angarsk
refinery plant. Gazpromneft has been also launching its own catalysts production at
Omsk refinery plant. As for the additions production, Transneft is planning to start
their production in Alabuga.

3.2 Joint Ventures Specific in the RF

On the basis of the information available, it is possible to say that joint projects can
be considered a very attractive way of developing business relationships in Upstream
Local Content Within Extractive Resources Industry … 365

projects (i.e. projects related to the oil and gas exploration and production). Many
international oil and gas companies are interested in international communication
and business development. There are many joint ventures (JVs) in the RF created
by the major participants of the international oil and gas market, i.e. ENI (Italian oil
company), Exon Mobile (USA oil company), Repsol (Spain oil company), Equinor
(Norwegian oil company, ex Statoil), British Petroleum (English oil company), with
their local partners, i.e. Rosneft Oil Company (Russian oil company), Zarubezhneft
(Russian oil company), Gazpromneft (Russian oil company).
It is possible to indicate the following benefits of the joint projects in comparison
with the other forms of international business cooperation:
(i) Capital intensity

Oil and gas projects are considered very expensive, therefore, possibility of foreign
investment guarantees the additional funding and resources to a project. It is inter-
esting to note that according to the latest trends, some of the JVs are originally being
funded only by the foreign partner under condition of returning the money later
during the operational phase in case of a project’s success.
For example, most of the Russian Federation JVs between Rosneft and its
foreign partners (i.e. ENI, Equinor, BP) are originally funded by the foreign partners
according to the shareholders and operating agreements. Given drilling operations
are very expensive (i.e. cost of one exploration well could cost up to 20 million USD),
such partnerships in JVs are strategically important for the foreign partners.
(ii) Risk mitigation

It is necessary to note that many JVs are created for the purpose of developing
exploration projects in the oil and gas sector. From a practical perspective, such
projects are considered to be very risky and only 30% of the projects are successful
(Ernst and Young report 2017). It is quite often, that a single company does not
want to invest solely in an unproven technology or region. In such cases, it is more
reasonable to share risks and costs correspondingly.
Most of the JV projects in the RF are structured in a way that foreign partners
invest funds in the first stage of the project implementation and later the local partner
will compensate such costs proportionally in case of success according to the agreed
terms and conditions.
(iii) Technology transfer

Usually, the main motivation for a JVs with a foreign partner is the opportunity
for technology transfer. The level of oil and gas technologies development is very
different around the world, and therefore, local oil and gas companies in developing
countries are very interested in cooperation with foreign partners who have modern
and effective technologies and equipment.
This international cooperation is relevant to the projects in the area of difficult-to-
extract oil because a lot of contemporary technologies are required for the successful
366 O. S. Kirillova

implementation of such projects (i.e. coil tubing, frack equipment, etc.). For example,
project agreements between Rosneft and Equinor have special conditions regarding
experience sharing, technology transfer, local staff education.
(iv) Access to resources

It is a common practice that the JVs shareholders delegate the staff to the project
on the basis of the corresponding staff services agreements and/or general services
agreements. Because it is extremely important for the JVs to have an experienced
and qualified staff, such an approach is quite useful for the projects.
For example, usually it is stated within the project agreement that each participant
shall provide educated and experienced staff according to the agreed organisational
chart and allocation of management positions. It is necessary to note that there are
special requirements in the RF regarding hiring of foreign employees. The general
rule is that the RF Government approves the quota for foreign employees who can
work in the RF. Nevertheless, if the foreign employee is considered as highly qualified
based on income, education and experience, that candidate can be hired on special
conditions from the quota approved by the RF Government. For local partners, it is
also very valuable to develop its staff through cooperation with the representatives
of the foreign partners and via mutual educational programs and trainings.
(v) Supply chain optimisation, market positioning and scale

Taking into account that the projects are usually implemented in very tight timely
conditions, it is quite important for the JV to be able to use its shareholder privileges
and benefits during negotiations with potential contractors. Such negotiations could
help to decrease the costs and production time significantly. For example, it is a
common practice to attract the local shareholder representatives to the procurement
process implemented by the JVs. This approach could help to secure better commer-
cial offers from the tender participants and to decrease price significantly. Usually,
the local partner is a strong local market player, has reliable business reputation and
relies on its local network, experience and knowledge of the local market. In case of
efficient strategy JVs can develop a strong market position for the purpose of its poten-
tial business development. For example, while planning the procurement process and
project implementation, JVs rely significantly on the information provided by the
local partner, which is aware of the local country context and can share important
information.
(vi) Awareness of the local norms and requirements

It is necessary to say that all countries have their local regulations regarding the
possibility of the foreign company to take part in the local oil and gas projects. In
the case of local partner availability, it is possible to get the qualified assistance and
advice regarding this local requirement. Usually, while structuring the project it is
very important to develop the right legal scheme and order of cooperation.
For example:
Local Content Within Extractive Resources Industry … 367

– three offshore projects between Rosneft and Equinor were structured in a way
when the JVs was a foreign legal entity with a branch in the Russian Federation,
– one onshore project was structured in a way when the JVs were established in the
Russian Federation as a Russian legal entity.
All these constructions are possible according to Russian legislation.
(vii) Political sensitivity

All international projects in the oil and gas sector are very political. Many deci-
sions regarding a projects’ implementation and relevant partners are taken at the top
level. At the same time, changes in political forces in the host country, such as new
sanctions, could significantly influence the projects’ implementation. Unfortunately,
many of the JVs were put on hold due to sanctions imposed in 2014 by the USA and
EU.
Usually, the JVs communication is considered to be more palatable to govern-
ment, labour groups and communities. According to a report by Skolkovo Energy
Center (2018), the latest international joint projects were implemented in the areas
of onshore tight oil exploration and offshore deep water. Table 1 presents the latest
main international joint projects implemented in the RF.
On the basis of the abovementioned, it is possible to conclude that the main inter-
national oil and gas companies that take part in the joint projects are Exxon Mobil,
ENI, Equinor (ex. Statoil) and BP. The main areas of international cooperation are
Upstream projects (offshore and onshore difficult-to-extract hydrocarbons), where
foreign technologies are extremely important for the successful implementation of
projects. According to the forecasts of Gazprom (2018), if the new technologies are
successfully implemented, the share of the Russian tight oil production is expected
to be 2.5 million barrels per year by 2025.

4 Conclusions

Taking into account all above mentioned, it is possible to summarise the following:
(i) There is no specific legislation regarding the local content requirements within
the extractive resources in the RF. The general understanding under this term
is the following: usage of the local goods and products, technology transfer,
employment of the local staff, new working places’ creation, and localisation
of R&D and production.
(ii) Joint ventures between Russian companies and foreign companies are consid-
ered very attractive for the development of localisation.
(iii) The consequences of the LCRs in the Russian Federation are not so unequiv-
ocal. Advantages include the growth of production and gaining benefits; never-
theless, reduction of foreign investments, increasing costs for buyers can be
considered as disadvantages.
368 O. S. Kirillova

Table 1 Main international joint projects implemented in the RF

Project Parties Status
Offshore projects
Well “Universitetskaya-1” JV between Rosneft (51%) Delayed due to sanctions
and Exxon Mobil (49%)
Vostochno-Prinovozemelskiy-1,2,3; JV between Rosneft (67%) Exxon left projects due
Severo-Karsky; Ust-Olenekskiy; and Exxon Mobil (33%) to sanctions
Ust-Lenskiy; Aninsko-Novosibirskiy; Rosneft decided to
Severo-Vrangelevskiy – 1,2,3; implement by itself
Uzhno-Chukotskiy Tuapsinskiy arch
Barents Sea and Black sea JV between Rosneft (67%) Delayed due to sanctions
and ENI (33%)
Onshore projects
Bazhenov and Achimov formations JV for Pilot Phase between Delayed due to sanctions
in the West Siberia Rosneft (51%) and Exxon
Mobil (49%)
Domanik sediments in Orienburg JV for Pilot Phase between Delayed due to sanctions
Rosneft (51%) and BP (49%)
Development of Bazhenov formation JV between Lukoil and Total Total transferred its
in Khanty-Mansiyski Autonomy share to Lukoil
district
Development of Bazhenov formation JV between Shell and Shell stopped operations
in Khanty-Mansiyski Autonomy Gazpromneft
district
Domanik sediments in Samara region JV for Pilot Phase between Pilot phase is going on
Rosneft (51%) and Equinor
(49%)
North-Komsomolskiy field JV for Operational Phase Operational Phase
between Rosneft (77%) and started in 2017
Equinor (33%)
(“Sevkomneftegaz” LLC)

(iv) LCRs and localisation within the extractive resources sector are considered
very important by the RF Government, which supports them by way of different
types of the state measures.
(v) Local content in the RF was developed due to the sanctions because business
had to find alternative options to progress without foreign support. Different
joint ventures have been incorporated in the RF between the Russian companies
and their foreign partners for the purpose of R&D and local production of goods.

References

British Petroleum. (2018). Energy outlook [Online]. Available from https://www.bp.com.

Local Content Within Extractive Resources Industry … 369

Deloitte. (2018). 2018 outlook on oil and gas [Online]. Available from https://www2.deloitte.com.
Ernst & Young. (2014a). Spotlight on oil and gas megaprojects [Online]. Available from https://
www.ey.com.
Ernst & Young. (2014b). Navigating geopolitics in oil and gas [Online]. Available from https://
www.ey.com.
Ernst & Young. (2017a). Joint ventures for oil and gas megaprojects [Online]. Available from
https://www.ey.com.
Ernst & Young. (2017b). Global oil and gas transactions review [Online]. Available from https://
www.ey.com.
Ernst & Young. (2018). Global oil and gas transactions review [Online]. Available from https://
www.ey.com.
Kazakova, M. V. (2010). Dependence of Russian budget from raw materials export. Gaidar Institute
for Economic Policy [Online]. Available from https://www.iep.ru/en/dependence-of-russian-bud
get-from-raw-materials-export.html.
Kozlov, D., & Zanina, A. (2018). Sakhalin-1 gets new life. Commersant [Online]. Available from
https://www.kommersant.ru.
Pertsova, V. (2018). Oil under sanctions. Forbes [Online]. Available from https://forbes.ru.
PWC. (2017). Making energy industry joint ventures work toward improved governance and
decision making [Online]. Available from www.pwc.com. Accessed August 30, 2018.
Semykina, I. (2015). Opportunities and benefits of local content requirement policy: case of Eastern
Siberian oil and gas industry. In 55th Congress of the European Regional Science Association:
“World Renaissance: Changing roles for people and places”, Lisbon, Portugal, August 25–28,
2015. Louvain-la-Neuve: European Regional Science Association (ERSA) [Online]. Available
from http://hdl.handle.net.
Semykina, I. O. (2017). Managing regional economic development through local content require-
ments in oil and gas industry. Ekonomikaregiona [Economy of Region], 13(2), 457–464 [Online].
Available from https://www.econstor.eu.
Simola, H., & Laure, S. (2017). Overview of Russia’s oil and gas sector. Bank of Finland, BOFIT
Institute for Economies in Transition [Online]. Available from https://helda.helsinki.fi.
Skolkovo Energy Center. (2018). Perspectives of the RF oil and gas industry under sanctions
[Online]. Available from https://energy.skolkovo.ru.
Uchenov, A. (2018). Participation in localization projects helps development of the Russian
companies [Online]. Available from https://rg.ru/2018.
Alaska’s Tug-of-War on Land Rights

Douglas B. Reynolds

Abstract Alaska’s petroleum industry is run by national and international oil

companies (IOCs) coming to Alaska with their workers and expertise to develop and
produce oil. However, a more pertinent issue surrounding the petroleum industry in
Alaska is who owns and who controls the land of Alaska including its mineral rights.
Alaska’s land encompasses about 360 million acres (146 million hectares) or about
the size of Germany, France, Italy, and the United Kingdom combined, but with
a population of only 700,000 people. After subsequent treaties and laws, the land
has become split between Native Alaskan land, U.S. Federal Government land, and
Alaska State land where by much of the splitting only occurred after the discovery
of the great Prudhoe Bay oil field on Alaska’s North Slope in late 1968. The story
of how the land was split and how much of Alaska’s land has been made into nature
preserves, which have been saved from mineral rights development, is quite a story.
The different interests of Americans, Native Alaskans, and average Alaskan citizens
have conflicted with each other every step of the way and have affected land rights
and even some business practices including how Alaska’s native companies work.

Alaska became, “the greatest conservation fight in history.”

Morris Udall, October 8, 1982

“The most fragile thing up at Prudhoe Bay is not the environment,

It is man!
It is tough up there … (and) environmentalist do not understand.”
Governor of Alaska, Wally Hickel, 1969

D. B. Reynolds (B)
Department of Economics, School of Management, University of Alaska, Fairbanks, USA
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 371
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_21
372 D. B. Reynolds

1 Introduction

There are three prevalent social groups in Alaska all with different needs, different
desires for Alaska, and different ideas about how Alaskan lands should be used.
Those groups that comprise Alaskan society include: (1) First, there are the Alaskans
who live in the bigger Alaskan towns and cities, the population of which comprise
only about 600,000 people. (2) Then, there are many first nation or native culture
peoples of Alaska, called Native Alaskans, many of whom live in small villages in
and around Alaska’s vast bush (frontier) regions, although many of whom also leave
the villages and live in the cities, and who still identify with the villages that they
left behind. Indeed, they often go back to visit their home villages. Native Alaskans
comprise about 100,000 Alaskans depending on how their ethnicity is counted. (3)
Finally, the last group of people, who are one of the least understood groups, and
yet who are unusually heavily involved in Alaska, and who do not even reside in
Alaska, are the so-called Lower-48ers.1 who are the bulk of the United States’ 325
million citizens. Lower-48 Americans are not often thought about when you think
of Alaska since these Americans live in the contiguous United States of America,
often called the Lower-48 states, and where Lower-48 Americans are often called
Lower-48ers for short. These Lower-48 Americans have a lot of opinions about how
Alaska should or should not be run, especially in regard to environmental standards,
wildlife management, and economic development.
While many first nation or native peoples of Alaska look at Alaska’s regions
as ancestral native lands that rightfully belong to them, but which through treatise,
laws, and decrees now belong to the U.S. Federal Government or the State of Alaska’s
Government (Alaska), or to some Native Alaskan villages, nevertheless, they do not
have a common view of Alaska. Native Alaskans have varying views on land usage
such as whether saving a certain wildlife population is important or not. Some tribes
may want to protect wildlife populations of certain animal species while others will
want more economic development of lands that could detrimentally affect certain
wildlife populations even as the development creates a lot of opportunity for their
tribal members. Sometimes a mineral resource development project that helps one
tribe can be the same development project that hurts another tribe, like, for example,
creating jobs for some Native Alaskans, but hurting salmon fishing for other Native
Alaskans. And so even among native groups or among Alaskans themselves, or for
that matter among Lower-48 Americans, there are wide differences of opinion about
what constitutes good land use policy for Alaska.
In general, the typical Alaskan encompasses a Eurocentric ethnicity and culture.
Most Alaskans live in and round Anchorage (population 500,000 in the metro area)
or Fairbanks (population 100,000 in the Fairbanks borough), or Juneau (population
50,000 in the metro area). Then, there are number of smaller towns, especially in
the Kenai Peninsula area (population 50,000 and over 15 million acres [6 million
hectares]). These urban dwelling Alaskans also interact with the vast Alaskan frontier

1 The “Lower-48,” are the fifty United States of America (USA) that do not include Alaska or Hawaii;

they are south of Alaska and thus “lower” on the map.

Alaska’s Tug-of-War on Land Rights 373

lands where they hunt, fish and ski even though most Alaskans stay in their urban
areas. It is these typical, city dwelling Alaskans, who tend to want more development
particularly during economic recessions.
The end result is there is a kind of tug-of-war between all three of these groups
in Alaska, where Lower-48 Americans are mostly represented by the U.S. Federal
Government; Alaskans are mostly represented by Alaska’s State Government, and
Native Alaskans are represented by villages, regions, the state, or the U.S. Federal
Government. The Lower-48 Americans are politically strong since they influence the
U.S. Federal Government regulations of Alaska the most. And, while it is hard for
non-Alaskans to believe that Alaska is under the cultural influence of the Lower-48,
it is not hard for Alaskans to believe it. Most Lower-48 Americans would like to
keep much of Alaska’s Federal land as undeveloped land in order to preserve natural
environments, but where many Alaskans would like to make much of Alaska into
developed land and would like to see the many U.S. Federal lands used for the express
purpose of developing mines. Native Alaskans are split on the issue of development
depending on if their village or region will benefit of not.
Interestingly, some Native Alaskans can use the Lower-48ers to their advantage.
That is, there is a kind of leveraging that takes place between Native Alaskans and
Lower-48ers. For example, if one tribe wants to open up an area for exploration
and development, say in the Arctic National Wildlife Refuge (ANWR), and another
tribe does not want it to open; then the latter tribe can send an elder to the U.S.
Congress and proclaim that all of the native tribes do not want to open up such an
area, and viola, the Lower-48ers believe that all Native Alaskans want this closing
up of Alaskan lands. Thus, there is a smaller tug-of-war between Native Alaskans,
between those who want to close up Alaskan lands and those who want to open up
Alaskan lands to such things as oil or mining development. Indeed, the economic
benefits of, and the very responsible environmental methods used in, drilling and
producing oil and mining make them very advantageous to many first nation peoples
economically, especially where development is close to Native Alaskans’ villages.2
During the Alaska land distribution process, the U.S. Federal Government (Lower-
48 Americans) went ahead and designated many of Alaska’s federal lands as perma-
nently withdrawn from consideration of being Alaskan State lands and withdrawn
from consideration of any oil and gas or other mineral development. The U.S. Federal
Government did this by making many different designations for its federal land
such as the Arctic National Wildlife Refuge (ANWR), 20 million acres, the Nation
Petroleum Reserve Alaska (NPRA), 24 million acres, and Gates of the Arctic National
Park, 8 million acres, among other lands that are now restricted in, or closed off
completely from, development potential. While many of the U.S. Federal lands in
Alaska are still open to mineral development; Alaskans would like more of these
lands to be open since development of federal land tends to help Alaska’s economy
but tends to have little effect on the Lower-48’s economy.
Native Alaskans were also not given the right to take large sections of land,
other than the roughly one eighth of the state that was given, but they were given

2 See Strohmeyer (1993) for more on Native rights.

374 D. B. Reynolds

an alternative to land, which is something called Native Corporations. The Alaska

Native Claims Settlement Act (ANCSA) is the law that settled the native claims to
all of Alaska lands. The ANCSA law allowed that Native Alaskans be given a small
portion of land (44 million acres or roughly 12% of Alaska), but where they still
were allowed to hunt, fish and whale along wide swaths of land and sea not owned
by them. Often, after the hunting, whaling or fishing was done, and the native peoples
would go back to live in small villages. On the one hand, if each native tribe were
only given a small reservation based on their village, then they would lose out on
the hunting and fishing outside theirs and other’s villages. On the other hand, all of
the valuable oil, mineral, and forest resource lands were taken by the U.S. Federal
Government or the State Government that Native Alaskans lost out on but which
they did receive some compensation over (roughly $1 billion in 1970 dollars) and
where they could now invest that money in businesses using the concept of Native
Corporations.
The way the Native Corporations work is that Native Alaskans can invest in
businesses in or outside of their village in order to make money, and they receive tax
exemptions. The Native Corporations, then, distribute that money to villages or native
residents identified with that particular Native Corporation. This was a compromise
between the Native Alaskans not receiving valuable land for mineral development
but being allowed to make economic gains for themselves. The Native Corporations
do, however, help in a lot of mineral development and profit from it, so at least
the Native Alaskans do benefit economically from the mineral development of their
ancestral lands, although Wall Street tends to be more lucrative for their investments.

2 Early State History

In the early history of Alaska, Alaska was governed under various U.S. appointed
governors, who were mostly interested in caretaking Alaska rather than in devel-
oping it. While there was fishing and mining development, much of it was done to
the benefit of the mining and fishing companies, which resided on the Lower-48 West
Coast, and little of the value of mining and fishing went into the development of the
State’s infrastructure that could improve the business environment and help develop
other industries or other mining and fishing. This meant that much of Alaska’s poli-
tics was under the thumb of outside business interests and not to the advantage of
most Alaskans. Finally, this caused enough Alaskans to push for Alaska becoming
a state, which it did in 1959. Since Alaska was entirely owned by the U.S. Federal
Government, though, there was a need to have state-owned lands, rather than all
federal land, so as to allow the State of Alaska to develop. So, the Alaska Statehood
Act included allowing that U.S. Federal lands should be transferred from the U.S.
Federal Government to the State of Alaska in the amount of a little more than 100
million acres (40 million hectares).
Nevertheless, there is a dichotomy about what Alaska is. To many Americans,
Alaska represents undisturbed land meant for having environmental services like
Alaska’s Tug-of-War on Land Rights 375

unbroken wilderness areas, lots of wildlife, and vast untouched ocean coasts, but to the
people living in Alaska it is a harsh cold environment with huge landmasses that are
distant to get to, but which need to be developed in order to give economic opportunity
to Alaskans. Ernst Gruening’s “Freedom from Colonialization” speech in 1959 just
before Alaska became a state, makes the point clear. Gruening said, “Conservation
of natural resources cannot be separated from the issues of conservation of human
resources.” That is you need jobs and a clean environment, but you have to develop
the land in order to get those jobs; although the development doesn’t have be done
in an environmentally detrimental manner. You have to build expansive roads that
are costly to maintain to get any industry going. So infrastructure costs more, wages
are higher due to difficult conditions; energy is expensive due to the long distances
which it has to be carried. And so this makes business in general difficult to develop.
However, the way to overcome these difficulties is to try to open up more resources
to development such that you can obtain more government revenues to pay for and
maintain more infrastructures that can in turn increase development further.
Then, on top of the high costs of normal day to day business, due to expensive
infrastructure and due to long distances and due to the requirement of higher wages,
there are also natural disasters that can be very prevalent in Alaska such as earthquakes
in South Central Alaska, flooding rivers that happened in Interior Alaska, and arctic
storm surges on the coasts. When these natural disasters happen, there is a certain
amount of help from the U.S. Federal Government, but the more enduring method
for overcoming them is to create a more vibrant economy that can provide jobs and
give tax revenues that can help to overcome the high costs of disasters in Alaska.
For example, when the great earthquake of 1964 happened in South Central
Alaska, it forced the state government to change how it was going to proceed with
land development, especially in terms of leases for oil exploration. The state govern-
ment knew that a more vibrant economy could help people pay for new housing
or to fix old homes and to build more expensive homes that are resilient to earth-
quakes. Also in 1967, Fairbanks had a great flood that inundated the entire town and
ruined lots of buildings and houses there. While a dam was built that could help keep
future Fairbanks’ floods away, nevertheless, the damage was done and the Interior of
Alaska, just like South Central Alaska, needed an expansion of the Alaskan economy
in order to pay for the damages and allow people to work to make money to pay for
their losses.
Both of these disasters caused the State of Alaska to accelerate its policy on
taking land from the U.S. Federal Government that had been going slow until then
and speeding up the process. In particular, the State declared the central North Slope
mineral rights land for its own State land in order to jump start new oil development
there. This was in stark contrast to the U.S. Lower-48, which had a booming economy
in the 1960s and which therefore wanted to see more natural resources kept safe
from development, especially in Alaska even though mining and oil exploration
and production can be done in a very environmentally clean manner when done
appropriately.
376 D. B. Reynolds

3 Alaska State Lands

When Texas became a state in the United States of America (USA), the U.S. Federal
Government did not own any land in Texas. All of the land was owned privately and
any land that the U.S. Federal Government wanted, they would have to purchase.
In diametric contrast to Texas, Alaska was completely owned by the U.S. Federal
Government, so once the U.S. purchased Alaska from Russia in 1867, there was no
privately held land. At first, the State of Alaska was a territory with an appointed
governor from Washington D.C., who would run the territory. And while some lands
were sold to settlers and some mineral rights were leased and coastal fishing rights
were given, the vast bulk of Alaska lay undeveloped.
Then, when Alaska became a State, it was negotiated that the U.S. Federal Govern-
ment would keep 60% or roughly 200 million acres (81 million hectares) of Alaska
land and that the State of Alaska would receive 30% or roughly 100 million acres
(40 million hectares) through a process of transfers. The transfers had Alaska taking
mostly land in and round its major cities and towns or along road ways or in areas
proven to have lucrative mineral rights, or potential mining lands. And Alaska has, as
of 1994, claimed its share of federal land, however, the final adjudication needs to be
completed with land surveys. Still, much of Alaska’s mining development potential
was and is in the hands of the U.S. Federal Government rather than in the hands of
Alaska’s State Government, although, Alaska has claimed the central North Slope
area where Prudhoe Bay exists, and the state benefited greatly from its development.
Indeed, it was issues surrounding the Prudhoe Bay oil field that instigated a lot of
the land transfers.
Later on Native Alaskans would be given a right to 12% or roughly 44 million acres
(18 million hectares) of Alaska land. On top of that, the U.S. Federal Government,
i.e., Lower-48 Americans through their representatives, has permanently taken away
many of the best oil and gas producing and mineral producing lands from consid-
eration for Alaskan land such as much of the North Slope and in and around the
Brooks range mountains on the north of the state where many of the most potentially
lucrative oil and mineral production exists. Americans often view Alaska as one of
the few remaining natural environments that they want to protect, whereas Alaskans
and even many Native Alaskans think of Alaska as a vast frontier land that is hardly
used other than for wildlife hunting and fishing, and so they want to use that land for
potential mining and petroleum production. What this meant was that, completely
different from Texas, the Federal or the state government owned and controlled all
mineral rights for mining and petroleum production in Alaska, rather than private
individuals, which reduced incentives for exploration in comparison to Texas. By
contrast, in Texas, oil companies buy leases from private landowners for the right to
extract oil and gas and pay a royalty to those landowners, which is why in Texas not
only are there private oil companies but private mineral lease owners as well, and
which may be why Texas is more robustly developed economically than Alaska.
In Alaska, all the value of the mineral rights goes to the federal, the state, or
a few native governments, and it is those governments that have to approve the
Alaska’s Tug-of-War on Land Rights 377

lease sales, which normally means that the lease sale must be much more lucrative
before the state or federal governments will engage in the sale of mineral rights,
compared to privately held land where the land owner will more readily sale their
mineral rights. Nevertheless, there was petroleum exploration in Alaska in the 1960s,
usually on U.S. Federal Government land because Alaska was slow to declare which
lands it would take from the U.S. Federal Government. Although, the U.S. Federal
Government set up onerous rules for lease sales on the North Slope that required
petroleum exploration companies to only be allowed to claim small parcels of land
at a time, and where no one company could own a lot of parcels together.
The reason the U.S. Federal Government wanted many different companies to
own leases was so that no one company would control all of the mineral rights in one
general area such as all of the Prudhoe Bay area. The Federal policy was designed to
reduce a monopoly power (or a monopsony) over all the mineral rights in one area
that would make it hard for workers to get jobs. Unfortunately, if one company had
a single parcel of land and if they found oil, then all the nearby parcels would also
have a right to that oil, and so other companies would gain profit at the expense of
the first company who invested all the money and work and who took all the risk in
exploring for and finding the oil in the first place. That is, the first company would
pay all the costs to look for oil, only to have others receive all the reward. So what
companies wanted to do to mitigate those costs was to own many parcels all next to
each other so that if they take all the risks of exploration and finding oil, then they
will receive all (or at least most) of the reward.
Since the U.S. Federal Government was not going to change its rules and its way
of doing business, it was determined that if the State of Alaska took those central
North Slope lands and made them into State lands, then Alaska could sale a lot of
parcels together creating large lease holding areas so that a single company could
reduce their exploration risks of not getting back all their costs of exploration. So
the oil companies asked Alaska to take those Federal lands. Alaska hesitated to
do that owing to a lack of state regulators to run such leases, but after the great
Alaska earthquake of 1964 that devastated Anchorage and South Central Alaska,
Alaska decided that one way to help overcome the economic consequences of the
earthquake was to finally take those U.S. Federal lands and organize them into leases
with larger parcels of mineral rights in order to develop the oil industry faster. Then,
eventually in early 1968 the stupendous Prudhoe Bay oil field was found on the newly
acquired state lands using the large parcels of lease sales, and it was soon followed
by other discoveries.
What the Prudhoe Bay example shows is that the tug-of-war over land rights can
delay the exploration and development of oil production. Most Alaskans view this
as a needless delay since they are interested in developing mineral rights in order
to gain economic development. Whereas most Americans feel this delay is a good
way to preserve the natural environment. Clearly Alaska is unique in that so many
people, like the 325 million or so Lower-48 Americans, feel that they have a say in
Alaska even though each American in his own state feels that only his state residents
should be in charge. An example of this out-of-staters opinion on Alaska was when
the late great senator John McCain of Arizona stated that, “I wouldn’t drill in the
378 D. B. Reynolds

Grand Canyon unless the people in Arizona wanted to.” But then he further stated that
drilling in ANWR is different because it is a wildlife refuge, and therefore, he voted
against opening up ANWR to oil development, even though he was a republican and
did vote for offshore oil development when many other Senators did not.3
It is as if an Illinois senator were to say that Wall Street is sacred to all of America
and that therefore the trading on Wall Street in New York City should be limited to
preserve New York’s historic trading buildings, while the trading in Chicago should
be encouraged, say with lower taxes to make its financial markets more vibrant.
While such a claim may or may not be true, many New Yorkers would find it odd
that an Illinois senator finds it compelling that the U.S. should treat New York and
Chicago trading differently. Likewise, if an Alaskan U.S. senator were to say that
drilling in ANWR is okay, but drilling in the Grand Canyon has nothing whatsoever
to do with Arizonians, then that would seem a bit odd.

4 The U.S. Federal Government Versus Alaska and Alaska

Native Land Claims

While the U.S. Federal Government lands in Alaska have not been completely devel-
oped, they have been developed to some degree. However, when Alaska finally took
some of its allotment of Federal land by taking the Central North Slope oil lands and
some of the North Slope coastal plains regions and sold oil leases there, which helped
in the discovery of Prudhoe bay; there was still an important role for the U.S. Federal
Government to play before Prudhoe Bay that could be fully developed because the
U.S. Federal Government had not settled much of the Native Alaskan land claims
from previous treatise and laws. This is why the above mentioned ANCSA was
finally settled, so that a large corridor of land for the right-of-way of the Trans-
Alaska Pipeline System (TAPS), which transports North Slope oil to market, could
be permitted. That is why, the first thing the U.S. Federal Government had to do after
Prudhoe Bay was discovered was to settle all the native land claims, and it did so
with ANCSA.
However, one other interesting aspect about ANCSA was that since much of
Alaska’s land mass held oil and other minerals and many Native Alaskans would
hunt and fish on wide swaths of land, then it was thought that instead of a reservation
system, like that in the Lower-48 Indian country, Native Alaskans within the ANCSA
act would have a different kind of settlement. The Lower-48 Indian reservation system
was where large swaths of land was given to individual native tribes, but this same

3 We should note one anomaly in Senator McCain’s position. Unlike many of his Republican coun-
terparts in the Senate, McCain has long been opposed to drilling in Alaska’s Arctic National Wildlife
Refuge, even though most Alaska residents support it. In Houston, McCain explained why ANWR
is a special case.
“Quite rightly, I believe, we confer a special status on some areas of our country that are best
left undisturbed,” McCain said. “When America set aside the Arctic National Wildlife Refuge, we
called it a “refuge” for a reason.”
Alaska’s Tug-of-War on Land Rights 379

idea was thought to not be workable in Alaska because: (1) The Alaskan Native
villages had very small populations that could not control large reservation lands.
(2) No matter how large reservation lands could be; they would not include all
traditional hunting, fishing, and whaling areas that Native Alaskans were used to
using, and so the reservation type system would constrain their subsistence hunting
rights. And (3) there were valuable mineral rights lands that the State and the U.S.
Federal Government wanted and valuable whaling and hunting areas that the State
and the U.S. Federal Governments wanted to protect, and so they did not want to hand
those lands over to a native reservation land system. When these issues came out in
U.S. congressional hearings on ANCSA, and with some Native Alaskans wanting to
keep their hunting and fishing areas protected as natural land preserves rather than
having those lands designated as mineral development land, and with many Lower-
48 Americans also wanting to preserve lands, then, the idea quickly came to fruition
that Lower-48 Americans can jump into the discussion of Alaskan lands settlement
on the side of at least some Native Alaskans who wanted less development. That is
Lower-48 Americans joined forces with a number of Alaskan Natives to emphasize
natural preservation of Alaskan lands as opposed to mineral right development of
those lands. After all, as stated, some Native Alaskans did want mineral and mining
development depending on how close to the development they lived, but others did
not.
Americans, i.e., Lower-48 Americans who outnumbered Alaskan Americans by
about 600 to one had, as of 1968 when Prudhoe Bay was discovered, gone through a
metamorphosis in regards to environmental consciousness. In 1962, Rachel Carson
published a book, Silent Spring, about how pollution, particularly insecticide used by
agriculture and city dwellers, was inadvertently killing birds and then reducing the
sound of their singing (tweeting), especially in the spring time, i.e., the springs were
more “silent” with less birds singing. This emboldened the environmental movement
causing Americans to suddenly grow more conscious of how a number of beautiful
lands within America, including Alaskan lands, was being mined, built over by
cities, and in general developed. So, these Americans saw the issue of native land
claims in Alaska as a way to attach a number of environmental concerns on to an
Alaska settlement, particularly land preservation concerns, where such lands can be
permanently kept undeveloped and left in their natural state. Since Alaska had more
undisturbed land than anywhere else in America, then Alaska became a focal point
of preservation, and ANSCA was the perfect legislative tool to use to get more land
preservation happening.
With the ANCSA law process, congress eventually ruled that some Native land
will be given back to Native Alaskans but that Native Alaskans will also receive
some financial compensation for their land claims that were not returned. But the
Native Alaskans will still be able to hunt, fish and whale in traditional ways and over
their traditional territory even if they do not own the lands. Also in ANSCA, Native
Alaskans would be able to set up the aforementioned “Native Corporations” to help
in their economic development.
However, on top of the native issues and due to the large environmental movement
in the 1960s and 1970s, one issue that was taken up within ANSCA, and added
380 D. B. Reynolds

on, was the so-called D-2 provision, whereby the U.S. Federal Government would
permanently preserve large areas of Alaska into national parks, wilderness, wildlife
refuges, and other designations. The D-2 provision stated that in addition to Alaska
native lands, of about 44 million acres given to Native Alaskans, there should also
be 83 million acres (33 million Hectares) of Alaska, later to be increased to over 100
million acres (40 million hectares) that Alaska will never be able to take as their own
state lands and that, in addition, will be permanently a part of U.S. Federally protected
lands such as national parks, wildlife refuges, and wilderness. But there was not
enough time to choose those lands, so the issue was to be decided over the course of the
next three years after ANCSA went into law; and then, the U.S. Federal Government
would choose which lands to preserve or not. However, after the three years were up,
the issue was still not decided so congress voted to delay the final decisions over the
D-2 lands. Then, finally with newly elected President Ronald Reagan about to take
office in early 1981 and congress about to change to a more republican controlled
body, President Jimmy Carter and the democratically controlled U.S. Congress put
together a list of Alaskan lands that would be permanently preserved. This was signed
into law as the Alaska National Interest Lands Conservation Act (ANILCA).
What ANILCA essentially did was create a compromise between the pro-mining
mineral development advocates, mostly Alaskans, who wanted to develop Alaska
and the nature preserving land, environmentally conservation minded Americans,
which are mostly Lower-48 Americans, who wanted to keep the land undeveloped.
To this day, both the debate in America and the debate in Alaska put a majority of
Americans, who are nominally environmentalists, and a majority of Alaskans, who
are nominally pro-development including mining development, at odds with each
other. Certainly, Alaska wants to develop the land in an environmentally responsible
manner, but develop it nonetheless. The compromise in ANILCA was put in force by
the U.S. Federal Government, and so it is not easily changed, but the way Lower-48
Americans forced Alaskans to have less development is still contentious.

5 The U.S. and the Trans-Alaska Pipeline System (TAPS)

Even though ANCSA was decided in 1970 in order to pave the way forward for
Prudhoe Bay’s development, there was still one last land development problem with
being able to get a pipeline permitted on U.S. Federal land from the North Slope
of Alaska all the way to Valdez Alaska in the south. The problem with getting the
Trans-Alaska Pipeline System (TAPS) permitted was that most of the right-of-way
for the pipeline was on U.S. Federal land. However, there was a law from the late
1800s that said any land access to a mine or mineral right on Federal land could only
use a 100 foot wide (30 m) corridor. Well 100 feet was good enough for an old road to
a mine in the 1800s, but to put in place TAPS, a 48 in. pipeline with all the equipment
needed for its construction; there was going to be a need for a wider corridor. So, U.S.
environmentalists sued the U.S. Federal Government to stop permitting the pipeline
Alaska’s Tug-of-War on Land Rights 381

because of the 1800s law, and indeed, it was found in the courts that TAPS could not
be put in place due to that law.
Therefore, it took an act of the U.S. Federal Government, i.e., an act of congress,
called the Trans-Alaska Pipeline Authorization (TAPA) Act, to get the pipeline
permitting approved. That is, Washington D.C. (the capital of the U.S. Federal
Government) was more important than Juneau, Alaska (the capital of the State of
Alaska) in getting the North Slope oil developed. However, the TAPA Act not only
permitted the pipeline it also outlined specific requirements for certain environmental
protections such as TAPS being earthquake proof, so that it would not leak during an
earthquake, and TAPS having to be built above ground, so it would not destroy the
permafrost. So TAPs was put above ground on slider supports so it could withstand
earthquakes, where the pipe would be able to slide along its supports, but not melt
the permafrost. Although, TAPS did have some below ground lengths of pipeline
in certain areas so caribou could get through to the other side of the pipe. Also the
pipeline has a zigzag design so that it can have some give and take to it should a
large earthquake hit. Interestingly while Alaska does have more earthquakes than
the Lower-48, those earthquakes are mostly in the southern region of the State such
that much of the design of the TAPS is overkill and not particularly needed.
A cheap option for the pipeline would have been to bury the pipeline underground
with a lot of insulation, and then, every time an earthquake would erupt or the
permafrost melt and cause a sink hole; you just shut down the pipeline oil flow,
for a few days, empty the pipe out at that area of breakage, and repair the pipe
and the surrounding ground support and then open it up again to restart the flow.
Nevertheless, after an extensive environmental impact statement (EIA), the pipeline
was built mostly above ground and made able to withstand a sizable earthquake on
the order of 8.0 on the Richter scale.
One of the interesting aspects of TAPS is that since it is mostly above ground,
then it can succumb to cold weather. The cold can cause the oil inside the pipe, even
with insulation, to cool and harden as the crude oil throughput declines. The oil goes
more slowly through the pipeline as oil production declines giving it a chance to cool
more and more as it proceeds through the 800 mile long pipe. One idea to be able to
allow less oil to get through TAPS was to simply heat up the oil as it goes through,
and one way to do that is to have coal-fired steam driven heat pumps at each pump
station where the excess heat of the steam engine can be used to heat up the oil inside
the pipe to keep it from cooling down to a hardened state.
One of the reasons for not using coal fired heat pump system is pressure from
the Lower-48 regarding environmental standards such as carbon emissions, although
labor costs and control system issues were important too. So the oil companies who
own the pipeline get pressure by the general public of the Lower-48, leading them
to use electric pumps, which probably uses more energy and probably emits more
carbon due the way the electricity is generated than if they used simple steam turbines
with the excess heat being used to heat up the oil. Such a system could allow for
lower throughputs to keep the pipeline open longer.
Still, with oil production lower on the North Slope, the lower production means
less throughput in the pipeline, which allows the oil companies to claim that they
382 D. B. Reynolds

need lower taxes from the State of Alaska to find more oil in order to keep the pipeline
fuller. All of this is due to the fear of the oil pumping more slowly through TAPS
and cooling to a hardened state and shutting down.
Granted you would need more personnel and more electronic controls to run the
coal fired pumping system, and yet much of these systems can be run remotely using
radio signals. There would possibly be a higher tariff to run the equipment but given
the technologies available; it should be possible to run TAPS at lower throughputs.
Nevertheless, there is an interesting technical-political interface with the oil pipelines,
and where public opinion from the Lower-48 seems to drive how the TAPS pipeline
is designed.

6 Alaska Native Land Issues

One last issue with Native Alaskan lands is how the different regions have different
incentives for development. One of the biggest examples is the Pebble Mine, a gold,
copper, and molybdenum mine in South West Alaska with roughly $100 billion
worth of minerals below the surface. The easiest way to mine those minerals is
with an open-cast mine where the over burden is put into a holding pond. The pond
would be highly toxic with acids and chemicals from the underground minerals and
from some of the mining chemicals used, but where the holding pond would slowly
evaporate leaving a hardened land fill behind, which would be covered by gravel and
soil and replanted. The resulting area would not be any more of an environmental
hazard than if it had not been mined. The problem is that once the mine is running,
the pond would be held in place by a dam, and since the area is earthquake prone,
the dam could give way under the power of a 7.0 or 8.0 earthquake, which is not
unheard of in that area. Then, if the dam is not built strong enough to take such a
quake, the pond would dump chemicals into rivers and streams and affect salmon
fisheries down river and on the coasts of Alaska.
Interestingly, the Native Alaskans who are nearer the mine and who would benefit
most from the mine are different than the Native Alaskans, usually of a different tribe
that use the salmon fishery downstream. So two different Native Alaskan groups can
often have opposing views to each other. The Native Alaskans close to a mine will
want it developed and the Native Alaskans far away from a mine, but close to the
salmon fishery that would be affected by the mine if there was a release of the holding
pond, are against the Pebble Mine.
This is in stark contrast to many Alaskans and Lower-48 Americans who believe
that all Native Alaskans have a similar view of Alaskan development in that they do
not want any at all. Nevertheless, many Native Alaskans, as is the case in the Lower-48
Indian country and on Indian reservation land, believe that economic development,
including mining, gives jobs to native peoples and helps their education funding and
provides welfare benefits for the tribal peoples.
ANCSA allowed the U.S. Federal Government and the State to own most of the
mineral resources of Alaska and sale mineral right leases for development. Although,
Alaska’s Tug-of-War on Land Rights 383

Native Corporations could buy land or put together their own oil companies to lease
oil minerals, it is often the big, private mining or petroleum companies that develop
mineral rights, but those big companies often involve the Native Corporations such
as the Arctic Slope Region Corporation (ASRC) to help in the mineral developments
such as having petroleum service companies. Indeed, native corporations set up many
service companies that do a lot of the work for the major oil producing companies.
These service companies would invest in capital equipment, labor, and management
that would conduct the work, and then, the native corporations receive a profit share
from that work, which goes to the owners of the native corporations, who are the
native tribe members based on living in certain regions and being in certain tribes.
The native corporations are involve in many businesses inside and outside Alaska,
too, so they tend to not to be heavily involved in the petroleum industry exclusively.
Rather the petroleum industry tends to have a few large international corporations
with many smaller contracting companies and where many of the contractors contract
offices are in Anchorage but where most of the worker’s, executives, and engineers
live outside of the state in sunnier, nicer climates. It’s rather like having all of the
industrial aspects of the industry in one remote location, on the North Slope, with a
few small offices in one city, Anchorage, and with the workers living all across the
Lower-48. While there are a few refineries in Alaska, they are relatively small so that
even the downstream industrial aspects of the petroleum industry are outside of the
state.
However, since the petroleum industry provides most of the state’s tax revenue, it
makes the state’s economy very dependent on the price of oil rather than on the jobs
within the industry. Alaska is therefore heavily government dependent economy
rather than a heavily petroleum industry job dependent economy, and with only
700,000 residences, many of whom live in remote villages or towns and where a
cold climate, sparse infrastructure, and high costs keep people and industry away;
then, there is little opportunity to expand industrial jobs, although many residents
like it that way.

7 Conclusion

Alaskans have always wanted to develop Alaska more, while Americans in the Lower-
48 have always wanted to preserve Alaska with nature preserves so that less of Alaska
gets developed. The battle for land development was implicit in Alaskan native land
rights. The chain of land rights events started with the U.S. Federal Government
owning all of Alaska and Alaskans not being able to develop the land very effectively
under a U.S. designated government. Then, Alaska became a State but was only
given one third of the land, and Native Alaskans were given one eighth of the land.
However, the land that Alaska would take was determined by how oil development
would proceed. Alaska managed to get land where the great Prudhoe Bay oil field
was discovered, but further native land claims and pipeline legislation was needed to
be able to build TAPS and develop Prudhoe Bay and the surrounding Central North
384 D. B. Reynolds

Slope oil lands. These U.S. Federal Government acts included ANCSA the TAPA
Act and eventually ANILCA. The gist of all these interactions was that Alaska got
its land and its oil, but Alaska lost a lot of lands that are permanently preserved and
not available for mineral development. Native Alaskans both won and lost in the land
tug-of-war depending on if they were close to or far away from mineral development.

References

Alaska national interest lands conservation act ANILCA 104 million acres taken from possible
Alaskan use. Signed on December 2 1980, by President Jimmy Carter.
D-2 Provision of ANCSA: allotted 83.5 million acres of wilderness, national parks, wild rivers,
wildlife refuges to be determined by conferees by the end of 1978.
Monday, August 4, 2008. https://www.politifact.com/. Accessed February 7, 2019. On Senator John
McCain.
Strohmeyer, J. (1993). Extreme conditions: Big oil and the transformation of Alaska. Anchorage,
Alaska: Cascade Press.
Local Content Policies in the Extractive
Industry in Canada

Chilenye Nwapi

1 Introduction

Canada is not recognized as a ‘go-to’ nation in local content policies (LCPs) in the
extractive industry. Its LCP reputation stems from renewable energy development.
Even then, it is an unenviable reputation that is connected with one of its provinces’
(Ontario’s) feed-in tariff programme for wind and solar energy launched in 2009.
The programme required electricity generators in Ontario to procure a minimum
share of goods and services required for wind and solar energy projects from local
Ontario manufacturers and service providers. A minimum of 25% was established
for wind energy (which would increase to 50% in 2012) whilst 50% was established
for solar (which would increase to 60% in 2012). Compliance with this minimum
requirement was a precondition for the receipt of subsidies and other governmental
support from Ontario. Joined by the European Union, Japan brought a complaint
against Canada in the World Trade Organization (WTO), arguing that the Ontario
programme violated certain provisions of the General Agreement on Tariffs and
Trade (GATT) and certain provisions of the Agreement on Trade-Related Invest-
ment Measures (TRIMs Agreement).1 Upholding the decision of the WTO panel,
the WTO Appellate Body ruled that the programme violated Article III of GATT
and Article 2.1 of the TRIMS Agreement and directed Canada to ensure that the
Ontario scheme complied with them (see Kuntze and Moerenhout 2013; Kiragu
2015). This decision—the first WTO ruling, at least in recent times, on the legality

1 See Canada-Measures affecting the Renewable Energy Generating Sector, and Canada-Measures

relating to the Feed-In tariff Programme, Reports of the Appellate Body (WT/DS412/AB/R:
WT/DS426/AB/R, May 6, 2013).

C. Nwapi (B)
Canadian Institute of Resources Law, Calgary, Canada
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 385
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_22
386 C. Nwapi

of LCPs—delivered a fatal blow on Ontario’s feed-in tariff programme, spurring

global academic debates on the international validity of LCPs generally (see Nwapi
2015; Ramdoo 2015, 2016) and reinvigorating debates on the use of industrial policy
by developing countries to accelerate economic development (see Nwapi and Lee
2016). Outside this case, not much is known about LCPs in Canada. Yet, LCPs have
a long history in Canada, including in the extractive sector, even if the Canadian
government does not openly describe its policies as LCPs.
The extractive industry is of critical importance to the Canadian economy. The
mining industry alone contributes more than CDN$40 billion annually to the Cana-
dian economy (Prospectors and Developers Association of Canada 2019), with a
total of about 426,000 workers directly and another 208,000 indirectly employed
in the various stages of the mining value chain, bringing it to a total of 634,000
(Prospectors and Developers Association of Canada 2019). The industry is esti-
mated to be the largest private sector employer of Canada’s First Nations and other
indigenous peoples (Mining Association of Canada 2018). Globally, about 75% of
mining companies trace their home to Canada. Around 2013, it was estimated that
about 70% of global equity capital is raised on the Toronto Stock Exchange and the
Toronto Venture Exchange (Nwapi 2014). However, a recent report by the Prospec-
tors and Developers Association of Canada (2019) shows an ‘extreme drop in equity
financing’ in the first half of 2019 in Canada.
With respect to oil and gas, Canada is the fourth largest oil producer in the world,
with about 170 million barrels in proven reserve (Natural Resources Canada 2018;
Canadian Association of Petroleum Producers 2018a). More than 95% of the oil
reserves are, however, held in the Alberta oil sands (Natural Resources Canada
2018). In 2017, the oil and gas industry contributed $101 billion to Canada’s GDP
notwithstanding the oil price downturn, and the industry is estimated to contribute
about $1.8 trillion between 2017 and 2027 (not including expected contributions to
Alberta) (Canadian Association of Petroleum Producers 2018b). Employmentwise,
the industry is responsible for 528,000 direct and indirect jobs (Canadian Association
of Petroleum Producers 2018b).
Local content development in Canada’s extractive industry is strongly influenced
by Canada’s constitutional framework. The Constitution Act, 1867 grants ownership
of non-renewable natural resources, such as minerals, oil and gas except uranium, to
the provinces where the resources are located (Section 92A(1)). Accordingly, regula-
tory authority over extractive resource development resides with provincial govern-
ments. It is up to each provincial government to decide the regulatory instruments
to utilize to ensure optimal benefit of the resources to the people of the province. As
a result, there is no uniform local content policy across Canada. On the other hand,
federal interest in extractive resource development is mainly indirect. Section 91(24)
of the Constitution Act, 1867 gives the federal parliament authority over matters
relating to ‘Indians, and lands reserved for Indians’. Under this authority, the federal
government has limited involvement in decisions regarding extractive resource devel-
opment in order to ensure that Aboriginal interests are protected. Efforts to protect
Aboriginal interests in extractive resource development have evolved considerably
through the application of the duty to consult Aboriginal peoples enshrined in the
Local Content Policies in the Extractive Industry in Canada 387

Constitution Act, 1982.2 The duty to consult is that of the Crown and not of compa-
nies but companies play a critical role in making the duty meaningful through direct
consultation with Aboriginal communities. Lastly, as will be seen later in this chapter,
whilst the duty was not conceived as a local content policy, the measures by which
extractive companies have sought to make the duty meaningful in their relationship
with Aboriginal peoples have involved measures typically associated with LCPs.
LCPs in the extractive industry in Canada can best be understood under three sepa-
rate analytical contexts: (1) under the federal foreign investment policy; (2) under
benefits plans established under federal oil and gas legislation and under federal-
provincial agreements; and (3) under the constitutional duty to consult Aboriginal
peoples before natural resource development projects are undertaken. These are
discussed in turn and followed by some concluding remarks.
The discussion makes some key finds. (1) The Canadian federal government does
not have an official LCP as we know it, as there is no policy document that makes
explicit reference to local content. But this does not mean that the policy is unknown
in Canada. In fact, unbeknownst to many, the federal government has incorporated the
policy in some form under the federal foreign investment policy since at least 1973. (2)
Local content is fully embedded in requirements for the submission of benefits plans
under accords negotiated between the federal government and the Atlantic provinces
of Newfoundland and Labrador and Nova Scotia to enable the provinces to benefit
from offshore oil and gas development in Canada’s continental shelf appurtenant
to those provinces. (3) Unlike in most other countries, local content in Canada is
not characterized by the setting of stringent local content targets that companies
must meet but instead adopts a more flexible approach. (4) The understanding of
‘local’ under Canada’s local content regime embraces three types of ‘local’: Canadian
nationals (and permanent residents) as a whole, provincial residents and Aboriginal
people. Each of these locals is the focus of separate local content programmes. This
approach shows how the LCP can be strategically harnessed to address the socio-
economic situation of different segments of the national population—an approach
that contains policy lessons for other countries.

2 LCPs Under the Federal Foreign Investment Policy

2.1 The Rise of Economic Nationalism

Although economic nationalism has a long history in Canada—dating back at least to

Prime Minister John MacDonald’s launching of the National Policy of 1878—local

2 Canada operates a mix of written and unwritten constitutions, with the written component
consisting of two separate documents: the Constitution Act, 1867 and the Constitution Act, 1982.
Whilst the former established Canada as a federation, the latter established enforceable human rights
and ended British involvement in constitutional amendments in Canada. The unwritten component
is a relic of its British colonial heritage.
388 C. Nwapi

content policies in their current iteration are relatively new. MacDonald’s National
Policy sought to promote the growth of Canadian industries by curtailing the impor-
tation of foreign goods into Canada through the imposition of high tariffs (Avery et al.
2013; Wesson 2007).3 His goal was to restore struggling industries, including mining,
agriculture and manufacturing (Wesson 2007). But the policy did not directly regu-
late foreign investment. In fact, foreign investors, especially American investors,
with strong interest in the Canadian market began to incorporate subsidiaries in
Canada in order to avoid the high tariffs (Olson 1980). Yet, the policy represented
a new thinking in Canada regarding the impact of foreign investments on Canadian
economic development.
Especially after World War II, Canada witnessed a huge influx of foreign invest-
ments, which included foreign acquisitions of Canadian businesses (Olson 1980). In
the beginning, the Canadian government encouraged such investments because they
resulted in an increased domestic production of Canadian goods. As the investments
grew, however, Canadians began to question their long-term value to Canada. One of
the main issues of concern was that both the management staff of the investors and
the technology required to run the investments were supplied by the foreign parents
(Avery et al. 2013; Olson 1980). As Canadians were not involved in technology
development, Canada’s technological growth suffered, with likely repercussions on
the international competitiveness of Canadian companies. Another major problem
was that the Canadian subsidiaries participated only in the supply of raw materials to
their foreign parents and did not participate in production activities. The raw mate-
rials were processed outside Canada by the foreign parents and imported into Canada
as finished products (O’Sullivan 1980).
Canadians were also concerned that the influx of foreign investors wrestled
decision-making power over the direction of Canada’s economic development from
Canadians to the management of the foreign parent corporations which were making
important decisions for their Canadian subsidiaries (Rostein 2015; O’Sullivan 1980).
There were also concerns about the extraterritorial effect of US laws, specifically the
Trading with the Enemy Act, 1917, which prohibited US companies, including their
foreign subsidiaries, from trading with countries regarded as US enemies. The impli-
cation was that the Canadian subsidiaries could not trade with such countries, which
could otherwise have been profitable (O’Sullivan 1980).
Canadian commentators have noted that these concerns are still present today and
are reflected in the types of undertakings, which the Canadian government requires of
foreign investors as a precondition for the approval of their investments (Avery et al.
2013). The Canadian government responded to the concerns by setting up several
task forces to investigate the impact of foreign investments. One of the task forces,
headed by Walter Gordon (1957), confirmed the rise of foreign direct investments in
Canada, and observed that ‘legitimate Canadian interests’ were being sacrificed in
the process, and recommended to the government to mandate at least part-ownership

3 High import tariffs had been imposed in the past under the leadership of Prime Minister Alexander

Mackenzie, but that was only for the purpose of raising revenues.
Local Content Policies in the Extractive Industry in Canada 389

of the foreign-owned subsidiaries by Canadians (Rostein 2015). Of note also is the

Watkins Report of 1968, which even took a less moderate tone:
The major deficiency in Canadian policy has been not its liberality toward foreign investment
per se but the absence of an integrated set of policies, partly with respect to both foreign and
domestic firms, partly with respect only to foreign firms, to ensure higher benefits and smaller
costs for Canadians from the operations of multinational corporations (Watkins 1968:392).

Other recommendations of the Watkins Report included the establishment of ‘a

special’ agency to coordinate Canadian government policies with respect to foreign
corporations to enable the government to better supervise their actions (Watkins
1968:395; Bishop 2016). Another report (the Wahn Report) published in 1970 recom-
mended 51% Canadian ownership of foreign corporations (House of Commons
1970). Yet another report with remarkable consequence was the Gray Report of 1972,
which stressed the need for a foreign investment review process ‘as an economically
rational instrument’ (Gray 1972:454). Gray recommended that foreign firms wanting
to establish in Canada should be required to show (1) that their products were needed
in Canada and would not merely duplicate products already available in Canada; (2)
the nature of the technology to be employed in comparison with technology available
in Canada; (3) the type of employment opportunities for Canadians; (4) their plans
for local purchase of materials, components and services; and (5) their plans for
research and development as well as their product innovation in Canada (see Rostein
2015). These recommendations speak clearly to local content as we know it and set
the tone for the later adoption of the LCP in Canada.

2.2 The Establishment of the Foreign Investment Review

Agency

The foreign investment reports, but particularly the Gray Report, led to the enact-
ment of the Foreign Investment Review Act (FIR Act) in 1973, with the explicit
purpose of enabling ‘the ability of Canadians to maintain effective control over
their economic environment’ (Section 2(1)). The FIR Act established the Foreign
Investment Review Agency (FIRA) with the task of reviewing proposals for foreign
acquisitions of Canadian businesses as well as proposals for the establishment of
new foreign businesses in Canada (Hilmer 2013). The standard for approval of an
investment by FIRA was that it would result in ‘significant benefits’ to the Cana-
dian economy. ‘Significant benefits’ were assessed based on five factors, namely (1)
contribution to job creation; (2) the participation of Canadians in the management of
the investment; (3) ‘the effect… on productivity, industrial efficiency, technological
development, product innovation and product variety in Canada’; (4) the effect on
competition with existing industries in Canada; and (5) compatibility with federal
and provincial industrial and economic policies (FIR Act, Section 2(2)).
Criticisms trailed the FIR Act and its implementation. First, the review process
was considered too long and uncertain, with added costs for investors, often leading
390 C. Nwapi

to outcomes considered ‘commercially unreasonable’ (Bishop 2016:8; Rose 1986;

Globerman 1984). There were no legal provisions for challenging FIRA’s determina-
tions. Observers note that although following the establishment of FIRA, there was
a noticeable increase in the Canadian acquisition of Canadian firms and a notice-
able decline in foreign acquisitions, they argue that the Canadian acquisitions were
anti-competitive (Globerman 1984). Also, in 1983, a GATT dispute settlement panel
found that the FIR Act’s undertakings for domestic sourcing were inconsistent with
Canada’s obligation to ensure the equal treatment of domestic and imported products
under Article III.4 of GATT (Rose 1986).
On the other hand, studies show that the government oftentimes negotiated with
investors and obtained their written commitments to accept to perform certain
local content-related activities, such as employment of Canadians (United Nations
Commission on Trade and Development (UNCTAD 2011). The implementation of
the commitments was monitored through requirements for the submission of regular
progress reports (UNCTAD 2011) although the government showed reluctance in
enforcing the commitments (Hoffman 2010). However, criticisms of FIRA’s appli-
cation of the ‘significant benefits’ test, coupled with ‘a domestic recession’ that began
in 1982 led to a policy shift that saw the relaxation of the review process to attract
foreign investments (Hoffman 2010; Bishop 2016).

2.3 The Establishment of the National Energy Programme

Another major aftermath of the foreign investment reports was the establishment of
the National Energy Programme (NEP) in 1980, tasked with protecting the security
of Canadian energy supply to end dependence on foreign suppliers amidst global
concerns around the future of global oil supply and rising oil prices. NEP was also
tasked to device measures to increase Canadian ownership of the oil and gas industry
in Canada. By then, foreign control of the energy industry exceeded 90%, three-
fourth of which was held by US investors (O’Sullivan 1980). NEP made three key
recommendations:
(i) at least 50% Canadian ownership oil and gas production by 1990; (ii) Canadian control of
a significant number of the larger oil and gas firms; and (iii) an early increase in the share of
the oil and gas sector owned by the government of Canada (Sheppard and Hardwicke-Brown
1992).

NEP resulted in increased Canadian ownership of the oil and gas industry (Shep-
pard and Hardwicke-Brown 1992). However, it did not find popularity in Alberta
where most of Canada’s oil and gas resources were located as the provincial govern-
ment saw it as an avenue for the federal government to take control of Alberta’s oil
(Bregha 2016). Some of the objectives of NEP, specifically that of increasing Cana-
dian ownership of the oil and gas industry, aligns closely with the objective of local
participation adopted as part of LCPs in many countries.
Local Content Policies in the Extractive Industry in Canada 391

2.4 The Establishment of the Investment Canada Agency

In 1985, FIRA was abolished through the enactment of the Investment Canada Act
(IC Act), which established the Investment Canada Agency (ICA) and substantially
limited the categories of foreign direct investments that were reviewable. The IC
Act’s stated purpose is:
to encourage investment in Canada by Canadians and non-Canadians that contribute to
economic growth and employment opportunities and to provide for the review of signif-
icant investments in Canada by non-Canadians in order to ensure such benefit to Canada
(Section 2).

The new Act replaced the ‘significant benefit’ test with a ‘net benefit’ test. Thus,
foreign investments or acquisitions in Canada must undergo a ministerial review
process to determine if they are ‘likely to be of net benefit to Canada’ (Section 16(1)).
The IC Act does not define ‘net benefit’. However, it establishes that the new
Agency’s decisions are to be guided by the following six considerations:
(a) the effect of the investment on the level and nature of economic activity in
Canada, including, without limiting the generality of the foregoing, the effect
on employment, on resource processing, on the utilization of parts, components
and services produced in Canada and on exports from Canada;
(b) the degree and significance of participation by Canadians in the Canadian busi-
ness or new Canadian business and in any industry or industries in Canada of
which the Canadian business or new Canadian business forms or would form a
part;
(c) the effect of the investment on productivity, industrial efficiency, technological
development, product innovation and product variety in Canada;
(d) the effect of the investment on competition within any industry or industries in
Canada;
(e) the compatibility of the investment with national industrial, economic and
cultural policies, taking into consideration industrial, economic and cultural
policy objectives enunciated by the government or legislature of any province
likely to be significantly affected by the investment; and
(f) the contribution of the investment to Canada’s ability to compete in world
markets.
These guidelines are identical with the guidelines established under the FIR Act,
except for the sixth factor, which was absent. The ICA assesses these factors based
on the information, representations and undertakings provided by the investor. It has
been argued that the above criteria were intended to be subjective in order to allow
the Canadian government to ‘exercise considerable latitude in the review process’
(Sheppard and Hardwicke-Brown 1992). The factors have however been described
as ‘protectionist’ and ‘economically incoherent’ and that the Act itself is based on
false ‘assumptions that foreign firms act differently than Canadian firms’ (Bishop
2016:1).
392 C. Nwapi

The factors set out in the IC Act for determining net benefit to Canada align
clearly with the objectives of LCPs. In fact, the foregoing review shows that the
Canadian government has the same concerns as other countries that have more explic-
itly adopted LCPs. Even though there are no explicit mandatory requirements for
employment and training of Canadians or minimum thresholds for the procurement
of Canadian goods and services, a potential foreign investor would, in practical terms,
need to make undertakings in these regards in order to demonstrate net benefit to
Canada. A report published by Industry Canada in 2010 providing guidance on the
assessment of net benefit states that the type of undertakings potential investors can
provide varies from transaction to transaction but usually relate to employment of
Canadians, capital spending, Canadians’ participation in the business, and invest-
ments in research and development particularly in industries driven by research and
technology (Industry Canada 2010).
These undertakings are not taken lightly by the Canadian government. The IC Act
itself contains clear enforcement provisions for non-compliance with undertakings.
For instance, the government can issue a demand letter to require an investor to
remedy a compliance default. It can seek an order of court directing an investor to
comply with an undertaking. An erring investor can be subject to $10,000 fine for
each day of the default. The government may also seek an order of divesture against
the investor (IC Act, Sections 39–40). The government has stepped up enforcement of
such undertakings. Its first formal attempt to enforce undertakings was in 2009 when it
brought judicial proceedings against US Steel for non-compliance with undertakings
relating to local production and employment of Canadians following the company’s
2007 acquisition of Canadian steel company Stelco. The government brought the
proceedings notwithstanding the price fall in the steel industry after the 2008 global
financial crisis. After an unsuccessful challenge of the validity of certain provisions
of the IC Act, US Steel negotiated a settlement with the government (Sheppard and
Hardwicke-Brown 1992). Thereafter, the government developed guidelines for the
settlement of such disputes through mediation.
Observers have noted that the oil and gas industry performed better than other
industries under FIRA because the industry ‘tended to provide benefits relating to
increased employment and capital injection into the Canadian economy, as well
as the increased use of Canadian parts and services to support increased levels of
resource processing’ (Sheppard and Hardwicke-Brown 1992:349). Thus, the more
local content there is in a foreign investor’s proposal the more likely the proposal
would pass the net benefit test; and the more the investor complies with such
undertakings the more the goals of the legislation are realized.
However, Canada’s approach seems to be more flexible than those of most LCP
countries and is not characterized by the setting of stringent local content targets. The
ICA has wide discretion to determine what is of net benefit to Canada whereas most
other countries establish less flexible and more mechanical or technocratic standards
for determining compliance with local content requirements. In addition, not all
foreign investment transactions in Canada under the IC Act require local content or
other undertakings. It depends on the importance of the transaction to the Canadian
economy and, specifically in the case of acquisitions, on the health of the Canadian
Local Content Policies in the Extractive Industry in Canada 393

business that is being acquired (Industry Canada 2010). This is a most defining
characteristic of the application of the LCP under Canada’s foreign investment policy.
However, there appears to be no transparency in the review process for determining
net benefits. Also, the flexible and uncertain nature of the review process has rendered
it vulnerable to political manipulations, as the decision whether a transaction meets
the net benefit test has, compared to other regulatory approval processes in Canada,
been considerably influenced by the political interests of the ruling party (Sheppard
and Hardwicke-Brown 1992; Bishop 2016).

3 Local Content Under Benefits Plans

3.1 The Canada Oil and Gas Operations Act, 1985

Although Section 92A(1) of the Constitution Act, 1867 grants ownership of non-
renewable natural resources, such as minerals, oil and gas, to the provinces where the
resources are located, the federal government still retains some regulatory authority
over oil and gas operations in defined areas or circumstances, such as oil and gas
development within Canada’s continental shelf, or where inter-provincial or interna-
tional oil and gas pipelines are to be built. Based on this power, the federal government
enacted the Canada Oil and Gas Operations Act, 1985 (COGOA), which applies to
oil and gas development in that part of the onshore that is under the administration
of a federal minister and oil and gas exploration and exploitation in Nunavut, Sable
Island, and in ‘the continental shelf of Canada and the waters superjacent to the
seabed of that continental shelf’, etc. (Section 3).
COGOA prohibits the approval of any plan for oil and gas development as well as
the issuance of an authorization of any work or activity unless the project proponent
or applicant has submitted a ‘benefits plan’ to the Minister for approval and which
the Minister has approved, unless the Minister has waived the requirement to submit
a benefits plan (COGOA, Section 5.2(2)).4 The Act defines a benefits plan as:
a plan for the employment of Canadians and for providing Canadian manufacturers, consul-
tants, contractors and service companies with a full and fair opportunity to participate on a
competitive basis in the supply of goods and services used in any proposed work or activity
referred to in the benefits plan (COGOA, Section 5.2(1)).

What distinguishes the above provision from most local content requirements
is that the provision does not require that Canadians be provided employment or
opportunities for the supply of goods and services on a preferential basis in relation
to non-Canadians. But this is a minor distinction that is of little or no consequence,
because once a benefits plan providing, e.g., for the employment of Canadians, has
been submitted, its effective implementation would require preferential consideration
of Canadians, otherwise it would be very difficult, if not impossible, for a company

4 This provision is adopted by the Canada Petroleum Resources Act, 1986, Section 21.
394 C. Nwapi

to uphold the terms of the plan. Moreover, the plan will be implemented within
the broader context of Canada’s employment policy, which requires all companies
operating in Canada, regardless of the sector, to demonstrate that there is no Canadian
or permanent resident of Canada who is qualified and available for a job before they
can hire a foreigner to take up a job. As will be seen later, however, benefits plans
required in Newfoundland and Labrador (NL) and Nova Scotia explicitly incorporate
the first consideration principle.
COGOA also contains an affirmative action provision allowing the Minister
to require project proponents to include in their benefits plans provisions that
specifically provide ‘disadvantaged individuals or groups’ access to opportunities
for training and employment and to enable such persons and businesses owned
and operated by them to participate in the procurement of goods and services
(Section 5.2(3)).
COGOA does not provide guidance for the operationalization of the benefits
plans provisions, but it provides the National Energy Board (NEB) the authority to
establish guidelines and interpretation notes for the application and administration
of the benefits plans (Section 5.3). It is not clear whether any such guidelines have
been established by the NEB.

3.2 The Atlantic Accords Benefits Plan

The most active adoption of the traditional language of LCPs in Canada is found
in the Canada-Newfoundland Atlantic Accord Implementation Act, 1987 (C-NAAI
Act) and the related Canada-Nova Scotia Atlantic Accord Implementation Act, 1987.
These Acts were enacted to fully formalize and make binding two 1985 memoranda
of understanding (MoUs) signed separately between the Government of Canada and
the Provincial Governments of NL and Nova Scotia on offshore oil and gas resource
management and revenue sharing.5 The MoUs were the product of political settle-
ments between the federal government and the two provinces to assuage the latter’s
bitterness over the decision of the Supreme Court of Canada in the Hibernia Reference
in which the court ruled that rights over the Canadian continental shelf rested with the
federal government rather than the government of the province bordering the shelf
(Clarke 2004; Macdonald and Thompson 1985). At the time, the two provinces were
faced with high levels of unemployment (Barber 2018). The agreements thus repre-
sent the federal government’s recognition that the provinces where natural resources
are found ought to be the primary beneficiaries of the resources.
The C-NAAI Act provides that before any oil and gas development plan can be
approved, a ‘benefits plan’, called the Canada-Newfoundland and Labrador Benefits

5 Thetwo provincial governments enacted their own legislation of the memorandum, the Canada-
Newfoundland Atlantic Accord Implementation (Newfoundland) Act; and Canada-No Scotia
Atlantic Accord Implementation (Nova Scotia) Act. References in this chapter are made to the
federal version of the legislation between Canada and Newfoundland and Labrador.
Local Content Policies in the Extractive Industry in Canada 395

Plan, must be submitted and approved by the Canada-Newfoundland and Labrador

Offshore Petroleum Board (C-NLOPB) established under the Act. After a benefits
plan is approved, the C-NLOPB will consider the development plan in its entirety.
Its approval of a development plan is regarded as a fundamental decision requiring
a subsequent approval by the relevant Ministers of Canada and NL. However, the
approval of a benefits plan is not regarded as a fundamental decision and so ends
with the Board (C-NLOPB 2006).
A benefits plan is defined as:
a plan for the employment of Canadians and, in particular, members of the labour force of
the Province … for providing manufacturers, consultants, contractors and service companies
in the Province and other parts of Canada with a full and fair opportunity to participate on a
competitive basis in the supply of goods and services used in any proposed work or activity
referred to in the benefits plan (C-NAAI Act, Section 45(1)).

A benefits plan must include the following provisions:

• a plan to establish an office in NL where appropriate levels of corporate decisions
are to be made;
• a plan for the employment of Canadians and for giving residents of NL ‘first
consideration’ in matters of employment and training;
• a plan of expenditures to be made on research and development and education
and training to be carried out in NL; and
• a plan for giving ‘first consideration’ to goods manufactured in NL and to
services provided from within the province ‘where those services and goods are
competitive in terms of fair market price, quality and delivery’ (C-NAAI Act,
Section 45(3)).
The C-NAAI Act creates an affirmative action provision requiring benefits plans
to include plans to ensure the effective participation of disadvantaged individuals
or groups in training and employment opportunities and for businesses owned by
such persons to participate in the supply of goods and services (C-NAAI Act,
Section 45(4)). Of significant importance is a requirement in the Act that collec-
tive agreements between a corporation and its employees shall not undermine the
right of access of residents of the province to training and employment opportunities
on a first consideration basis (C-NAAI Act, Section 45(3)(b)).
The overall intent of the benefits provisions of the C-NAAI Act is to ensure that
oil and gas development in NL makes a long-term contribution to the sustainable
development of the province. A key vehicle for achieving this is to provide resi-
dents of the province avenues to participate in the economic opportunities that the
development of the resources brings. The resource development approval process is
therefore made dependent on the quality and quantity of such opportunities proposed
by a prospective investor.
Rather than itself provide detailed guidance on the preparation of benefits plans,
the C-NAAI Act allows the C-NLOPB to issue guidelines and interpretation notes
for the preparation of benefits plans to assist project proponents to comply with the
intendments of the benefits plans provisions. In February 2006, the C-NLOPB issued
396 C. Nwapi

the Canada-Newfoundland and Labrador Benefits Plan Guidelines (C-NLOPB

2006). New Draft Guidelines were published in January 2016 but it is unclear
whether they were finally adopted, as a publicly available version of the Guidelines
is described as ‘Draft’ (C-NLOPB 2016). The difference between the two Guidelines
is not significant at least for the purposes of this discussion and the difference relates
more to the way certain guidelines are framed than to the actual substance of the
guidelines themselves.
Under the Guidelines, a benefits plan is required to be ‘as detailed and specific
as possible’, clearly specifying the manner in which each of the elements of a bene-
fits plan will be addressed. Project proponents are further required to ‘describe the
consultative, monitoring and reporting procedures’ they intend to utilize to achieve
the objectives of the benefits plan (C-NLOPB 2006:3–4). Benefits plans are subject
to amendment, especially when an operator seeks to amend its development plan. In
fact, the operator is required to amend the benefits plan unless it can provide a ratio-
nale that an amendment of the benefits plan is not warranted in the circumstances
(C-NLOPB 2006).
Benefits plans are subject to a high level of scrutiny to ensure that they promote
the objectives of the Act. For instance, project proponents and operators are not only
required to establish procurement procedures that do not unfairly put local suppliers
at a disadvantage, they must equally demonstrate that they have taken all reasonable
measures to ensure that local suppliers are provided an opportunity to participate
in the procurement process on a competitive basis. As explained in the 2016 Draft
Guidelines, ‘[s]electing suppliers on a competitive basis’ means using the ‘fair market
price, quality and delivery’ of a good or service to determine which supplier is to
be selected (C-NLOPB 2016:6). It thus means that operators cannot determine the
outcome of the procurement ‘solely on the basis of lowest price’ (C-NLOPB 2006:7).
A public hearing may be conducted to determine the compliance of an operator’s
benefits plan with the intendments of the Act.
Providing provincial residents opportunities to participate in procurements
involves investments in local supplier development. This includes assessing provin-
cial and other Canadian supplier capabilities with a view to identifying their strengths
and constraints, establishing policies and programmes to enable provincial resi-
dents and other Canadians to participate in the operator’s national and interna-
tional activities, and technology transfer to Canadians (C-NLOPB 2006). It also
includes providing timely information to provincial and Canadian supplies about
project opportunities and requirements. The establishment of management offices
in the province is intended to facilitate the involvement of provincial residents in
management responsibilities. For matters of employment, an operator is required to
identify training requirements that are needed to facilitate the participation of provin-
cial residents and other Canadians in its labour force and the impact of the project
demand on existing educational facilities of the province (C-NLOPB 2006).
To facilitate the giving of first consideration to residents of NL on matters of
employment and procurement of goods and services, the Guidelines define who
a ‘resident’ means, namely a Canadian or permanent resident of Canada who has
resided in NL for the last six months. Thus, the person need not be a Canadian
Local Content Policies in the Extractive Industry in Canada 397

citizen, but holders of work permits and other visas who reside in the province
do not qualify as residents. The reason for the adoption of the first consideration
principle, as has been explained, was to address the high unemployment levels in NL
to support families and communities, a policy that was ‘expedient for the provincial
government’ (Barber 2018).
The Guidelines explain in detail what ‘first consideration’ means. Operators are
free to stipulate the required qualifications, expertise and experience that candidates
for an advertised position must possess. Once these have been established, operators
must first look to NL candidates and give the job to any one of them meeting those
qualifications, expertise and experience. Furthermore, if there are positions in the
operator not initially held by residents of NL, the operator must establish a succession
plan for qualifying residents to take over the positions (C-NLOPB 2006).
The ‘first consideration’ principle applies also to goods and services procurement.
Local suppliers of goods and services that are competitive based on fair market price,
quality and delivery are to be given first consideration. In the C-NLOPB’s view, the
price quoted by a local supplier should not outweigh other factors, so that where the
local supplier’s bid is not relatively low in relation to price, he should still receive first
consideration if his is otherwise ‘competitive in relation to the low bidder, and meets
or is comparable to other evaluated factors (e.g. technical, HSE, benefits, etc.)’ (C-
NLOPB 2016:7). Furthermore, first consideration allows an operator ‘to limit bids
only from providers from the Province, should there be competitive capacity in the
Province’ and an operator might choose to source from a sole provider if the Province
has only one supplier with the requisite competitive capacity (C-NLOPB 2016:7; C-
NLOPB 2006:8). In other words, as long as there is even only one qualified provider,
an operator cannot go outside the province. However, the process of ascertaining the
existence of a qualified provider in the province will usually warrant a Canada-wide
search unless qualified provincial providers have become well known in the industry.
The Guidelines do not establish minimum employment or procurement thresholds
for companies to meet. Neither do they establish targets that the province must meet
within any defined timescale. However, the Guidelines require project proponents to
provide a high level of detail and specificity regarding their local employment and
procurement levels. For instance, project proponents are to specify the proportion of
work and employment that can be performed by provincial and Canadian businesses
and workers (C-NLOPB 2016). Also, they are to establish an estimate of the goods
and services required annually to support their production operations and provide,
for each major cost category identified for each production system, an assessment of
the available capacity in the province and in Canada to perform the work associated
with each category, including any constraints thereto (C-NLOPB 2016).
To ensure that operators follow the principles of the benefits plan as well as meet
their commitments, the Guidelines provide for monitoring and reporting of operators’
implementation of their benefits plans. Operators are thus required to submit quarterly
and annual reports, which will be shared with the public. At the expiry of their project
approvals, they are to provide an assessment of the results of the application of the
benefits plan and the likelihood that further benefits might be realized (C-NLOPB
2016).
398 C. Nwapi

In addition to the statutorily mandated benefits plans, benefits agreements are also
negotiated between NL and project operators for all offshore petroleum projects. The
Board has no statutory authority with regard to negotiated agreements, whether in
terms of the negotiation process or in terms of the enforcement and monitoring
process. However, negotiated agreements typically include provisions that grant
monitoring and oversight functions to the C-NLOPB. In such cases, the C-NLOPB’s
role is usually limited to monitoring the implementation of benefits agreements to
ascertain whether operators are complying with the terms of the agreements and
to notify the government of NL accordingly. It is the responsibility of the govern-
ment of NL, and not that of the C-NLOPB, to resolve any disputes that may arise
between it and operators regarding compliance with a negotiated benefits plan (Wood
Mackenzie 2018).
Negotiated agreements have the advantage of flexibility over mandated benefits
plans. As such, they can be more easily tailored to meet the needs of the government.
In addition, as the negotiating process will normally involve considerable dialogue
between the government and the project proponent, negotiated agreements are an
important instrument for building relationships. However, mandated benefits plans
have established guidelines for their development, which can contribute to their
effectiveness.

3.3 Benefits Plans in Practice

There is not much academic discussion of the Atlantic Accords’ benefits plan, as
a result of which not much is known of the plan’s performance. The little avail-
able information shows that as a result of the benefits plans, the offshore petroleum
industry in NL has delivered substantial and sustainable economic development to
the province, as there has been significant growth in employment and local supplier
capability, in addition to growth in the contribution of the sector to provincial GDP.
The province has also, at least partly as a result of the benefits plans, witnessed a
significant growth in the number of university graduates with skills relevant to the
oil and gas sector, a small but flourishing research and development community,
‘an increasingly diverse and cosmopolitan urban culture, and improved external
transportation links’ (Shrimpton 2012).
Details of benefits plans are made public and operators submit quarterly and annual
implementation reports, which can be found in the public domain (see, e.g., Iron Ore
Company of Canada 2017; Hibernia Management and Development Company 2016;
Husky Energy 2016; Wood Mackenzie 2018). A 2018 Annual Report submitted by
Suncor Energy in connection with the Terra Nova development project showed that
as of 31 December of that year, a total of 1032 persons were directly employed
in the project, approximately 88% of which were residents of NL, 9% other Cana-
dian residents and 3% non-Canadian residents. Of the 1032 employees (which were
disaggregated according to discipline, e.g., management, engineering, professional,
technicians, etc.), 910 were male whilst 122 were female. The report also showed
Local Content Policies in the Extractive Industry in Canada 399

that during the reporting period (1 January 2018 to 31 December 2018), a total
of 4,712 purchase orders with a cumulative value of about CDN$58 million were
awarded, of which about 62% were awarded to NL vendors, 26% to other Canadian
vendors, and 12% to non-Canadian vendors. Also, about CDN$2.3 million was spent
on research and development during the same period whilst over $1 million was spent
on education and training (Suncor Energy 2018).
The 2017–2018 Annual Report of the C-NLOPB shows that as of 31 December
2017, there were 4,915 NL and other Canadian residents in direct employment in
the offshore petroleum industry. Production activities accounted for annual expen-
ditures of $1.7 billion, of which approximately 63% occurred in NL and a further
18% occurred in other parts of Canada. Expenditures on research and development,
together with education and training, accounted for CDN$23 million, spent on such
areas as science, technology, engineering and math programs; employee health and
safety; enhanced oil recovery; seismic exploration technologies; and educational
scholarships (C-NLOPB 2018).
The publication of the performance reports can facilitate policy learning, i.e., the
ability and willingness of an agency to sit back and measure its progress and review
its interventions to identify where changes are needed (see Vogel 2017). The LCP
Guidance for Governments published by the Intergovernmental Forum on Mining,
Minerals, Metals and Sustainable Development (2018) stresses the importance of
performance measurement in the success of LCPs. Furthermore, the availability of
benefits plans and annual implementation reports in the public domain speaks to
the transparency of the benefits regime, a contrast to the way in which, as will be
seen later, impact benefit agreements with Aboriginal communities are treated. Trans-
parency enlists the public, especially civil society organizations, into the local content
project and empowers them to provide important oversight that would help to improve
processes and enhance the benefits of the programmes. It helps the government to
obtain more information about the performance of the programme and increases its
ability to analyse and target its resources to where they are most needed. It also
encourages firms to review their supply chains to identify where alternative local
suppliers are available (Geipel and Hetherington 2018).
It is remarkable that the reports track the gender diversity of the companies’
employees. Furthermore, a look at the benefits plans—both statutorily mandated
plans and negotiated agreements—shows the existence of strong local content
commitments as well as ‘best-endeavours’ clauses. For instance, a negotiated
benefits agreement between the Government of NL and ExxonMobil in connec-
tion with the Hebron Oil Field project—the province’s fourth offshore develop-
ment project operated by ExxonMobil under a joint venture with Chevron Canada
Resources, Suncor Energy, Statoil Canada and the Energy Corporation of Newfound-
land and Labrador—includes a project partner’s commitment of CDN$1 million to
enhance skills training in the College of North Atlantic and Memorial University of
Newfoundland (a firm commitment) and a commitment to a comprehensive gender
equality programme (a best-endeavours commitment).
A 2018 study by Wood Mackenzie noted that the requirement of benefits plans
has rendered the development permitting process for oil and gas development in NL
400 C. Nwapi

relatively less attractive (Wood Mackenzie 2018). The study also notes that whilst
both provincial policy-makers and industry players share the broad goals of LCPs in
the offshore oil and gas sector, industry players have raised concerns regarding the
need for provincial suppliers and service providers to strive to become internationally
competitive (Wood Mackenzie 2018).
Other commentators have noted that project operators face difficulties in deter-
mining what is ‘full and fair opportunity’ to Canadians and provincial residents as
well as in applying the ‘first consideration’ criterion. For instance, an operator may
be presented with multiple bids having competing degrees of local content, but which
otherwise are equal in terms of price and quality. The operator is expected to select
the bidder with the highest degree of local content. However, whether bids are equal
may depend on the eyes of the beholder and, ‘[i]f pressed, an operator can usually
identify some “material” difference, be it technical, commercial or otherwise’ (Taylor
and Dickey 2001:79).
On monitoring, it has been noted, albeit with regard to Nova Scotia, that whilst
the Board monitors the content of employment and supply contracts, it is mostly
the commitments made by project proponents that are monitored and that the Board
but does not specifically require project proponents to maintain any level of local
content (Clarke 2004). In addition, there has been little evidence that failure by oil
companies to maintain adequate levels of local content in their projects will attract
sanctions (Clarke 2004).
Disputes have sometimes arisen over the implementation of benefits plans. One
such dispute relates to the Hebron oil field. The Government of NL signed an MoU
with the Hebron project partners to provide benefits commitments to the province.
The MoU required the project to provide to the province’s residents first consideration
in matters of employment and in the supply of goods and services and to construct
their machinery within the province. It emerged that a key equipment module was
constructed in South Korea instead of in NL. The parties settled the dispute with
ExxonMobil paying CDN$150 million to the government (Wood Mackenzie 2018).
The benefits Guidelines published by the C-NLOPB have also come under direct
legal challenge. In 2012, Mobil Investments Canada Incorporated, joined by its
project partner Murphy Oil Corporation, brought proceedings against the Canadian
Government before an arbitral tribunal at the International Centre for the Settlement
of Investment Disputes challenging the Guidelines for research and development
expenditures, which required investors to spend a fixed percentage of their revenues
from offshore petroleum products within NL. They argued that the fixed expenditures
established under the Guidelines had a significant financial impact on them and that
they contravened Article 1106(1)(c) of the North American Free Trade Agreement,
which prohibits a Trading Party from requiring an investor from another Trading Party
‘to purchase, use or accord a preference to goods produced or services provided in its
territory, or to purchase goods or services from persons in its territory’. The arbitral
Local Content Policies in the Extractive Industry in Canada 401

tribunal found that Canada violated the said provisions of NAFTA and order Canada
to pay approximately CDN$19 million to the investors.6
Based on the foregoing, it can be concluded that benefits plans have made signif-
icant contributions to the economic development of NL and Canada as a whole.
However, the performance of benefits plans as revealed in this discussion should be
taken with caution, for other than through annual and quarterly reports, which were
published by companies and the C-NLOPB, not much is known about the successes
or limitations of benefits plans. Detailed independent studies are needed in order to
properly and fairly assess the performance of benefits plans.

4 Local Content Under Impact Benefit Agreements

with Aboriginal Communities

Development policy in Canada has had ‘a chequered history’ with regard to Aborig-
inal peoples (Young 1995). Filled with colonial mentality, Canadian development
policy for a long time showed an unwillingness to recognize Aboriginal voices
regarding both the process and the goals of development (Young 1995). This gener-
ated enormous acrimony in the relationship between the government and Aboriginal
peoples. However, it has since been recognized that reconciliation can be achieved
only through careful consultation between the government and Aboriginal peoples,
conducted within a framework that incorporates Aboriginal social and economic
values (Young 1995). To this end, Canadian courts have determined that the Crown
has a duty to consult Aboriginal peoples whenever the Crown intends to act in a
manner that may have an adverse impact on the enjoyment of Aboriginal or treaty
rights guaranteed under Section 35 of the Constitution Act, 1982.7
The Crown’s duty to consult is rooted in the ‘Honour of the Crown’ and is legally
binding and enforceable.8 The duty is not owed only by the federal Crown but
also applies to provincial Crowns and unless the Crown can obtain the consent of
Aboriginal peoples, any infringement of Aboriginal or treaty title must be fully
justified.9 Furthermore, the Crown cannot delegate the duty to consult and accom-
modate to third parties (Newman 2014). By implication, project developers cannot
legally assume the duty to consult. However, it has become ‘a non-optional practice’,
connected with the need to obtain a social licence to operate, for project developers
to engage in consultations with Aboriginal peoples before the commencement of
projects (Newman 2014:80). Whilst this is not as a matter of legal obligation, it is

6 See Mobil Investments Canada Inc & Murphy Oil Corporation v Canada (2012), ICSID Case
No. ARB(AF)/07/4; Attorney General of Canada, v Mobil Investments Canada Inc. and Murphy
Oil Corporation, 2016 ONSC 790, https://www.italaw.com/sites/default/files/case-documents/ita
law7160.pdf.
7 Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73, 3 S.C.R. 511.
8 Ibid.
9 Tsilhqot’in Nation v British Columbia, 2014 SCC 44.
402 C. Nwapi

arguable that consultation by industry evolved out of the entrenched nature of the
Crown’s constitutional duty to consult coupled with pressures exerted by Aboriginal
peoples who threatened to obstruct the take-off of resource development projects and
demanded control over natural resources on their lands.
An important offshoot of the evolution of the Crown’s duty to consult is the
development of Impact Benefit Agreements (IBAs) between project developers and
Aboriginal communities. Broadly speaking, IBAs are contractual arrangements nego-
tiated between project developers and Aboriginal communities with the principal
aims of accommodating Aboriginal interests and building relationships. Histori-
cally, the negotiation of IBAs in Canada began in the mid-1970s as agreements
between the government and industry, whereby the government acted on behalf of
Aboriginal communities to provide socio-economic benefits for them (Public Policy
Forum 2006; Gilmour and Mellett 2013). Since the 1990s, however, IBAs have been
generally negotiated directly by Aboriginal people and project developers. Empirical
research shows that the negotiation of IBAs is part of industry’s ‘good neighbour’
policy intended to ensure business stability by fending off opposition and securing
the support of Aboriginal communities (Public Policy Forum 2006; Gilmour and
Mellett 2013). The direct involvement of Aboriginal communities in the negotiation
of IBAs has been largely attributed to the evolution of the recognition of Aboriginal
rights by the courts as well as through treaties and land claim agreements (Public
Policy Forum 2006).
IBAs are generally not legally mandated (Gilmour and Mellett 2013; Lacasse
2005).10 In fact, they occupy a regulatory void, for there are no regulations governing
their negotiation or implementation. Typically, an Aboriginal community that signs
an IBA commits to support the resource development project to which the IBA
relates in return for a ‘package of measures’ that include both economic benefits
and the minimization of the adverse socio-environmental impacts of the resource
development on the Aboriginal community (Imai 2017; O’Faircheallaigh 2003).
There is little guidance on what should be the contents of an IBA, but IBAs have
become an important local content instrument in Canada even though the Cana-
dian government does not see them to be so (OECD 2017). Typically, IBAs often
provide for the employment of members of Aboriginal communities who are parties
to the agreements and may provide for preferential consideration for the community
members before other candidates are considered. Often, IBAs set targets or quotas
for the employment of Aboriginal people on a project (Sosa and Keenan 2001). To
facilitate the employment of Aboriginal people, some IBAs require that positions be
advertised in Aboriginal newspapers, which are published by Aboriginal organiza-
tions primarily for the readership of their members (McKinley and Huebner 2018).
Some IBAs give priority to Aboriginal employees over seniority in times of lay-off
(Sosa and Keenan 2001).
Associated with employment is the provision of training and apprenticeship
programmes as well as educational, including scholarship, programmes to enable

10 Some initial IBAs were mandated under land claim settlements. See Gilmour and Mellett (2013);

Lacasse (2005).
Local Content Policies in the Extractive Industry in Canada 403

Aboriginal people to acquire relevant skills. Some IBAs extend these obligations of
project developers to their contractors and subcontractors even though these are not
parties to the agreements (Sosa and Keenan 2001). Cash payments by project devel-
opers to Aboriginal communities can also form part of IBA provisions (Kennet 1999).
Other typical elements of IBAs include clauses that prohibit Aboriginal communities
from objecting to projects, or from engaging in specified kinds of resistance (Gilmour
and Mellett 2013). From the perspective of project developers, such clauses are the
key element in IBAs.
Unlike benefits plans and other local content measures in other countries, IBAs are
ad hoc in nature and are negotiated with specific Aboriginal communities rather than
with the government. There is little government oversight regarding their content and
implementation. Also, unlike benefits plans, they target specific social groups within
the population rather than all locals. From a local content perspective, therefore, local
is understood in the context of IBAs as only the Aboriginal community to which the
IBA relates, who have faced historical marginalization in Canada (Grice 2018). This
approach is different from the notion of ‘community content’ (also referred to as
‘local–local content’) found is some jurisdictions, such as the Philippines.11 Whilst
community content is location-specific, Aboriginal content is social group-specific.
However, both community content and Aboriginal content spring from the same intu-
ition, for, like Aboriginal content, community content is rooted in the fact of marginal-
ization that communities located near extractive resource projects have historically
faced, especially in developing countries (Nwapi 2015; Marcel et al. 2016; Esteves
et al. 2013). A major advantage of IBAs over legally mandated local content require-
ments is that being a product of dialogue and negotiation between project developers
and Aboriginal communities, IBAs serve as an important instrument for relationship
building and conflict prevention and resolution.
IBAs are not without their problems. Scholars have highlighted the power imbal-
ance in the negotiation of IBAs (Caine and Krogman 2010). Such power imbalance
influences the actual contents of an IBA, in terms of the type, quality and quantity
of benefits project developers are to provide to Aboriginal communities. The ad hoc,
flexible nature of IBAs has also meant that the quality and quantity of benefits to
Aboriginal communities depends largely on their negotiation strategy and might in
some cases imply weak monitoring of the implementation of IBAs (OECD 2017).
The power imbalance has been blamed in part on the absence of Crown involvement
in most IBAs although Crown non-involvement is on the other hand viewed as a
recognition of the capacity of Aboriginal people to determine their priorities and to
speak for themselves (Fidler and Hitch 2007).
There is no designated agency to supervise and monitor the design and implemen-
tation of IBAs. This means that the prospects for policy learning are very limited.
There is also a problem of transparency. Unlike benefits plans under the Atlantic

11 Section 136(d) of the Revised Rules and Regulations of the Philippines Mining Act of 1995

stipulates that priority should be given to Filipinos living in ‘local’ or neighbouring communities
or the province where a mine is located.
404 C. Nwapi

Accords, IBAs incorporate confidentiality clauses that prohibit their public disclo-
sure (Gilmour and Mellett 2013). As such, the actual contents of specific IBAs
are shrouded in secrecy. Furthermore, where Aboriginal land claims have not been
settled or where the impacts of a project extend from the boundaries of one land
claim into another, the negotiation of IBAs is complicated. This is because in such
situations, there is often a proliferation of claims and demands for IBAs and ‘there
is no principled basis for determining eligibility to negotiate IBAs’ in such situ-
ations (Kennet 1999:35). Project developers have often cited Aboriginal people’s
‘lack of basic education, skills, business experience and capital’ as the main reasons
why many mining projects do not generate significant employment and business
opportunities for Aboriginal people. And efforts by project developers to prepare
Aboriginal people to take advantage of the opportunities often takes a long time to
produce results (Kennet 1999). As a result, most of the available jobs for Aboriginal
people are unskilled jobs whilst non-Aboriginal people disproportionately occupy
the skilled and higher paying positions (Gibson et al. 2005).
The use of ‘fixed quotas and guaranteed jobs or contracts’—a common element
in IBAs—is widely considered by Canadian commentators to be ill-suited to enable
Aboriginal people to become economically independent (Kennet 1999). Likewise,
unskilled jobs hardly provide long-term benefits to Aboriginal people, for when, for
instance, a mine shuts down, unskilled employees are hardly able to find new jobs due
to their lack of skill (Kennet 1999). Similarly, the long-term economic value of cash
payments to Aboriginal peoples has been questioned due to the absence of account-
ability mechanisms to ensure that cash payments are responsibly utilized to promote
economic development (Brock and Migone 2018; Blue and O’Faircheallaigh 2018;
Kennet 1999). It has also been found that Aboriginal organizations that have been
awarded contracts by project developers often subcontract them to non-Aboriginal
companies or form joint ventures in which their ‘operational role’ is very minimal
(Kennet 1999).
As a local content instrument, the greatest weakness of IBAs is perhaps the lack of
any guidance established by an independent body regarding the negotiation process,
content and implementation monitoring of IBAs. This has tilted the scale heavily to
one side. It is also a serious shortcoming that IBAs are kept confidential. Being confi-
dential, there is no way the public can credibly assess claims made by project devel-
opers regarding their commitment to provide benefits to Aboriginal communities
impacted by their projects.

5 Conclusion

Local content in Canada’s extractive industry is pursued through three vehicles: the
federal foreign investment policy, benefits plans under federal oil and gas legisla-
tion and under federal accords with the Atlantic provinces of Newfoundland and
Labrador and Nova Scotia, and under IBAs negotiated between project developers
and Aboriginal communities. These vehicles also incorporate the understanding of
Local Content Policies in the Extractive Industry in Canada 405

the different types of ‘local’ in LCPs, namely national content, provincial content
(which roughly aligns with the notion of local-local content) and Aboriginal content.
The idea of Aboriginal content is unique in that it focuses on a particular social
group, rather than a geographical location, which has faced historical marginaliza-
tion within the Canadian population. The Canadian approach thus shows how the
LCP can be utilized to address the economic situation of other marginalized groups in
other countries. It must be warned, however, that the status of Aboriginal peoples in
Canada in relation to extractive resource development is unique, as recognized under
the Canadian constitution, and may not directly be transposed to other marginalized
groups around the world. However, it may be possible for other jurisdictions to adapt
the LCP to their own situation to address the challenges faced by marginalized groups
within their territory.
Of the three local content vehicles, benefits plans represent the strongest incor-
poration of local content requirements and align with the practice in most other
jurisdictions. This is because of the explicit requirements on local employment and
procurement, the giving of first consideration to residents of the provinces (NL and
Nova Scotia) near the offshore oil and gas resources and the establishment of a
Board to supervise the design and implementation of benefits plans. However, there
is very limited independent assessment of the successes and challenges of benefits
plans available, as available sources emanate from the C-NLOPB and companies.
On the other hand, whilst IBAs with Aboriginal communities facilitate relationship
building vital for the success of projects, they are tormented by lack of guidance on
their contents, lack of a watchdog agency to monitor their implementation, and lack
of transparency about their actual contents. And whilst federal foreign investment
policies provide a useful instrument to promote local content through the assessment
of net benefits, their success has been marred by political considerations.
The statistics show that benefits plans have led to a large volume of goods and
services procurement being localized. Massive local employment has also been
created and significant investments in training and in research and development
have equally been made. Experience with the benefits plans shows that where the
government has a clearly defined goal, it is easier to measure progress. The back-
ground to the emergence of benefits plans in NL (and in Nova Scotia) shows that the
government’s primary goal was to address the massive unemployment problem in the
province as well as to ensure that other benefits of offshore oil and gas development
are retained in the province. Whilst the federal government understood the impor-
tance of spreading the benefits across the country, it recognized that the province
bordering the continental shelf ought to be primary beneficiary of the resources.
Accordingly, it conceded to a benefits plan regime that gives first consideration to
the subnational locality likely to be impacted the most by the development of the
resources rather than adopting a broader national content strategy. This is an impor-
tant lesson for other LCP countries. Every country is unique and should establish its
goals accordingly, as there is not a one-size-fits-all approach.
406 C. Nwapi

References

Attorney General of Canada v Mobil Investments Canada Inc. and Murphy Oil Corpora-
tion, 2016 ONSC 790. https://www.italaw.com/sites/default/files/case-documents/italaw7160.
pdf. Accessed November 1, 2019.
Avery, A., Glossop, P., & Olexiuk, P. (2013). Foreign investment in Canada’s oil and gas sector:
New and emerging challenges. Alberta Law Review, 51(2), 343–384.
Barber, L. (2018). Inside the mobilities regime of Newfoundland and Labrador’s construction
megaprojects: Experiences of rotational work close to home. Journal of Canadian Labour Studies,
81, 187–212.
Bishop, G. (2016). A rule of reason for inward FDI: Integrating Canadian foreign investment
review and competition policy. The School of Public Policy Research Papers, 9(34). University of
Calgary. https://www.policyschool.ca/wp-content/uploads/2016/10/Foreign-Investment-Bishop-
Final.pdf. Accessed November 9, 2019.
Blue, L., & O’Faircheallaigh, C. (2018). Indigenous autonomy and financial decision-making in
communities. Financial Planning Research Journal, 4(2), 39–50.
Bregha, F. (2016). National energy programme. https://www.thecanadianencyclopedia.ca/article/
national-energy-program. Accessed October 20, 2019.
Brock, K., & Migone, A. (2018). Financial capacity of First Nations in Canada. Canadian Public
Administration, 61(4), 479–498.
Caine, K. J., & Krogman, N. (2010). Powerful or just plain power-full? A power analysis of impact
and benefit agreements in Canada’s north. Organization & Environment, 23(1), 76–98.
Canadian Association of Petroleum Producers. (2018a, July). Canada’s oil sands.
Canadian Association of Petroleum Producers. (2018b). Economic report series: leveraging
opportunities: Diversifying Canada’s oil and natural gas markets.
Canada—Measures affecting the Renewable Energy Generating Sector, and Canada—Measures
relating to the Feed-In tariff Programme. Reports of the Appellate Body (WT/DS412/AB/R:
WT/DS426/AB/R, May 6, 2013).
Canada-Newfoundland Atlantic Accord Implementation (Newfoundland) Act.
Canada-Nova Scotia Atlantic Accord Implementation (Nova Scotia) Act.
Canada-Newfoundland and Labrador Offshore Petroleum Board. (2006). The Canada-
Newfoundland and Labrador Benefits Plan Guidelines.
Canada-Newfoundland and Labrador Offshore Petroleum Board. (2016). Canada-Newfoundland
and Labrador benefits plan guidelines (Draft) 2016. https://www.cnlopb.ca/wp-content/uploads/
cnlopbsn/bpguide.pdf. Accessed October 15, 2019.
Canada-Newfoundland and Labrador Offshore Petroleum Board. (2018). 2017–2018 annual report.
https://www.cnlopb.ca/wp-content/uploads/ar2018e.pdf. Accessed October 15, 2019.
Clarke, M. (2004). Primary beneficiaries: Newfoundland and Nova Scotia’s struggle to achieve the
promise of petroleum wealth. Dalhousie Journal of Legal Studies, 13(2), 1–30.
Esteves, A. M., Coyne, B., & Moreno, A. (2013). Local content initiatives: Enhancing the
subnational benefits of the oil, gas and mining sectors. Natural Resource Governance Insti-
tute Briefing Note. https://resourcegovernance.org/sites/default/files/Sub_Enhance_Benefits_2
0151125.pdf. Accessed November 11, 2019.
Fidler, C., & Hitch, M. (2007). Impact and benefit agreements: A contentious issue for environmental
and aboriginal justice. Environments Journal, 35(2), 45–69.
Geipel, J., & Hetherington, D. (2018). Local content policy: What works, what doesn’t work.
https://assets.publishing.service.gov.uk/media/5c7d425aed915d4063af98df/BERF-Zimbabwe-
What-Works-in-Local-Content-Policy-30Oct18.pdf. Accessed November 11, 2019.
Gilmour, B., & Mellett, B. (2013). The role of impact and benefit agreements in the resolution of
project issues with First Nations. Alberta Law Review, 51(2), 385–400.
Globerman, S. (1984). Canada’s Foreign Investment Review Agency and the direct investment
process in Canada. Canadian Public Administration, 27, 313.
Local Content Policies in the Extractive Industry in Canada 407

Gordon, W. (1957). Royal Commission on Canada’s Economic Prospects. Final report. Ottawa:
Queen’s Printer.
Gray, H. (1972). Foreign direct investment in Canada. Ottawa: Information Canada.
Grice, T. (2018). Local content policies in the mining sector: Stimulating direct local employment.
In Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development and
the International Institute for Sustainable Development. <https://www.iisd.org/sites/default/files/
publications/local-content-policies-mining-direct-local-employment.pdf. Accessed October 16,
2019.
Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73, 3 S.C.R. 511.
Hibernia Management and Development Company Ltd. (2016). Canada—Newfoundland and
Labrador benefits report. https://www.hibernia.ca/2016AnnualReportingofIndustrialBenefits.
pdf. Accessed November 1, 2019.
Hilmer, N. (2013). Foreign Investment Review Agency. The Canadian encyclopedia. https://www.
thecanadianencyclopedia.ca/article/foreign-investment-review-agency. Accessed November 9,
2019.
Hoffman, A. (2010). Broken promises mark foreign mining deals. https://www.theglobeandm
ail.com/globe-investor/broken-promises-mark-foreign-mining-deals/article574587/. Accessed
November 9, 2019.
House of Commons—Standing Committee on External Affairs and National Defence. (1970).
Special Committee respecting Canada–US relations: Report to the House.
Husky Energy. (2016). Canada-Newfoundland and Labrador benefits annual report. Husky Energy
Ref. No. WR-ADM-RP-0044. https://huskyenergy.com/downloads/areasofoperations/eastcoast/
CNLOPB_2016_Annual_Report_Website.pdf. Accessed November 4, 2019.
Imai, S. (2017). Consult, consent and veto: International norms and Canadian treaties. In M. Coyle,
& J. Borrows (Eds.), The right relationship: Reimagining the implementation of historical treaties
(p. 405). Toronto: University of Toronto Press.
Industry Canada. (2010). Investment Canada Act: annual report 2009–2010. https://www.ic.
gc.ca/eic/site/ica-lic.nsf/vwapj/ica-report-2010-eng.pdf/$file/ica-report-2010-eng.pdf. Accessed
November 10, 2019.
Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development
(IGF). (2018). IGF guidance for governments: Local content policies. Winnipeg:
IISD. https://www.iisd.org/sites/default/files/publications/igf-guidance-for-governments-local-
content.pdf. Accessed November 11, 2019.
Iron Ore Company of Canada. (2017). IOC Wabush 3 open pit mine project industrial and employ-
ment benefits plan 2017. http://www.ironore.ca/CLIENTS/1-iocv4/docs/upload/sys_docs/IOC_
Wabush_3_Benefits_Plan__January_27_2017.pdf. Accessed November 7, 2019.
Kennet, S. (1999). Issues and options for a policy on impact and benefits agreements. Paper prepared
for the Mineral Resources Directorate, Department of Indian Affairs and Northern Development,
Canadian Institute of Resources Law. http://www.cbern.ca/content/uploads/sites/4/2016/03/Iss
ues-and-Options-for-a-Policy-on-Impact-and-Benefits-Agreements.pdf. Accessed November 9,
2019.
Kiragu, E. (2015). Transition into a Green Economy: Are there limits to government intervention?
World Trade Institute Working Paper No. 05/2015. <https://www.wti.org/media/filer_public/5b/
dd/5bddb3d9-5ed8-448a-8d38-ff3325c4cd97/wti_seco_wp_05_2015.pdf. Accessed October 13,
2019.
Kuntze, J.-C., & Moerenhout, T. (2013). Local content requirements and the renewable energy
industry—A good match? International Centre for Trade and Sustainable Development, Ad hoc
Expert Group Meeting on Domestic Requirements and Support Measures in Green Sectors:
Economic and Environmental Effectiveness and Implications for Trade Salle XXI, Palais des
Nations, Geneva, June 13–14, 2013. https://unctad.org/meetings/en/Contribution/DITC_TED_
13062013_Study_ICTSD.pdf. Accessed November 1, 2019.
408 C. Nwapi

Lacasse, J.-P. (2005). Impacts and benefits agreements on aboriginal title lands. In D. Dorey, &
J. Magnet (Eds.), Legal aspects of aboriginal business development (p. 311 at 321). Markham:
Butterworths.
MacDonald, C. P., & Thompson, R. S. G. (1985). The Atlantic accord: The politics of compromise.
Alberta Law Review, 24(1), 6.
Marcel et al. (2016).
McKinley, T., & Huebner, C. (2018). Extractive industries and consumption linkages to enhance
industrialisation. Paper prepared for the Consultancy for the United Nations Development
Programme Regional Service Centre for Africa ‘Extractive Industries for Sustainable Devel-
opment’ Programme, January 2018.
Mining Association of Canada. (2018). Facts and figures of the Canadian mining industry.
https://mining.ca/wp-content/uploads/2019/03/Facts-and-Figures-English-Web_0.pdf. Accessed
November 11, 2019.
Mobil Investments Canada Inc. & Murphy Oil Corporation v Canada. (2012). ICSID Case No.
ARB(AF)/07/4.
Natural Resources Canada. (2018). Crude oil facts. https://www.nrcan.gc.ca/science-data/data-ana
lysis/energy-data-analysis/energy-facts/crude-oil-facts/20064. Accessed November 9, 2019.
Newman, D. (2014). Revisiting the duty to consult Aboriginal peoples in Canada, revised edition.
Saskatoon: Purich Publishing.
Nwapi, C. (2015). Defining the ‘local’ in local content requirements in the oil and gas and mining
sectors in developing countries. Law & Development Review, 8(1), 187–216.
Nwapi, C. (2014). Resource extraction on the courtroom: The significance of Choc v Hudbay
Minerals Inc. for transnational justice in Canada. Asper Review of International Business and
Trade Law, 14, 121–160.
Nwapi, C., & Lee, Y. S. (2016). Trade and development in Africa. In Y. S. Lee (Ed.), Reclaiming
development in the world trading system (2nd ed., pp. 334–360). New York: Cambridge University
Press.
O’Faircheallaigh, C. (2003). Accountability in the negotiation of indigenous mineral development
agreements. Brisbane, Queensland, Australia: Centre for Governance and Public Policy, Griffith
University.
Olson, T. H. (1980). Foreign investment restrictions on Canadian energy resources. International
Lawyer, 579–608.
O’Sullivan, B. J. (1980). Canada’s Foreign Investment Review Act revisited. Fordham International
Law Journal, 4(1), 174–198.
Prospectors and Developers Association of Canada. (2019). Industry news. CORE. https://issuu.
com/pdac-web/docs/core__fall_2019_?e=36081262/72726050. Accessed November 8, 2019.
Public Policy Forum. (2006). Sharing in the benefits of resource developments: A study of
First Nations-Industry impact benefits agreements. https://ppforum.ca/wp-content/uploads/2018/
05/Sharing-in-the-Benefits-of-Resource-Development-PPF-report.pdf. Accessed November 9,
2019.
Ramdoo, I. (2016). Local content, trade and investment: Is there policy space left for linkages
development in resource-rich countries? ECDPM Discussion Paper No. 205. https://ecdpm.org/
publications/local-content-trade-investment/. Accessed November 9, 2019.
Ramdoo, I. (2015). Unpacking local content requirements in the extractive sector: What
implications for the global trade and investment frameworks? E15Initiative. Geneva:
International Centre for Trade and Sustainable Development (ICTSD) and World
Economic Forum. https://ecdpm.org/wp-content/uploads/Unpacking-Local-Content-Requireme
nts-Isabelle-Ramdoo-September-2015-ECDPM.pdf. Accessed November 9, 2019.
Reference re Newfoundland Continental Shelf, [1984] 1 SCR 86.
Revised Rules and Regulations of the Philippines Mining Act of 1995.
Rose, W. B. (1986). Foreign investment in Canada: The New Investment Canada Act. International
Lawyer, 20, 19–44.
Local Content Policies in the Extractive Industry in Canada 409

Rostein, A. (2015, 29 June). Economic nationalism. The Canadian Encyclopedia. https://www.the

canadianencyclopedia.ca/en/article/economic-nationalism. Accessed October 30, 2019.
Sheppard, M. J., & Hardwicke-Brown, M. (1992). Overview of the Investment Canada Act with
a focus on investments in Canada’s upstream oil and gas industry. Alberta Law Review, 30(1),
4–56.
Shrimpton, M. (2012). Delivering benefits: Approaches, initiatives and outcomes. In OTC Arctic
Technology Conference, Houston, TX. https://www.onepetro.org/conference-paper/OTC-237
06-MS. Accessed 6 November 6, 2019.
Suncor Energy. (2018). Terra Nova development: Canada-Newfoundland and Labrador benefits
public annual report.
Taylor, A., & Dickey, J. (2001). Regulatory regime: Canada-Newfoundland/Nova Scotia Offshore
Petroleum Board Issues. Dalhousie Law Journal, 24, 51–86.
Tsilhqot’in Nation v British Columbia, 2014 SCC 44.
United Nations Conference on Trade and Development. (2011). How to attract and benefit from
FDI in mining: Lessons from Canada and Chile. Best practices in investment for development
case studies in FDI. New York and Geneva. https://unctad.org/en/Docs/diaepcb2010d11_en.pdf.
Accessed November 9, 2019.
Vogel, D. (2017). The role of policy learning and regulation in regulatory excellence. In C.
Coglianese (Ed.), Achieving regulatory excellence (pp. 207–224). Washington, DC: Brookings
Institution.
Watkins, M. (1968). Task Force on the Structure of Canadian Industry. Foreign ownership and the
structure of Canadian industry—Report of the Task Force on the Structure of Canadian Industry.
Ottawa: Queen’s Printer.
Wesson, T. (2007). The sectoral structure of Canada’s economy. In Tom Wesson (Ed.), Canada and
the new world economic order: Strategic briefings for Canadian enterprise (3rd ed., pp. 68–82).
Concord: Captus Press.
Wood Mackenzie (2018). Newfoundland & Labrador competitiveness in oil & gas investment.
https://www.nr.gov.nl.ca/nr/publications/energy/Competitiveness_Oil_Gas_Investment.pdf.
Accessed October 29, 2019.
Young, E. (1995). Third world in the first: Development and indigenous peoples. London: Routledge.
Local Content Policies for Regional
Economic Development in Western
Australia

Simon White

Abstract This chapter examines the efforts of the Western Australian Government
to promote new economic, business and employment opportunities for local firms
and residents in its non-metropolitan regions. Specific attention is given to the use
of public policies, institutions and programmes to realise these opportunities based
on increasing investments in the extractives sector.

1 Introduction

Like many territories engaged in resource extraction, mining sites in the Australian
State of Western Australia (WA) are largely located in areas of low population. While
this creates logistical challenges for the extraction, processing and transportation of
minerals, based on distance and infrastructure, it also creates a challenge for the devel-
opment of sustainable non-metropolitan regional communities. While governments
often welcome the significant investments mining brings, they are often eager to
ensure these benefits extend beyond the payment of mineral royalties by contributing
to new jobs, improved infrastructure and increased business for local firms. Local
content policies have been used by governments to enhance these broader benefits,
often with mixed results.
The WA economy is dominated by mining, and while this has led to signifi-
cant investments into new jobs and better infrastructure, the sustainability of these
outcomes is not assured. Thus, it is important to use these investments to transform
the economy in ways that deepen their industrial base, improving local skill and firm
capabilities. This chapter examines the case of WA and the attempts by the Western
Australian Government to increase local content provisions for local workers and
businesses.

S. White (B)
Publicus Pty. Ltd., Subiaco, Australia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 411
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_23
412 S. White

2 Mining and the WA Regional Economy

The development of the State’s non-metropolitan regions has been driven by agricul-
ture and minerals. Late in the nineteenth century, when WA was still a colony, some
32% of its population lived in non-metropolitan settlements. Many of these commu-
nities were transient, based on the economic opportunities of the time. Some fifty
years after Federation, a series of State resource booms shifted the economy towards
minerals (Wilson et al. 2004). Indeed, the sectoral contribution to the WA economy
has changed significantly over time. While the service sector now dominates the State
economy, mining accounted for 30% of Gross State Product (GSP) in 2017–2018,
while agriculture (around A$79 billion) forestry and fishing accounted for only two
per cent. Indeed, Western Australia accounted for 52% of Australia’s mining gross
value added in 2017–2018. Iron ore, from the Pilbara Region, accounted for 50% of
the State’s minerals and petroleum sales in 2018, followed by liquefied natural gas
at 21%. Other key contributors, albeit at a smaller scale are gold (9%), alumina and
bauxite (6%), crude oil (2%), and lithium, tin and tantalum (1%) (Government of
Western Australia 2019).
Both the Federal and State governments have supported regional development
with varying objectives. At the Federal level, government influences development
in regions in six main ways. First, it redistributes income from the more popu-
lous to the less populous States, primarily through direct payments to Local and
State governments. Second, it contributes to regional development through poli-
cies dealing with ‘adjustment failures’ within those regions with persistently high
unemployment and declining economic activity. Third, it has policies that seek to
promote selected regional ‘winners’ by strengthening their comparative advantages
and industry linkages. Fourth, it has introduced general decentralisation measures
to spread people and industry beyond the capital cities. Fifth, it influences regional
development through industry policy and the provision and pricing of public infras-
tructure, notably in relation to roads, transport and communications. Finally, it
provides various types of assistance to promote regional growth directly (Department
of Tourism and Department of Industrial Relations 1992).
State governments have supported development in the regions through a more
direct involvement with rural regions, albeit with fewer funds, while struggling to
balance urban policies with rural ones. Since Federation, State governments have
been involved in opening up new land for development. This largely focused on the
provision of essential infrastructure. However, in the past 50 years, State govern-
ments have also had to deal with some of the social and economic consequences of
rural decline. Most States have established a network of regional development organ-
isations with various organisational and funding arrangements. The WA network is
discussed further below.
The current WA Regional Development Strategy: 2016–2025, prepared under
the former Liberal-National Government (2008–2017), describes how the State
government would ‘direct greater resources towards establishing the socio-economic
foundations for development while also driving growth and new investment in the
Local Content Policies for Regional Economic Development … 413

regions’. This includes fostering the growth of emerging industries and the attrac-
tion of new private investment in the form of ‘capital and capability (Government of
Western Australia 2016).
A constant challenge for Federal and State governments has been to find ways
to broaden the benefits of mining investments and build a broader set of industrial
capabilities. In the 1980s, the Australian Parliament commissioned an investigation
into Australian industry participation in major projects. The resulting report, A sea of
indifference: Australian industry participation in the North West Shelf Project, found
that government had failed to ‘play a significant role in promoting and fostering local
industry in major projects’ and is ‘indifferent to the real opportunities for domestic
industry growth’ (Chairperson’s Foreword). As a result, the inquiry argued the case
for local content provisions and the development of cross-sectoral linkages (House
of Representatives Standing Committee on Industry Science and Technology 1998).
Comparing Australia with Norway, Hunter (2014) argues that the Australian
government’s failure to use policy to diversify its industrial base in the petroleum
resources sector has meant that domestic industry diversification in Australia has
faltered, with minimal economic diversification occurring and few cross-sectoral
linkages established and a failure to promote local suppliers’. Australia’s primary
exports are dominated by minerals and agricultural products, while Norway exhibits
a more diversified portfolio. Norway has used revenues from oil and gas to create
a sovereign wealth fund with over one trillion US dollars. In addition to petroleum
and gas, Norway’s economy includes machinery and equipment, metals, chemicals,
ships and fish products.
More recently, the 2018 report of the Australian Parliament’s Committee on how
the mining sector can support businesses in regional economies, Keep it in the regions,
describes a range of initiatives resource companies have employed to promote local
content. The Committee notes, however, that despite many large mining compa-
nies having local procurement programmes, ‘regional communities are missing out
on these opportunities’ (House of Representatives Standing Committee on Industry
Innovation Science and Resources 2018: 43). Indeed, small and medium enterprises
(SME’s) were found to face a number of barriers to their participation in mining
contracts, including the centralisation of mining company offices outside of the
regions in which the company operates, complex tendering processes, loose defi-
nitions of ‘local’ used by mining companies, poor regional infrastructure and a lack
of local industry capacity.
Thus, government efforts to build an industrial base for increasing value addition
have proved to be relatively shallow and inadequate. It is in this context that the
efforts of the WA Government to support regional economic development through
local content mechanisms are examined. This incorporates the institutional and policy
framework for regional development, including support for the economic and indus-
trial development of the State’s non-metropolitan regions. More specifically, this
review includes the major policies, laws and programmes that attempt to integrate
mining into the regional economies in which they operate.
414 S. White

3 Institutions for Regional Development

As with most other States, WA has established a network of regional institu-

tions designed to coordinate and support development in the nine demarcated non-
metropolitan regions. Each region contains a Regional Development Commission
(RDC) to oversee the State government’s support for development. These agencies
coordinate government service provision, conduct studies of social and economic
infrastructure requirements, provide information to new and existing firms, and
identify regional growth opportunities and impediments to development with the
aim of attracting investment to their respective regions. RDCs are legislated by the
Regional Development Commissions Act of 1993. State Government funding varies
significantly between regions, both in absolute and per capita terms.
The RDCs develop and implement regional development policies, strategies and
plans. While these typically cover a wide range of issues, including government
services, social and community development, and infrastructure, they also have a
particular emphasis on economic strategies to enhance growth and job creation.
The economic component of these regional development plans typically identifies
strategic industry sectors, both current and emerging, and describes the ways RDCs,
in concert with other State and Local government entities, and in some cases Federal
Government instrumentalities will work with the private sector and civil society
to achieve desired outcomes. Within this context, several regional communities in
Western Australia have formulated regional ‘blueprints’. Regional blueprints assist
in future regional development and set a firm foundation for regional action. They are
prepared by the RDC and are designed to strengthen regional policy leadership and
horizontal policy integration. Blueprints incorporate land use planning, while identi-
fying future needs for a better and broader range of government services (Government
of Western Australia 2010).
As statutory authorities with the status of a State government agency, RDCs play a
pivotal role in planning, in collaboration with the peak planning agency, the Western
Australian Planning Commission. The Western Australian Planning Commission
is the decision-making body responsible for guiding the future development of the
State. It plays a major coordinating role across all aspects of the State Government’s
planning process and operates as a partnership between the community, business and
all levels and sectors of government. It has a broad range of strategic responsibil-
ities, including the preparation and implementation of the State Planning Strategy
that proposes a vision for the future development of Western Australia. Within this
mandate, the commission has responsibilities for metropolitan and non-metropolitan
matters.
The State government has invested heavily into regional planning, requiring a
wide range of State and Local government agencies to prepare and submit plans
on a regular basis. In 2014, the Planning Commission released the State Planning
Strategy 2050. This document sought to reach ‘beyond traditional land-use planning’
by placing ‘a priority on economic and population growth as the key drivers of land
use and land development’ (pp. 7). This would ‘help to align and deliver regional
Local Content Policies for Regional Economic Development … 415

development programmes and services’ (Western Australian Planning Commission

2014:8). The strategy also identified a hierarchy of 27 regional centres and sub-
regional centres, also referred to as ‘Super Towns’. State government has supported
the preparation of Blueprints for the development of selected regional centres and
towns and has also supported regional centres in the preparation of economic growth
plans (Department of Regional Development and Lands 2011).
Another State planning structure, the Regional Development Council is the peak
advisory body to the Minister for Regional Development. Established by the Regional
Development Commissions Act 1993, the Council consists of the chairs of the nine
RDCs and advises the Minister for Regional Development on all regional develop-
ment issues. This includes promoting the development in the regions, developing
policy proposals, facilitating liaison between commissions and relevant government
agencies, and liaising between Local, State and Federal Government bodies with
respect to regional issues (Government of Western Australia 2017). In addition, the
Regional Development Trust was established in 2009 as an independent statutory
advisory body under the Royalties for Regions Act. The Trust provides indepen-
dent and impartial advice and recommendations on the allocation of funds from the
Royalties for Regions Fund.
Paül and McKenzie (2015) describe how regions in Australia have evolved
from an ‘undefined and sometimes confused meaning’ to become ‘particular and
bounded territories with specific attributions’. WA regions have evolved from being
‘ambiguous rural areas to constitute certain territorial shapes with a distinct unit
in the spatial structure of the society. Despite the top-down, State-driven approach
to regional development, WA’s regions are unique in Australia for their process of
regionalisation and regional consistency. The RDCs have played a significant role in
this regard, providing sustained institutions for planning.
Appointed by the Minister for Regional Development, RDC members typically
include private sector and community representatives from the region. Despite this,
the level of private sector participation in economic planning and development
initiatives is somewhat limited.

4 State Agreements and Public–private Partnerships

The State Government established a range of initiatives to engage large mining

projects in an effort to maximise the economic and social benefits of mining and
mitigate environmental risks. Sensitive to the dangers of scaring off international
investors, these initiatives have sought to encourage, rather than regulate for greater
integration by local firms and workers into supply chains, while promoting some
level of corporate social responsibly. The obligations placed upon firms vary from
project to project.
One of the State Government’s earliest and most long-lasting attempts to regulate
for local content in major resource projects was through the use of State Agreements.
416 S. White

These are legal contracts between the Western Australian Government and a propo-
nent of a major project. Under such agreements, proponents take or share responsi-
bility with the State for developing infrastructure specific to the project (Department
of Jobs Tourism Science and Innovation 2019). Thus, a State Agreement is a ‘contract
containing financial and non-financial concessions granted by the State in return for
project obligations accepted by private companies’ (Horsley 2013).
Since 1952, these agreements had their genesis in assisting the establishment of
a fledgling iron ore mining project for domestic usage only, due to the then Federal
Government’s embargo on the export of iron ore. This project contemplated mining
of iron ore deposits at Yampi Sound in the State’s West Kimberley region. In fact,
the first State Agreement was formulated in 1947, principally to reduce the amount
of land that could be held under a mining lease due to a concern that limited strategic
resources should not be controlled by a single party. However, first State Agree-
ment in the form it is understood today was signed by the State government and
BHP to support the development of an oil refinery in Western Australia, the Oil
Refinery (Kwinana) Agreement Act 1952. This initiated the subsequent widespread
use of State Agreements to facilitate development of major resource-based projects
commenced with the development of the State’s iron ore industry in the Pilbara.
Over time, local content provisions have been incorporated into State Agreements.
One example of this is the agreement entered into as part of the Gorgon Project,
which requires the use of local labour, suppliers and professional services where it is
reasonable and economically practicable to do so. The proponents are also required
to provide local suppliers with a fair opportunity to tender or quote during design
and the tendering and letting of contracts.
Horsley (2013) describes how the 1960s State Government vision for an integrated
industrial complex in the desert was written into the series of State Agreements
entered into for the development of the Pilbara region. These agreements all contained
clauses calling on the companies to maximise local content and proceed through
secondary processing to an integrated iron and steel industry. However, it became
evident that the forward and backward industrial linkages were not emerging and
could not be left to the market alone. As a result, the government attempted to take
a more proactive approach through regional industrial development policies.

5 Royalties for Regions

The Royalties for Regions programme was the centrepiece of the State government’s
regional development agenda at the height of the mining boom in the late 2000s.
Shortly after the election of the Liberal-National alliance Government in 2008, the
Royalties for Regions Act 2009 was passed. This provided the legislative frame-
work for the creation of the Royalties for Regions Fund and the Western Australian
Regional Development Trust. The Act provides for the equivalent of 25% of the
State’s forecast annual mining and onshore petroleum royalties to be directed into
Local Content Policies for Regional Economic Development … 417

the fund, which is separate from the government’s Consolidated Account. The Royal-
ties for Regions Fund balance cannot exceed A$1 billion at the end of a financial
year with any surplus funds returned to the Consolidated Account. The object of
the Act is to promote and facilitate economic, business and social development in
regional Western Australia through the operation of the Fund (Royalties for Regions
Act 2009). Monies allocated from the Fund are over and above existing or planned
normal expenditure by government agencies and used for three purposes: to (1)
provide regional infrastructure and services; (2) develop and broaden the economic
base of the regions, and (3) maximise regional job creation and career opportunities.
The Act formalised the architecture of the allocation of royalty funds to the overar-
ching Royalties for Regions Fund. The remainder of the programme was established
in administrative provisions within the Department of Regional Development (now
the Department of Primary Industries and Regional Development). These adminis-
trative provisions have changed over time, in line with government priorities and the
findings of a series of external reviews into the structure, processes and governance
of the programme.
While Royalties for Regions was generally well received in the non-metropolitan
regions, over time many questions were raised regarding the allocation of fund
resources. Towards the end of the two-term Liberal-National alliance Government,
there were concerns the Fund was being misused. In May 2017, the new Labour-
led State Government commissioned a special inquiry into the decision–making
processes, transparency and financial consequences of 31 projects commissioned
between 2008 and March 2017. This included a number of projects funded under the
Royalties for Regions programme. In February 2018, Former Under Treasurer John
Langoulant AO released the 900-page inquiry report, which contained 107 recom-
mendations to the State Government. The inquiry found a ‘significant deficit in the
rigour applied to project selection and poor targeting of funding towards projects that
would deliver lasting economic and social outcomes to regional Western Australia’.
It was common practice for government to establish ‘buckets of money’ from which
future expenditure projects would dip into without adequate business cases was
concerning. The so-called ad hoc nature of many housing projects funded by Royal-
ties for Regions in the Pilbara underlined the failure of rigorous planning (State of
Western Australia 2018: 142).
In response to the special inquiry report, the State Premier indicated that the State
government had already integrated the Royalties for Regions budget into the normal
State Budget cycle, but would maintain the programme with a defined strategy,
plan and set of priorities. In addition, the State government would develop ‘a full
suite of economic and social data at a regional level to provide the evidence base to
guide decision-making’ and develop a formalised programme evaluation framework’
(Government of Western Australia 2018b).
The Langoulant inquiry also examined government procurement, which the
Department of Finance manages under the State Supply Act 1991. The inquiry
found a significant need for improvement. There was a lack of central leadership
and confusion around the complex legislative framework governing procurement.
This had resulted in a situation in which the framework “did not provide optimal
418 S. White

support for the government’s commitment to maximising local content, providing

opportunities for jobs on government projects, supporting small and medium busi-
nesses and Aboriginal businesses” (pp. 19). Generally accepting the recommenda-
tion of the inquiry, the Labour-led Government indicated it would undertake further
consultations towards the introduction of a single procurement act (State of Western
Australia 2018).
The Royalties for Regions programme represents an innovative approach by the
State government to provide the regions with resources that were a direct result of
the significant levels of private investment into mining and gas extraction. Typically,
mining royalties are paid directly into Consolidated Revenue and regions would seek
allocation through the normal budgetary processes, which are often not favourable
to regions with populations that are substantially smaller than the Perth (the WA
State capital city) metropolitan area. The earmarking of royalties for use in the
regions was well received and led to investments in a wide range of community and
social development and infrastructure projects in the regions. Staden and McKenzie
(2019) claim that regional development challenges are framed from a place-based
perspective and argue that the Royalties for Regions programme does not view the
development challenge as a place-neutral mobility issue. Instead, the programme put
money back into regional communities in order to create sustainable communities.
The problem for regions is the growth of Perth, at the expense of rural populations.
Ellem and Tonts (2018) also describe the programme positively, suggesting it was
designed to disrupt development so that ‘wealth and power accumulate in places
other than the site of extraction’. Thus, Royalties for Regions sought ‘to challenge
the marginalisation of remote regions’.
The problem, however, was that very little programme funds were used to stim-
ulate local industries and businesses, either in the mining supply chains or in other
regional economic sectors. Indeed, the special inquiry criticised the project selec-
tion process as inadequate with ‘a lack of clearly defined regional development
policy outcomes’. The absence of an overarching strategic framework and appro-
priate measurement of regional development outcomes made it difficult for govern-
ment to determine whether funded projects contributed to improved economic and
social outcomes in the State (State of Western Australia 2018: 143).

6 The WA Plan for Jobs and Jobs Act

In 2017, the Minister for Jobs in the new Labour State Government introduced
the Western Australian Jobs Act 2017 to maximise local small business participation
in the State economy through the use of State Government procurement processes in
the supply of goods and services. State Government procurement amounts to around
A$27 billion per annum, and the Act puts greater responsibility on State government
agencies to provide local industry with full, fair and reasonable opportunity to access
and win State Government supply contracts. It also puts a focus on the reporting of
economic outcomes of local industry participation.
Local Content Policies for Regional Economic Development … 419

The Jobs Act is a legislative component of the WA Plan for Jobs, which identi-
fies a number of focus areas, including support for innovation and new industries,
tourism marketing, infrastructure and industrial lands development. It also includes
a government commitment to local content and jobs on government projects and
serviced industrial land developed under the Industrial Lands Authority to foster
private sector investment in the regions.
A key component of the Jobs Act is the Western Australian Industry Participa-
tion Strategy (WAIPS), which seeks to promote the diversification and growth of
the WA economy by opening up supply opportunities for local industry, providing
local suppliers with increased access to, and awareness of supply opportunities
and building local industry capability. The WAIPS requires prospective suppliers to
complete and submit a participation plan as part of their tender bid. This is an outline
of how the project proponent will support the principle of full, fair and reasonable
opportunity and give ample consideration to the project’s local economic impacts.
The government requires project proponents to report on its contracting outcomes
every six months and at practical completion (Government of Western Australia
2018a). Depending on the value of the supply contract, proponents are required
to prepare either a ‘core’ or ‘full’ participation plan. A core participation plan is
a simple plan that outlines the local economic benefits they will produce should
they be awarded the contract. A full participation plan is more detailed, requiring
prospective suppliers to demonstrate local economic benefits and provide a full, fair
and reasonable opportunity to local industry, should they be awarded the contract.
Participation plans will be used as part of the evaluation, award and contracting
process (Government of Western Australia 2018c).
A further support to the policy is the Industry Capability Network WA (ICNWA).
This is a specialist WA and Australian vendor identification service provided as a joint
industry government initiative. ICNWA is part of the Australia-wide ICN network
assisting project proponents to ensure they are not paying a premium on imported
equipment, spare parts and services that can be obtained at a more competitive cost
from local suppliers. The State Government will invest A$1 million per annum to
reinvigorate ICN WA to support WA businesses to compete for government contracts.
As indicated above, the Jobs Act focuses on public procurement and not procure-
ment by large private miners. The latter is somewhat covered by the older Building
Local Industry Policy, which endeavours to ensure that competitive local industry
receives full, fair and reasonable opportunity to participate in the State’s major
private sector projects. This policy was amended in October 2018 to transfer public
procurement processes to the WAIPS, while retaining procurement provisions for the
private sector. The Building Local Industry Policy seeks to achieve a cooperative and
coherent approach from government, project proponents, suppliers and unions, while
assisting more WA businesses to compete for major project work in the private sector
and provide improved access to local businesses for major project proponents. A key
element of the policy is the requirement for project developers to prepare an Industry
Participation Plan (IPP) for all private sector projects ‘where the Government makes
a significant contribution’. The purpose of the IPP is to show how project propo-
nents plan to include WA industries in their project-wide procurement strategy and
420 S. White

demonstrate how local industry will be given full, fair and reasonable opportunity to
supply goods and services to the project’s development and operational stages.
The Department of Jobs, Tourism, Science and Innovation began implementing
the Jobs Act in October 2018. However, in the non-metropolitan regions, the Depart-
ment of Primary Industries and Regional Development implements the act through
a regional network of Local Content Advisers who provide advisory and referral
services to businesses in regional areas. Interviews conducted for this study with
Local Content Advisers found that their role is often divided between working with
public sector procurement managers and local firms who are interested in bidding
for government contracts. Interestingly, public procurement managers are often in
short supply in regional centres due to centralised procurement processes of many
government agencies that are managed by head offices in Perth. In some cases, Local
Content Advisers are also working with mining procurement offices and firms inter-
ested in participating in mining supplies. However, these interactions are mostly
driven by the initiative and networks of the Local Content Advisers.
This is not the first time the government has attempted to promote local content.
There have been previous initiatives, such as in 2002 when the State Government
announced the Buy Local Policy aimed at recognising the contribution of local
businesses to the State economy and confirming the government’s ‘commitment
to buying locally’. The policy promotes the decentralisation of purchasing functions
and responsibilities to regional areas in order to stimulate local competition and
provide increased opportunities for local businesses. This includes the use of two
types of regional price preferences: Regional Business Preferences, which provides
regional businesses, located within a prescribed distance from a regional purchase
or contract point of delivery, with a price preference that is applied to the total cost
of the bid; and Regional Content Preferences, which provides a price preference to
all WA businesses that purchase services or materials for use in regional contracts,
from regional businesses (Government of Western Australia 2002).
A Regional New Industries Fund of A$4.5 million for regional WA will provide
grants to support new and emerging businesses in the regions, the agriculture sector
will be encouraged to grow, and more support will be provided for tourism and
hospitality in the regions. In addition, the State Government has used Royalties
for Regions to fund Regional Economic Development (RED) Grants, which seek
to support community-driven projects designed to create jobs and boost economic
growth across regional Western Australia.

7 Conclusions and Lessons Learned

This case study of the Government of Western Australia’s attempts to promote local
content in the extractives sector in order to benefit the residents, firms and workers
of non-metropolitan regions highlighting the strengths and limitations of govern-
ment policy. Over the last fifty years, the State Government has sought to maximise
the benefits of mining activity through regionally focused policy instruments and
Local Content Policies for Regional Economic Development … 421

institutions. However, these have typically focused on social and community bene-
fits to regional life and have rarely addressed specific regional industry or economic
concerns. While WA’s regions are eager to attract investment, with substantial support
from the State Government, relatively little success has been achieved in stimulating
local industries and their supplier networks.
Formal State Agreements sought to ensure mining firms provided with govern-
ment financial and non-financial concessions were required to fill a range of local
obligations. Over time, these obligations included the need to maximise local content
and support secondary processing that would integrate mining into the iron and steel
industry. However, these efforts relied heavily on market forces and ultimately did
little to stimulate regional industry transformation.
The Royalties for Regions programme was a unique and innovative attempt to
channel mining royalties back into the regions. While this led to a number of benefit
projects, very few of these focused on strengthening local industries and increasing
local content. The more recent policy initiatives to promote local content and employ-
ment has largely focused on public procurement. While this is an important first step,
the challenge remains as to how to effectively engage and partner with large mining
projects.
Mining royalties have largely been used to fund regional development outcomes,
rather than stimulate economic diversity and employment growth. Royalties have
been an additional, and rather large, source of revenue that has arguably distorted
State Government efforts to promote regional development efforts and undermined
strategic planning. While the use of royalties to support economic and employment
growth in regional areas is to be commended, a more strategic and industry aligned
approach to the use of these funds would have greater success in diversifying regional
economies and improving labour market dynamics.

References

Department of Jobs Tourism Science and Innovation. (2019). What is a state agree-
ment. Retrieved from https://www.jtsi.wa.gov.au/what-we-do/manage-state-agreements/what-is-
a-state-agreement.
Department of Regional Development and Lands. (2011). Regional centres development plan
(supertowns) framework. Retrieved from Perth.
Department of Tourism and Department of Industrial Relations. (1992). Impediments to regional
industry adjustment. Canberra: Australian Government Publishing Service.
Ellem, B., & Tonts, M. (2018). The global commodities boom and the reshaping of regional
economies: The Australian experience. Australian Geographer, 49(3), 383–395.
Government of Western Australia. (2002). Buy local policy. Retrieved from Perth.
Government of Western Australia. (2010). Structuring regional development for the future; a review
of the functions and responsibilities of regional development commissions. Retrieved from Perth.
Government of Western Australia. (2016). regional development strategy 2016–2025; building
vibrant regions with strong economies. Retrieved from Perth.
422 S. White

Government of Western Australia. (2017). Regional development council. Retrieved from https://
www.drd.wa.gov.au/about/PORTFOLIO/Independent-Partners/Regional-Development-Cou
ncil/Pages/default.aspx.
Government of Western Australia. (2018a). Buiulding local industry policy. Retrieved from Perth.
Government of Western Australia. (2018b). Media statement: ‘McGowan government response
to the special inquiry implementation program’ [Press release]. Retrieved from https://www.
mediastatements.wa.gov.au/Pages/McGowan/2018/02/McGowan-Government-driving-major-
changes-across-government.aspx.
Government of Western Australia. (2018c). Western Australian industry participation strategy.
Retrieved from Perth.
Government of Western Australia. (2019). Western Australian Economic Profile March 2019.
Retrieved from Perth. https://www.jtsi.wa.gov.au/docs/default-source/default-document-library/
wa-economic-profile-0319.pdf?sfvrsn=e609731c_4.
Horsley, J. (2013). Conceptualising the state, governance and development in a semi-peripheral
resource economy: The evolution of state agreements in Western Australia. Australian Geogra-
pher, 44(3), 283–303. https://doi.org/10.1080/00049182.2013.817038
House of Representatives Standing Committee on Industry Innovation Science and Resources.
(2018). Keep it in the regions: Mining and resources industry support for businesses in regional
economies. Retrieved from Canberra.
House of Representatives Standing Committee on Industry Science and Technology. (1998). A sea
of indifference: Australian industry participation in the North West shelf project. Retrieved from
Canberra.
Hunter, T. (2014). Law and policy frameworks for local content in the development of petroleum
resources: Norwegian and Australian perspectives on cross-sectoral linkages and economic
diversification. Mineral Economics, 27(2), 115–126. https://doi.org/10.1007/s13563-014-0051-y
Paül, V., & McKenzie, F. H. (2015). ‘About time the regions were recognised’: Interpreting region-
building in Western Australia. Australian Geographer, 46(3), 363–388.
Staden van, J.-W., & McKenzie, F. H. (2019). Comparing contemporary regional development in
Western Australia with international trends. Regional Studies. https://doi.org/10.1080/00343404.
2019.1584394.
State of Western Australia. (2018). Special inquiry into government programs and projects, final
report volume 1. Retrieved from Perth.
Western Australian Planning Commission. (2014). State planning strategy 2050 Retrieved from
Perth.
Wilson, E., Layman, B., & Christmas, D. (2004). An economic history of Western Australia since
colonial settlement; Research Paper. Retrieved from Perth.
Norwegian Local Content Policy

Jonathon W. Moses

Abstract The Norwegian petroleum industry is today strong and internationally

competitive. Of course, this was not always the case: the industry was supported,
protected, and nurtured at a time when states enjoyed much greater scope for
sovereign autonomy. During a relatively short period of time, from about 1970–
1986, the Norwegian authorities employed four main instruments to develop local
competence in the sector: their unique licensing system, a strong national oil company
(Statoil, now Equinor), a series of Technology Agreements and an autonomous regu-
latory regime that benefited domestic producers. None of these tools are used today, as
Norwegian authorities now embrace a remarkably “hands-off” approach to managing
the sector. This chapter describes this brief period of political activism, and the
industry it created.

Keywords Norway · Local content policy · National oil company · Sovereignty

Although Norway’s oil production only began in the early 1970s, oil and gas have
become and remain major contributors to the Norwegian economy. The country’s
Petroleum Directorate estimates that petroleum activities have contributed to more
than 14,000 billion in current NOK to Norway’s GDP—a figure that does not include
the related service and supply industries (NPD 2019a). In 2018, the petroleum sector’s
influence on the broader Norwegian economy is formidable, representing 17% of
Norwegian GDP, 19% of the country’s total investments, 43% of its exports, and
providing 21% of the Norwegian state’s revenues (ibid).
The influence of petroleum in Norway is both smaller and greater than these
macroeconomic figures imply. On the one hand, the petroleum industry is hardly a

This contribution draws heavily from my book, co-authored with Bjørn Letnes (Moses and Letnes
2017a); especially Chap. 8.

J. W. Moses (B)
Department of Sociology and Political Science, Norwegian University of Science and
Technology, Trondheim, Norway
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 423
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_24
424 J. W. Moses

600 18
16
500
14
400 12
Billion NOK

% of GDP
10
300
8
200 6
4
100
2
0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Axis Title
InternaƟonal Norway Total/GDP

Fig. 1 Norwegian petroleum supply industry. Sources Rystad Energy (2018: 8, 19); SSB (2019)

major employer—both in Norway or elsewhere. In 2017, only 6% of the Norwegian

labor stock (or a little over 170,000 people) were directly employed in the oil sector
(NPD 2018). Petroleum-related employment reached its peak in 2014 (at around 9%),
when it fell alongside the price of oil (Moses and Letnes 2017b). On the other hand,
the impact of oil extends much farther than the usual economic suspects. While most
people associate the Norwegian oil industry with the country’s National Oil Company
(NOC), Statoil (now Equinor), there is a much more varied collection of firms flying
just under the radar. In particular, there are other Norwegian oil companies (both
smaller and private1 ), a sizeable research and development sector associated with
offshore petroleum production, and a significant oil service and supply industry,
which is spread out across the entire country, and which exports throughout the
world.2
Figure 1 provides an overview of the influential supply industry associated with
Norwegian petroleum. Here, we can find a plethora of firms delivering everything
from seismic studies and subsea equipment (the latter is the largest sector) to firms
that provide transport and logistics. As we can see in Fig. 1, these companies are most
active within Norway, but a significant share is also active internationally. Altogether

1 SeeNPD ( 2019b) for examples.

2 In2017, the largest Norwegian supply companies, in terms of international presence, were (listed
alphabetically): ABB, Akastor, Aker Solution, BW Offshore, Cameron, DeepOcean, DNV GL,
DOF, TechnipFMC, Fred Olsen Energy, Kongsberg Gruppen, NOV, Odfjell Drilling, PGS, Rolls-
Royce Marine, Siem Offshore, Solstad Farstad, TGS, and Vard and Wärtsilä. This list includes 7 rig-
and ship-owners; 12 offshore and maritime equipment and service providers and one shipbuilding
company (Rystad Energy 2018: 6).
Norwegian Local Content Policy 425

(domestic and international), these activities captured roughly 10% of Norway’s GDP
in 2017. Since the 2014 fall in oil prices, it would appear that these industries are
having a hard time, both in Norway and internationally, as their numbers are falling
quickly.
To understand how this broad and mostly successful industry came to be, we have
to go back in time. Students of Local Content Policies (LCPs) will search in vain
for any explicit sign of local content legislation or regulation on Norway’s books
today. Rather, Norway’s local petroleum sector was nurtured and protected as an
infant industry in the 1970s, then encouraged to grow with a strong and supportive
policy mix. This sort of policy support could be done at a time when political inter-
vention in the economy was more widespread and acceptable, and when countries
had access to a broader array of tools to encourage local content. Now that these
firms are mature and internationally competitive, the Norwegian government has
mostly dropped its domestic support; it now works actively to open foreign markets.
In the doing, Norwegian policymakers try to limit other states’ access to the sort of
discriminatory policies from which their own industry once benefited.
In short, Norway developed its oil industry at a time when it was much more
common and possible to employ state policies to prioritize local economic activity.
A network of international legal obligations, and a changed ideological setting, have
made this element of the Norwegian model much more difficult for other states
to emulate today. This contribution begins by revisiting the historical context that
allowed for this development, and then describing the four main instruments that
Norway used to build up its vibrant local petroleum industry.

1 Historical Context

Every country hopes to turn its natural resources into engines of local economic
activity. In contrast to the more limited opportunities facing many countries today,
Norway had two things working to its advantage. The first was that it developed its
oil industry in an international context that facilitated greater democratic control over
national investment, production and regulatory regimes. The second was the unique
and demanding requirements for producing oil on the Norwegian Continental Shelf
(NCS): New tools and thinking was absolutely necessary, and Norway was well
positioned to provide both.
426 J. W. Moses

1.1 A Changed International Environment

It is difficult to exaggerate the difference that separates our world of economic

exchange from that of the late 1960s.3 While sundry GATT4 rounds of negotia-
tions were slowly extending the scope of free trade (across a rather narrow set of
sectors), national capital markets remained heavily regulated, global capital mobility
was minuscule (and mostly linked to direct investment and trade opportunities), and it
was not uncommon for states to nationalize industries facing significant challenges.
Given the lack of international capital mobility (at the time), states were able to
pursue more autonomous monetary, fiscal, regulatory and even procurement poli-
cies. Indeed, the international arrangements crafted at Bretton Woods in 1944 were
designed to provide states with the tools they needed to steer the national economies
in ways that could minimize economic and political turbulence, and to avoid another
crisis like that from the interwar period (Ruggie 1982). In other words, in the late
1960s and 1970s, economic management was seen to be part of the legitimate purview
of sovereign officials. The only international constraints on policy that mattered were
respect for contracts and private property rights—beyond these, states had a much
freer hand to do what they wished (and what their people wanted).
This scope for policy autonomy was exploited by the Norwegian authorities at
the time: they wielded extensive regional (rural) policies, an active monetary policy,
a substantial welfare state fed by a progressive tax system, and strong regulations to
protect workers and the environment. The Norwegian state was not averse to letting oil
companies make money on the Norwegian continental shelf—even sizeable amounts
of money, as it turns out—but it was determined that these rewards would not come
at the expense of the Norwegian people or environment.
This sort of freedom no longer exists for contemporary states hoping to create
national champions. International organizations (such as the World Trade Organiza-
tion), along with regional organizations (such as the European Union), lending bodies
(such as the World Bank and the International Monetary Fund) and a plethora of bilat-
eral agreements increasingly require signatory states to jettison sovereign control and
influence in the name of greater efficiency and a level playing field. Today’s states face
a myriad of restrictions on their ability to conduct autonomous procurement, pref-
erential, concessions and competition policies. Until recently, political momentum
was extending free trade and lending agreements to an ever-broader array of areas
and instruments, including the greater liberalization of investments (TRIMs) and
intellectual property (TRIPs), trade in services (GATS) and even procurement poli-
cies (GPA),5 while at the same time, including Investor State Dispute Settlement

3 SeeChap. 2 in Moses and Letnes (2017a).

4 General Agreement on Tariffs and Trade (GATT), subsequently the World Trade Organization
(WTO).
5 There are lots of acronyms in this paragraph. These four are directly associated with programs at

the World Trade Organization (WTO): TRIMs: Trade-Related Investment Measures; TRIPs: Trade-
Related Aspects of Intellectual Property Rights; GATS: General Agreement on Trade in Services;
and GPA: General Procurement Act.
Norwegian Local Content Policy 427

(ISDS) and/or so-called stabilization clauses in a growing number of international

agreements and contracts. All of these changes limit a state’s ability to influence the
level (and type) of domestic activity in the petroleum sector.

1.2 Special Needs

In the more-forgiving international context of the 1970s, Norwegian elected officials

enjoyed greater scope to influence domestic economic conditions. This freedom
could be leveraged because of the especially challenging conditions where Norway’s
petroleum resources were located. This is the second advantage Norway enjoyed,
relative to young oil states today. When international oil companies (IOCs) first
came to Norway, they quickly discovered that the conditions in the North Sea were
much more demanding than those that existed in the Gulf of Mexico (where much
of the existing equipment and expertise had been developed). The colder climate,
deeper depths, rougher weather and higher seas meant that existing, off-the-shelf,
technologies could not be employed offshore. The industry needed to replace much
of its equipment and expertise with better (more suitable) alternatives.
One does not usually associate Norwegian climate and weather with the concept
of advantage, but the challenges associated with Norwegian geography provided
the country with a number of unique opportunities. Given Norway’s challenging
conditions, it was necessary to develop new tools and approaches to access the
resource—and Norway’s own industries were well positioned to fill this need.
More to the point, Norway already enjoyed technical competence in tangential
fields that could be re-tooled to meet the needs of the oil industry. Norwegian ship-
builders could use their knowledge of local conditions to build stronger and more
suitable offshore platforms and supply ships. The engineering and materials exper-
tise used to develop Norway’s hydroelectric industry could be re-tooled to meet the
needs of the oil industry, and its institutions of higher education were revamped
accordingly. Given the demand for new solutions to Norway’s unique challenges, a
broad political consensus in support, and the prior existence of relevant pockets of
expertise and protection, all the Norwegian political authorities needed to do was
to provide the appropriate incentives to match this new demand with existing local
suppliers.
A good example of the new challenges, and the opportunities they offer, can be
seen in the first generation of supply boats sent over from the Gulf of Mexico to
service Norway’s offshore platforms. These boats were simply not built to withstand
the conditions in the North Sea, and their inability to work under storm conditions
meant that production was frequently delayed. It was clear, almost immediately, that
new ships would be needed, and that somebody would have to design and build them.
This void was filled by Norwegian contractors. After all, Norwegian shipbuilders
were already familiar with North Sea conditions and had been building suitable
ships for generations. Norwegian shipbuilders could use their local knowledge and
expertise to make necessary improvements to the supply ship fleet: building ships
428 J. W. Moses

with higher freeboard, more powerful engines, bow-thrusters, etc. The Norwegian
government could facilitate local content provision by helping companies transition,
and by changing contract requirements in a way that made them more relevant and
manageable for domestic producers (e.g. designing platforms to consist of smaller,
modular, pieces).
These contextual advantages are important to underscore, because young oil states
today do not find themselves in a similar situation. Today’s international context
does not allow states the same degree of policy autonomy: States are hemmed-in
by a number of international agreements and contracts are designed to facilitate
free exchange (and protect established interests). In the name of efficiency and a
level playing field, today’s international regime benefits large international players
at the expense of those who would help to procure smaller, local producers. In
addition, and more often than not, IOCs find that they can employ cheaper off-
the-shelf technologies in developing new fields, providing little room for political
officials to leverage local companies and competencies.

2 Tools of the Trade

Norwegian local content policy can be divided into three distinct periods. For most
of Norway’s oil history, the government has not played an active role in encouraging
local content. For example, in the early years of the industry (1963–1970), and in the
period after 1986, the government has largely remained on the sidelines, trying to
create a level playing field upon which Norwegian firms could compete. It is only in
the intervening period (1970–1986) that we find the Norwegian government actively
encouraging and facilitating the expansion of local content in the petroleum sector.
During this period, we see a strong set of signals being developed to guide Norwegian
policymaking toward greater local content provision, and the development of four
distinct channels of influence. This section considers each of these components.

2.1 Policy Foundations

Before any oil was actually discovered off the Norwegian coast, policymakers were
quite hesitant to involve local firms. The capital requirements, and the level of risk
exposure, in the petroleum sector were simply too high for Norway’s relatively small
and conservative firms (see, e.g. St. meld. nr. 11 (1968–9), pp.7). For that reason, the
first emphasis of Norwegian policymakers was to attract as much foreign expertise
and capital as possible and entice them to settle in Norway.6 This meant providing

6 Thefirst effort was actually to settle the boundaries of the Norwegian Continental Shelf with
neighboring Denmark and the UK. Once these territorial boundaries were established and agreed
upon, policymakers could begin to formulate a development strategy.
Norwegian Local Content Policy 429

better (more lucrative, and less interfering) terms than could be found on the other
side of the North Sea, where Britain was simultaneously trying to attract IOCs to
develop its own resource. Once viable and profitable fields were discovered, however,
Norwegian policymakers realized the need to develop a regulatory regime that better
reflected Norwegian values.
In the early 1970s, a number of government white papers established a basic
framework for Norwegian policymaking, and this framework provided a space for
(subsequent) democratic interventions. In particular, a 1971 white paper produced
what came to be known as Norway’s “10 Oil Commandments,” which received
unanimous support in parliament and became the de facto political standard, against
which subsequent oil policy was gauged (see St. meld. nr 28 (2010–2011), pp.8).
Among the 10 Commandments were many opportunities for potential local content
development (See Moses and Letnes 2017a: 74). For example, there was provision for
national supervision (1); the need to develop new business activities (3); a requirement
that the petroleum be landed in Norway (5); a recognition of the need for active
state involvement in the development of a Norwegian oil community (7); and the
desirability of a national oil company (8).
But when a formal requirement for local content was introduced by Royal Decree
in 1972, it was remarkably weak:
“Licenses shall use Norwegian goods and services in petroleum operations to the extent that
these are competitive in terms of quality, service, delivery time and price.”7

This Royal Decree did not require the hiring of Norwegian firms; it did not set
a floor for the minimum share of Norwegian activity on a license; it did not set a
price buffer for domestic producers; it did not elaborate on a precise definition of
Norwegian content or domestic firms. This Decree was very different from what we
think of today when we consider and compare local content policies.
The initial Norwegian intent was to create a level playing field. Policymakers
wanted to provide opportunities for Norwegian firms to compete with foreign firms.
It was not their (original) intent to provide a leg-up for domestic firms. At the same
time (1972), the government established a Goods and Services Office at the Ministry
of Industry to map out the degree to which Norwegian firms were being included (or
not) on the various tender lists. But the activities of this Office were, at first, aimed
at monitoring and informing international companies of the local possibilities that
existed.
It did not take long before local (Norwegian) industries became frustrated by the
lack of opportunities available to them. Indeed, two large Norwegian firms (Aker and
Kværner) protested the first allocation of licenses on the Norwegian Continental Shelf
(NCS) for the relative scarcity of Norwegian firms. While a handful of Norwegian
firms were included in some of the allocated licenses, their inclusion appeared as
a token or gesture. As large international firms ran away with the cake, Norwegian
firms were left with the crumbs.

7 Article 54 of a Royal Decree from 8 December 1972. See Moses and Letnes (2017a: 155).
430 J. W. Moses

For example, the first large production facility on the NCS, the Ekofisk field, was
operated by Phillips Petroleum, out of their main office in Bartlesville, Oklahoma.
Phillips employed large American engineering firms (with whom they were accus-
tomed); their purchasing office was located in London; and most of their equipment
and staff was originally imported from their operations in the Gulf of Mexico. This
was (is) how the oil industry worked: they were a relatively small band of interna-
tional companies, whose employees travelled around like nomads from one produc-
tion location to another, relying heavily on one another’s expertise. The Norwegian
share of productive activity in this first major field was miniscule, until a Norwegian
contractor won its bid for an enormous new subsea storage tank made of concrete.
Even after this massive contract, however, the Norwegian share of Ekofisk was limited
to about 17% (Skule and Grytli 1997: 38ff).
Then, by the middle of the decade, we can see a change in tide. The first real
efforts at encouraging local content began in the wake of the first oil crisis, in 1973,
and the devastating effect this crisis had on the international shipping industry. Many
companies were forced to cancel their oil-tanker orders, and the Norwegian fjords
were starting to fill up with vacant ships. Norway’s coast began to look like a parking
lot, and many shipbuilders were forced to shut down production. Norwegian policy-
makers realized that they needed to spark new activity in Norway’s shipbuilding
industry, in order to replace the shrinking shipbuilding orders that keep people
employed up and down the coast.
By the end of the 1970s, and with the government now in the hands of the Labor
Party, Norwegian policymakers began signaling a much more activist policy, along-
side the development of new institutions for policy and regulation. Informing them
all were four fundamental principles (see St. meld. nr. 53 (1979–80):
• Maximize Norway’s economic gain from the resource;
• Contribute to the country’s social and economic development;
• Develop and maintain strong environmental and safety standards;
• Develop the resource in a slow, careful and deliberate manner (Moses and Letnes
2017a: 75).
By the end of the 1970s, the aforementioned Goods and Services Office was not
only monitoring the inclusion of local content, but requiring international companies
to explain why they were not employing Norwegian suppliers (when these were
available). It was at this time that the Norwegian net share of deliveries to petroleum
operations in Norway began to take off: from 28% in 1975, to 42% in 1976, to 50%
in 1977 and to 62% in 1978 (St. meld. nr. 53 (1979–80), pp. 27). This remarkable
rise of Norwegian local content was driven by four specific instruments of policy:
Norway’s unique concession or licensing system; its NOC; an array of Technology
Agreements; and a national regulatory framework that was alien to the IOCs.
Norwegian Local Content Policy 431

2.2 Licensing System

The first instrument that Norwegian policymakers used to secure local content was
the very unique means by which licenses were allocated for offshore production.
Starting with its second allocation round, the Norwegian licensing system employed
a negotiated process by which political authorities decided the specific make-up of
the joint ventures that secured a license. Rather than letting the companies decide by
themselves who would join together in bidding for a Norwegian production license,
the authorities took responsibility for creating the joint ventures, and then used this
responsibility to piece together license groups that could develop local competencies
(for details, see Moses and Letnes 2017a: Chap. 5). In practice, this meant pairing up
different companies as partners in a license group, and then distributing the voting
shares of the license such that the state (and/or its NOC) controlled a majority within
each license group. This allowed the state to prioritize its national oil company
(Statoil), and require that other, more experienced, firms teach Statoil the tricks of
the trade. (Statoil was not the only Norwegian company that benefited from this
arrangement—only the most prominent.) Statoil subsequently used its position to
train a highly-skilled domestic workforce, develop broad operator experience, and
prioritize Norwegian suppliers. By using its licensing agreements to link Norwegian
firms with IOCs, the Norwegian authorities could encourage cooperation among
individual firms and on specific projects. In so doing, they facilitated a substantial
level of technological and knowledge transfer, to the benefit of Norwegian firms.

2.3 Statoil

The rise and dominance of Statoil, as the national oil company, can be seen as the
second main instrument that the authorities used to secure local content in Norway.
Having benefited substantially from the licensing allocation process described above,
Statoil grew faster than anyone could have imagined. Starting with the third allocation
round (in 1974), the authorities introduced a number of additional measures that
helped secure Statoil a privileged position in the Norwegian market. In particular,
we can focus on five different (albeit related) privileges provided to Statoil by the
Norwegian authorities: operatorship guarantees; licensing shares; carrying clauses;
sliding scales; greater voting rights.
• Operatorship guarantees: Statoil was provided with extraordinary opportunities
to attain operator status after a very steep learning curve. For example, in the
licensing agreement for the Statfjord field (1974), Statoil was promised an oppor-
tunity to take over (from Mobil) the operator status of the license after ten short
years, assuming that the company was up to the task. Mobil originally agreed
to the terms of the agreement, but probably did not expect that a relatively new
company, like Statoil, could be prepared to take over operator responsibility for
432 J. W. Moses

such a challenging field so quickly after it was formed. Mobil apparently miscal-
culated: it was tasked with teaching Statoil the job, and then forced to resign
its operator responsibility after the 10-year training period. Once it became the
license operator, Statoil was able to subcontract out many of the required tasks to
local companies.
• Licensing shares: Statoil’s second privilege came with Norway’s third allocation
round (1974–1978), when the authorities introduced a rule, by which Statoil was
to be given a minimum 50% share in all new licenses. This resulted in an enormous
expansion of Statoil activity (and the wealth associated with that activity). This
privilege was subsequently dropped in 1996.
• Carrying clauses: The third allocation round also introduced the use of a carrying
clause to minimize Statoil’s exposure to risk, maximize its financial gains, while
providing the company with the experience it needed to manage and develop the
resource. In particular, a carrying clause allows a working interest partner (here
Statoil) to pay a disproportionately lower share of its costs and expenses (than its
working interest share), during the (risky) exploration or development phase of a
contract. For example, even if Statoil enjoyed 50% of a license, it was not expected
to pay 50% of the exploration costs. As much exploration ends in failure, this is a
very costly and risky part of the oil adventure. Once the exploration results in an
economically viable well, however, the NOC (here Statoil) was allowed to “back
in” as a member of the license and pay its full share of costs (and receive its full
share of reward). This particular privilege was dropped from all new licenses in
1987, and from all production licenses in 1991.
• Sliding scale: Statoil also benefitted from Norway’s use of a sliding scale (this
device was also introduced in the third allocation round). As the size of the resource
rent increases with the size of a field’s productive capacity, the government intro-
duced a sliding scale to ensure these rents would remain with the Norwegian
people (to be more precise, with Statoil). In other words, Statoil’s share of total
production was allowed to “slide” along with the size of peak production in any
given field. Thus, in a smaller field, Statoil’s share might be limited to 50%, but
as the size of field increased to reveal a gigantic resource, Statoil’s share could
eventually increase to as high as 80% (Moses and Letnes 2017a: 158–9). This
privilege has also been dropped in recent years.
• Voting shares: Finally, Statoil benefited from the way in which the government
could (and did) allocate voting shares when it decided how to distribute its licenses.
From the third allocation round until 1985, the government ensured that 50% of
all license rights went to Statoil (this was enough to commit the license). In
controlling a majority of the voting rights, Statoil was then able to influence the
way that field was developed and to prioritize local companies and expertise in
the process.
By exploiting these five privileges, Statoil became a very effective tool for securing
and developing Norwegian competence in the sector. These benefits help to explain
why there are so many successful Norwegian supply companies, and why Statoil
Norwegian Local Content Policy 433

seems to be unique as an NOC in playing a role as an integrated contributor to the

nation’s industrial base and the national economy at large (Victor et al. 2012: 894).

2.4 Technology Agreements

While Statoil plays a central role in any explanation of the strength and breadth
of Norwegian local content, a fourth instrument played a vital role in developing
Norwegian technological competence: the government’s use of Technology Agree-
ments. Norway’s fourth allocation round (in 1978) introduced a requirement that 50%
of research and development (R&D) efforts related to field development needed to
occur in Norway. Hence, license applicants were expected to sign technology (or
R&D) agreements with Norwegian institutions if they had any hope of securing a
production license. These agreements varied in form, but they aimed to encourage
collaboration with Norwegian research institutions and to fund specific R&D projects
undertaken at Norwegian institutions.
These Technology Agreements were rooted in Norwegian law and then integrated
into the licensing/concession framework. The government argued that such agree-
ments were necessary to develop Norwegian competitiveness, but also to ensure that
the resource was developed in a way that was compatible with Norway’ strict safety
and environmental regulations (St. meld. nr. 53 1979–80), pp. 67. In general, there
existed two types of Technology Agreements in Norway: 50 percent agreements
required an operator to conduct at least 50% of the research necessary to develop
its field in Norway; while offer agreements mandated companies to cooperate with
Norwegian R&D facilities within defined areas, for explicit amounts, if they were to
obtain a license. In addition, Norway encouraged non-binding and voluntary good-
will agreements, where companies declared their intent to conduct as much of their
petroleum-related R&D in Norway.
As a result of these agreements, Norwegian research institutions and universities
enjoyed a substantial boost, propelling them to the technical frontiers of the industry.
The competitiveness of Norway’s internationally-active supply industry rests heavily
on the technological prowess that the agreements secured.

2.5 Regulations and Language Requirements

Finally, when Norwegian authorities were willing to impose Norwegian safety and
environmental regulations on the offshore industry, it created an implicit competitive
advantage for Norwegian firms that had (earlier) experience with the Norwegian
system (and the language it was written in). Foreign (mostly American) firms coming
to Norway had a very difficult time understanding the scope and style of Norwegian
regulations: it was a completely alien environment for them. Norwegian firms, and
their Norwegian employees, were better able to understand and exploit these rules
434 J. W. Moses

and regulations. Hence, IOCs were forced to hire Norwegian sub-contractors or

consultants to help them navigate these regulatory waters, or to hire Norwegian staff
that held this form of specialized competence.
Over time, these local regulations and standards have been replaced with interna-
tional standards and regulations (see Moses and Letnes 2017a: Chap. 9). This is true
in Norway, as it is for the industry world-wide. In embracing international standards
and regulations, we have (perhaps unwillingly) shifted the competitive advantage
from local firms to IOCs. In today’s global marketplace, it is more often the case that
the international oil company has greater competence and insight into the relevant
(international) standards and regulations, than do local firms or political authorities.
This brings us full circle, as we are reminded of how today’s international context
can limit the opportunities of states to follow the Norwegian experience.

3 Conclusion

The Norwegian petroleum industry is a product of significant political invention

in the way that petroleum production licenses were regulated and distributed in
Norway. This intervention was possible in the 1970s and early 1980s, when interna-
tional agreements, standards and practices facilitated more democratic control over
domestic economic conditions. In this window of opportunity, Norway encouraged
the development of an infant NOC and its supply industry, then allowed it to grow
behind a protective and supportive wall of licensing requirements.
The success of these policies created an NOC—Statoil—that became so powerful
that Norwegian politicians felt a need to cut it down in size. The Conservative Party
(Høyre) was particularly concerned about Statoil becoming a state within the state.
This perceived threat was dealt with in two blows. In 1985, the government separated
Statoil’s operator holdings from the Norwegian state’s financial interests in various
production licenses—in effect cutting Statoil in half. Then, in 2001, Statoil was
privatized (while keeping a majority of shares in the government’s hand).
That window for national policy autonomy has now been closed. Once these firms
were strong enough to stand on their own and began the search for new markets
abroad, the Norwegian political authorities quickly changed tack. Norway, its NOC
(now Equinor), and the Norwegian supply industry seek to compete with nascent
foreign firms abroad, in their own backyards. In doing so, the Norwegian industry
must push to minimize the sort of national support and protective measures that they
themselves benefited from at their inception. If other countries are allowed to do
what Norway did, then Norwegian firms would not be able to compete with them.
This story is akin to the one that Ha-Joon Chang (2005) tells about trade policy in
general: Norway and Norwegian firms are now “kicking away the ladder.”
In doing so, Norway is following the norms of today’s international economic
environment: countries find it difficult to encourage local champions and support
Norwegian Local Content Policy 435

infant industries. As a result, it is difficult for today’s new oil states to pursue the
same sort of nourishing and supportive policies that Norway did in the 1970s and
early 1980s.

References

Chang, H.-J. (2005). Kicking away the ladder: Development strategy in historical perspective.
London: Anthem Press.
Energy, R. (2018). Internasjonal omsetning fra norske oljeserviceselskaper. Rapport til Olje- og
energidepartementet. 13 November.
Moses, J., & Letnes, B. (2017a). Managing resource abundance and wealth: the norwegian
experience. New York: Oxford University Press.
Moses, J., & Letnes, B. (2017b). Breaking Brent: Norway’s response to the recent oil price shock.
Journal of World Energy Law and Business, 10, 103–116.
NPD (Norwegian Petroleum Directorate). (2019a). The Government’s Revenues. Norwegian
Petroleum. 13 February draft. https://www.norskpetroleum.no/en/economy/governments-rev
enues/. Accessed August 5, 2019.
NPD. (2019b). Companies. Norwegian Petroleum. 13 February draft. https://www.norskpetroleum.
no/en/facts/companies-production-licence/. Accessed August 5, 2019.
NPD. (2018). Employment in the Petroleum Industry. Norwegian Petroleum. 9 October draft. https://
www.norskpetroleum.no/en/economy/employment/. Accessed August 5, 2019.
Ruggie, J. G. (1982). International regimes, transactions and change: Embedded liberalism in the
postwar economic order. International Organization, 36(2), 379–415.
Skule, S., Grytli, T. (1997). Teknologisk utvikling og samfunnsendring. Eksempler fra oljehistorien
og bankhistorien. FAFO Report 217. Oslo: FAFO.
SSB (2019) Final expenditure and gross domestic product. Current Prices, NOK millions.
8 February version. https://www.ssb.no/en/nasjonalregnskap-og-konjunkturer/tables/nr-tables.
Accessed August 5, 2019.
St. meld. nr. 28 (2010–2011). En næring for framtida—om petroleumsvirksomheten. Oslo: Olje-
og energidepartementet.
St. meld. nr. 53 (1979–80). Om virksomheten på den norske kontinentalsokkelen. Oslo: Olje- og
energidepartementet.
St. meld. nr. 11 (1968–9). Undersøkelse om boring etter petroleumsforekomster på den norske
kontinentalsokkel i Nordsjøen. Oslo: Industridepartementet.
Victor, D. G., Hults, D. R., & Thurber, M. (2012). Oil and governance: State-Owned enterprise
and the world energy supply. Cambridge: Cambridge University Press.
CSR
Corporate Social Responsibility
in the Oil and Gas Industry in Nigeria:
The Case for a Legalised Framework

Eghosa O. Ekhator and Ibukun Iyiola-Omisore

Abstract This chapter focuses on the extant corporate social responsibility (CSR)
practices in the oil and gas industry in Nigeria. The oil and gas industry has been
beset by a lot of problems not limited to violence, kidnappings, eco-terrorism, and
maladministration amongst others. One of the strategies of curing or mitigating these
inherent problems in the oil and gas sector is the use of CSR initiatives by many oil
multinational corporations (MNCs) operating in Nigeria. Notwithstanding that the
majority of CSR initiatives in the oil and gas sector in Nigeria are voluntary, this
chapter avers that CSR initiatives should be made mandatory by the Nigerian govern-
ment. Furthermore, Civil Society Organisations (CSOs) should play an integral role
in the implementation of any legalised framework on CSR that will be developed in
the country. This chapter suggests that a CSR law should be developed specifically
for the oil and gas industry to mitigate the negative externalities arising from the
activities of oil MNCs in the Niger Delta region of the country.

Keywords Nigeria · CSR · Regulation · Oil industry · Niger delta

1 Introduction

CSR is the idea or theory that companies have a duty towards the society beyond its
primary obligations to its shareholders or owners and it is said to be voluntary (Amao
2014). CSR is an increasingly important part of international business. Globalisation
of world trade and the rise of powerful companies (MNCs) are mainly responsible
for the rise of CSR practices. However, in some instances, the activities of MNCs
have had negative consequences in many countries (especially developing countries,
including Nigeria). Examples include the Bodo oil spill in Nigeria (amongst many

E. O. Ekhator (B)
University of Derby, Derby, England
e-mail: [email protected]
I. Iyiola-Omisore
University of Leeds, Leeds, UK

© The Editor(s) (if applicable) and The Author(s), under exclusive license 439
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_25
440 E. O. Ekhator and I. Iyiola-Omisore

other oil spills in the country), Pfizer’s clinical trial of a polio drug that killed 11
children and rendered several others blind and deaf in Nigeria and the Union Carbide
disaster in India that killed over 5000 people and caused lifelong health damage to
up to 100,000 others (Owoeye 2015; Ekhator 2016a). Thus, Owoeye has argued that
‘the list of multinational companies’ activities that have inflicted costly damage on
populations in the developing world in the unconscionable exercise of the corporate
power is indeed endless’ (Owoeye 2015: 1; Maiangwa and Agbiboa 2013). Hence,
the development of CSR initiatives has encapsulated the various strategies to curb
corporate misbehaviour (Adeyeye 2010). These strategies have led to a large number
of diverse actors and stakeholders developing soft law initiatives and compulsory
rules to enhance corporate behaviour (Adeyeye 2010). Adeyeye (2010: 144) avers
that the modern manifestation of CSR is ‘generally associated with voluntary non-
binding rules which corporations adhere to in an attempt to be socially responsive.
CSR encompasses the voluntary codes, principles and initiatives companies adopt
in their general desire to confine corporate responsibility to self-regulation’. We will
discuss some of these CSR mechanisms in a latter part of this chapter.
Due to the impact of the activities of MNCs on the environment and society, MNCs
have a responsibility to mitigate the negative consequences of their actions or activi-
ties (Ekhator 2014c). CSR makes corporations responsive to a lot more stakeholders
other than just shareholders. These stakeholders could include suppliers, customers,
shareholders, environment, and communities amongst others (Ekhator 2014a). Thus,
corporations are expected to take responsibility for their actions (if any) on the afore-
mentioned stakeholders. CSR explores issues relating to human rights, labour rights
or standards, bribery and corruption amongst others (Amao 2011). In essence, CSR
extends beyond the traditional and legal requirements, expected of corporations with
regard to its impact on stakeholders. Thus, CSR has been described as a ‘business
approach for addressing the social and environmental impacts of company activities’
(Frynas 2009: 1).
This chapter focuses on the extent CSR policies in the oil and gas sector in
Nigeria. This work is divided into six parts including this introduction. The second
part of the chapter concentrates on the various definitions of CSR. The third part
discusses the extant CSR initiatives in the oil and gas industry in Nigeria. Also,
some of the international CSR initiatives will be highlighted in this section. The
fourth part of the chapter emphasises the case for a mandatory CSR framework in
the oil and gas sector in Nigeria. This is due to the failures and weaknesses of the
existing voluntary-styled CSR initiatives in the oil and gas sector. The fifth part
of the work discusses some suggestions to enhance any mandatory framework on
CSR that will be developed in the country. For example, we recommend that Civil
Society Organisations (CSOs) should play an integral role in the implementation
of a mandatory/statutory framework on CSR in Nigeria. CSOs are already playing
similar roles in different sectors in Nigeria. The sixth part concludes the chapter and
offers lessons learnt.
Corporate Social Responsibility in the Oil and Gas Industry… 441

2 Defining CSR

The major problems besetting CSR include the lack of an acceptable definition and the
use of various academic/theoretical frameworks to measure its spread and influence
(Ekhator 2014a). Notwithstanding the fact that there is no acceptable or universal
definition of CSR (Ekhator 2014a; Zhao 2017; Okoye 2009), it is a widely accepted
concept in the business world (Zhao 2017). However, there are many definitions
of CSR and views on the evolution, history, and concept of CSR.1 One of the first
attempts at defining CSR can be traced back to the definition by Bowen in the
1950s (Bowen 1953). His work emanated from the idea that many large businesses
were important centres of power and decision-making and the activities of these
corporations touched the lives of citizens at several points (Bowen 1953). Although
he raised numerous questions, the most important one was, ‘What responsibilities to
society may businessmen reasonably be expected to assume’ (Carroll 1999: 270).
In defining CSR, Bowen sets out the social responsibilities of businessmen: ‘it
refers to the obligations of businessmen to pursue those policies, to make those deci-
sions, or to follow those lines of action which are desirable in terms of objectives and
values of our society’ (Bowen, p 153, in Carroll 1999: 270). Similarly, Davis defines
CSR as ‘businessmen decisions and actions taken for reasons at least partially beyond
the firm’s direct economic or technical interest’ (Davis 1967 in Carroll 1999: 271).
He believes that making responsible business decisions lead to long-term economic
gain to the company, which is seen as a reward for its socially responsible outlook
(Davis 1967).
The 1970s to 1980s ushered in a new era in the understanding of CSR. According to
Carroll (1999), a major writer in this era is Johnson (1971) who offered various views
on CSR. Two of Jonhnson’s definitions are examined here. First, he presented what
he labeled “conventional wisdom”; according to him, ‘A socially responsible firm is
one whose managerial staff balances a multiplicity of interests. Instead of striving
only for larger profits for its stockholders, a responsible enterprise also takes into
account employees, suppliers, dealers, local communities, and the nation’ (Johnson
1971: 50; Carroll 1999: 273). A significant point here is the insinuation of possible
stakeholder approach to CSR, for he includes “multiplicity of interests” and actually
mentions the various specific interests (Johnson 1971). Johnson’s second view of
CSR is that ‘Social responsibility states that businesses carry out social programs to
add profits to their organisation’ (Johnson 1971, p 54; Carroll 1999, p 274). Here,
he links CSR with financial performance, this term is known as the business case.
Scholars espousing this viewpoint believe businesses should engage in CSR for
long-term profit maximisation (Jonker and Marberg 2007). On the other hand, it is
argued that the business case negatively affects the academic CSR discussion in that

1 This chapter will not discuss the various arguments on the definitions, history, and evolution of CSR.

For an overview of these views, see generally, Ekhator (2014a) and Okoye (2009). Notwithstanding
that CSR and its ideals are seen from Western (USA and Europe) influenced perspectives; many
scholars have argued that concepts similar to CSR existed in other cultures in different parts of the
word. See, generally, Husted (2015).
442 E. O. Ekhator and I. Iyiola-Omisore

it ‘largely ignores the integral responsibilities of companies that are associated with
impacts on stakeholders’ (Waddock 2004: 21). CSR in this framework is not about
doing what is right by society, but rather doing what is right for the company’s bottom
line (Jonker and Marberg 2007).
In 1991, Carroll developed a well-recognised and comprehensive framework on
CSR (Carroll 1979, 1991, 1999, 2015, 2016) and he gave a comprehensive four-part
definition of CSR. However, the four-part definition was first published by Carroll
in 1979 and in 1991, Carroll modified the four-part definition into a CSR pyramid
(Carroll 2016). He posits that ‘the social responsibility of business encompasses the
economic, legal, ethical, and discretionary expectations that society has of organisa-
tions at a given point in time (Carroll 1999, p 283, 1979 p 500). He explained further
that the economic responsibility of business involves its responsibility to make profits
for its investors. At the same time, the society expects businesses to obey the law just
as it makes profit, which represents the legal aspect (Carroll 1999). It is the duty of
businesses to operate within the framework of legal requirement (Carroll 1999). The
ethical responsibility of a company is ‘the responsibility to do what is right, just, and
fair’ (Carroll 1979: 500). This includes society’s expectations of business (behaviour
and practises) over and above (any) legal requirements (Carroll 1979). Companies
must strive to exceed legal duties and obligations in their relationships with members
of the society (Carroll 1979). Lastly, discretionary responsibilities signify the volun-
tary duties that companies assume but for which society does not provide as clear-cut
an expectation as it does with ethical responsibility (Carroll 1999). They are left at
the discretion of individual managers to perform. These voluntary activities include
philanthropic contributions to various sectors for social, educational, recreational or
cultural purposes (Amodu 2017). Mallin (2019) interprets this definition further as
the business first duty to make profit, then abide by legal requirements, to do what is
right and fair and to do what might be expected of businesses in terms of supporting
local community and making charitable contributions.
Proponents of neo-liberalism have criticised the CSR definitions discussed above.
They believe corporations do not have any responsibility towards other stakeholders;
their only responsibility is to maximise profits to shareholders (Mallin 2019). A well-
known author associated with this view is Milton Friedman. In his book, Capitalism
and Freedom (1962: 133), which was based on a series of lectures he gave in 1956,
he said:
the view has been gaining widespread acceptance that corporate officials and labour leaders
have a ‘social responsibility’ that goes beyond serving the interest of their stockholders or
their members. This view shows a fundamental misconception of the character and nature
of a free economy. In such an economy, there is one and only one social responsibility of
business- to use its resources and engage in activities designed to increase its profits so long
as it stays within the rules of the game, which is to say, engages in open and free competition,
without deception or fraud.

Friedman (1962) does not believe social responsibility should interfere with the
workings of a free market economy, especially in the USA at that time. In recent times,
focus has shifted from shareholder theory to more global issues, which include envi-
ronment, human, and labour rights. Stone criticised Friedman’s viewpoint, stating
Corporate Social Responsibility in the Oil and Gas Industry… 443

that businesses have broader responsibilities that extend beyond owners and share-
holders to include employees, customers, suppliers, and host communities (Stone
2012, p 83). He believes that businesses should be considered as increasingly respon-
sible entities, because they play important roles in society, as distributors, taxpayers,
investors, and service providers amongst others (Stone 2012). Mitchell (2001, p 74)
similarly states ‘that the corporate goal of stockholder wealth maximisation not only
destroys the corporation but also destroys our social fabric’.
Proponents of stakeholder theory posit that shareholder theory is less econom-
ically profitable than the latter paradigm (Mitchell 2001). As the environment in
which companies function is far more complex than the simplified reality assumed
by the shareholder theory, a managerial focus wholly on duties to shareholders diverts
attention and energy away from other groups like employees and customers amongst
others (Mitchell 2001). The involvement of these groups within the company in
the creation of value and satisfaction with their treatment by the firm is important to
the corporations’ success or failure (Mitchell 2001).
It is important to note that CSR is often used interchangeably with business ethics
and sustainability (Carroll 2015). It demonstrates numerous ways in which compa-
nies may promote responsible behaviour. However, some argue that they are different.
A close examination of these concepts seems to refer to the same phenomenon
but with a slightly nuanced emphasis (Carroll 2015). The next part of the chapter
discusses CSR initiatives in the oil and gas industry in Nigeria.

3 CSR in the Oil and Gas Sector in Nigeria

The Nigerian economy is heavily reliant on the revenues accruing from the oil and
gas sector (Ekhator 2014a). The Niger Delta region where oil MNCs maintain a
significant presence has become a theatre of incessant violent conflicts or crisis
(Ekhator 2014a). Some of the negative consequences of the MNCs in the oil sector
in Nigeria include gas flaring, oil spills, environmental pollution, negative social
impacts, conflict and violence. Thus, due to these negative impacts arising from the
activities of oil MNCs, many oil companies in the country have developed CSR
initiatives in an effort to mitigate these negative consequences.
MNCs operating in the oil and gas sector in Nigeria have engaged in a series of
initiatives to enhance community development in the Niger Delta (Egbon et al. 2018).
This is anchored on the premise that ‘… if oil MNCs can contribute to community
development via CSR, it will help to address local grievances, improve community
development and promote positive corporate-community relations’ (Egbon et al.
2018: 54). Many oil MNCs (and other companies) are involved in a plethora of CSR
initiatives in the Niger Delta and other parts of Nigeria. CSR initiatives in Nigeria
may include the building of schools, hospitals, markets, and provision of pipe borne
water amongst other initiatives (Amaeshi et al 2006). Nevertheless, ‘the extent to
which the CSR initiatives have contributed to community development in the region
remain contested’ (Idemudia and Osayande 2016: 2).
444 E. O. Ekhator and I. Iyiola-Omisore

Some scholars including Edoho (2008), Frynas (2009), Akpan (2006), Tuodolo
(2007, 2009), and others have contended that the CSR process in Nigeria is not
far reaching or deeply entrenched (Ekhator 2014a). Thus, it has been contended
that some of these CSR initiatives are not carried out on a coherent basis and not
always sustained (Amaeshi et al., 2006). Arguably, despite the adoption of various
CSR mechanisms by oil companies in Nigeria, the oil-producing communities ‘have
received a proportionately low amount of benefit compared to the high social and
environmental costs of extractive activities’ (Lisk et al. 2013: 20). Notwithstanding
the minimal contributions of CSR to oil-producing communities in the Niger Delta,
many communities still suffer from various ills including gas flaring, oil spillage,
and violence.
On the other hand, Idemudia and Ite (2006), (Ite 2007) and Eweje (2006) support
CSR initiatives, arguing that CSR is making tremendous progress in the area of local
community initiatives in Nigeria. To further elucidate these assertions, Eweje (2006)
illustrates that it is becoming increasingly apparent to oil companies that pollu-
tion prevention pays whilst pollution does not and under pressure from stakeholder
groups, oil companies now routinely incorporate environmental impact assessments
into their corporate strategy. Furthermore, Lompo and Trani (2013) averred that CSR
initiatives of oil MNCs have enhanced access to basic capabilities like shelter, water,
and electricity but have also weakened human development (Idemudia and Osayande
2016: 2). Also, Renouard and Lado (2012) argued that CSR has impacted positively
on some of the people and communities close to oil production sites but inequalities
still remained entrenched in such communities (Idemudia and Osayande 2016: 2).
Generally, CSR is voluntary in the oil sector in Nigeria. Many MNCs now utilise
the Memorandum of Understanding (MOUs) as a means of realising CSR in the
Niger Delta (Egbon et al. 2018). Thus, companies engage in the CSR initiatives
to obtain “social licence” to operate in that community or region (Ekhator 2016a;
Odumosu-Ayanu 2012; Egbon et al. 2018). MOUs are also referred to as examples of
Community Development Agreements (CDAs) (Odumosu-Ayanu 2012). Companies
such as Chevron and Shell have variants of the MOUs called Global Memorandum
of Understanding (GMOU) (Odumosu-Ayanu 2012; Ekhator and Anyiwe 2016).
Hence, CDAs are akin to MOUs and GMOUs that are prevalent in the oil and gas
sector in Nigeria (Ekhator and Anyiwe 2016).
‘The MOU is a bilateral or multilateral agreement between two or more parties. It
expresses a convergence of will between the parties, indicating an intended common
line of action. In this case, it is an agreement between the MNC and the community
on how to implement a set of CSR programs within a given time frame’ (Osemeke
et al. 2016: 370). However, it should be emphasised that MOUs and GMOUs models
(operating in the oil and gas sector) entered into between MNCs and communities
are not legally binding contracts (Ekhator 2016a: 26). Notwithstanding the fact that
MOUs and GMOUs are not sacrosanct, Niger Delta communities consider them
to be binding and oil MNCs are expected to enforce them (Ekhator 2016a). Thus,
many Niger Delta communities and NGOs aver that MOUs should be considered as
contracts, for example, as an intention to create binding commitments on the part
of oil MNCs towards the inhabitants of oil-producing communities (Ekhator 2016a:
Corporate Social Responsibility in the Oil and Gas Industry… 445

26). Thus, this non-enforceability of MOUs and GMOUs have led to many conflicts
and crisis in some communities in the Niger Delta.

3.1 International Initiatives on CSR

In recent years, there have been an explosion of initiatives or mechanisms relating

to CSR at the international and local levels. Many MNCs have signed up to these
international mechanisms. Examples of these initiatives include OECD Guidelines
for Multinational Enterprises, and Global Compact amongst others (Ekhator 2016a).
This chapter will briefly discuss the Global Compact and the OECD Guidelines.
According to the former UN Secretary-General Ban Ki-moon ‘[t]he Global
Compact asks companies to embrace universal principles and to partner with the
United Nations. It has grown to become a critical platform for the UN to engage effec-
tively with enlightened global businesses’(Ekhator 2016a: 7). The Global Compact
is a collaborative model for businesses that are willing to commit their operations to
align with the ten principles, especially in areas of labour, the environment, human
rights, and anti-corruption (Global Compact website, Ekhator 2016a: 7). Presently,
the Global Compact has more than 11,000 participating companies from more than
160 countries and is the largest CSR initiative in the world (Ekhator 2016a). There
have been divergent views on the impacts of the Global Compact. For example,
‘one school praises the Global Compact for its voluntary approach in the absence
of supranational regulatory structures in providing principles for business commit-
ment and public scrutiny, differentiation and social approval competition’ (Osuji and
Obibuaku 2016: 330). However, the Global Compact has been criticised and has
been ineffective for lacking compliance, monitoring, and enforcement provisions,
particularly, in relation to the quality and veracity of information that its signato-
ries provide (Osuji and Obibuaku 2016). Hence, notwithstanding the large number
of corporate participants in the Global Compact initiative, many companies remain
indifferent to it (Mujih 2012).
The next international initiative that will be in focus is the OECD Guidelines on
Multinational Enterprises (the Guidelines). They are recommendations on respon-
sible business conduct for MNCs operating in or from the adhering countries (Ekhator
2016a). They are voluntary and non-binding, and paragraph 7 of their General Princi-
ples encourages self-regulation by MNCs (Mujih 2012; Ekhator 2016a). The Guide-
lines are very detailed and intended to be localised into national laws or corporate
governance by OECD members (Ekhator 2016a). However, some commentators aver
that the Guidelines’ non-binding model is not a disincentive (Ekhator 2016a). For
example, they are used to promote CSR initiatives in different parts of the world and
‘represent a consensus on what constitutes good corporate behaviour in an increasing
global economy’ (Muchlinski 2001, p 24). Furthermore, the guidelines could evolve
into hard and binding international laws if states adhere and continually apply them in
their business relationships with MNCs (Mujih 2012). However, it can be contended
446 E. O. Ekhator and I. Iyiola-Omisore

that the voluntary nature of the international CSR mechanisms is a massive weak-
ness and thus MNCs are able to evade liability in many instances of environmental
injustices (Gilberthorpe and Banks 2012, p 185). The next part of the chapter focuses
on CSR and the laws applying to it in Nigeria.

3.2 CSR and the Law in Nigeria

Many of the existing CSR initiatives in Nigeria are self-regulatory and voluntary in
nature. Pillay (2014: 10) avers that ‘…contemporary ideas of CSR tend to be firmly
premised on a shareholder-oriented model of the corporation as a private enterprise
whose directors owe enforceable duties only to shareholders’ and Nigeria is no
different. This part of the chapter will focus on the Companies and Allied Matters
Act 1990 (Cap C20 Laws of the Federation of Nigeria, 2004).
The Companies and Allied Matters Act 1990 (CAMA) is ‘the primary corpo-
rate law legislation in Nigeria’ (Amodu 2017: 115). The CAMA is premised on a
shareholder-centric model and it ‘adopt[s] the traditional primacy model of corpo-
rate governance, whereby corporate responsibility towards stakeholder groups such
as employees, creditors, local communities, and suppliers, is very limited’ (Amodu
2017: 116). Thus, CSR initiatives are organised on a voluntary basis by the companies
operating in the country.
It is important to explore the provisions of CAMA, in order to decide whether any
improvement has been made in promoting responsibility of MNCs and CSR initia-
tives in the country. Section 334 of the CAMA enjoins company directors to prepare
a financial statement for each financial year (Amao 2008). The information expected
to be disclosed under section 334 (2) CAMA includes the following: (a) statement
of the accounting policies, (b) the balance sheet as at the last day of the financial
year, (c) a profit and loss account or, in the case of a company not trading for profit,
an income and expenditure account for the financial year, (d) notes on the account,
(e) the auditors’ report, (f) the directors’ report, (g) a statement of the source and
application of funds, (h) a value-added statement for the financial year (i) a five-year
financial summary, and (j) in the case of a holding company, the group financial
statement.
According to Amao (2008: 101), a remarkable obligation is the provision in
(h) that the statement should include ‘value-added statement for the financial year’
[section 334(2) CAMA]. This provision is thus linked to financial reporting (Amao
2008). This requirement only focuses on reporting of the financial statement of the
company, without reference to non-financial or sustainable reporting. However, the
overarching effects of section 279(4) and (9) of CAMA ‘shows very limited support
for CSR in Nigeria, especially as regards employee rights’ (Amodu 2017: 116).
Section 279 provides that company directors owe duties to only the company (i.e.
shareholders), and thus have no legal responsibility or capacity to embark on any
other duty apart from their duty to the company and its shareholders. Section 279
(4) of CAMA seems to enjoin directors to consider and have ‘regard for and balance
Corporate Social Responsibility in the Oil and Gas Industry… 447

employee-related issues and interests in making corporate decisions’ (Amodu 2017:

116). However, Sect. 279(9) makes it clear that—whilst employees may believe that
their interests are being taken into account in promoting the success of the company,
they are not entitled to sue or make any claim whenever the company in making
decisions does not consider their interests (Amodu 2017). Since only the company
(that is the shareholders as a whole) can sue if this right is violated or appears to have
been violated (Amodu 2017), one begins to question the effectiveness of Sect. 279(4)
in the first place.
In other words, this provision has no teeth, as employees are unable to sue or
make any claim whenever the company does not consider their interests. From the
discussion above, it is clear that the CAMA does not really recognise the stake-
holder engagement model, as it is based on the shareholder primacy model of
corporate governance (Amodu 2017). There is little or no protection afforded to
other constituents such as the employees, environment, suppliers, contractors, local
community, and other stakeholders (Amodu 2017). There is a risk that directors
are likely to focus on profit maximisation for shareholders, without considering the
interests of other members affected by the company’s decisions.
The debates so far have shown that Nigerian company law has failed to rise to
the potential of domestic company law as an instrument for controlling MNCs and
promoting CSR in its provisions (Amao 2011). Whilst in one respect, constraining the
ability to hold the parent companies of MNCs liable for the acts of its subsidiary under
Sect. 54 of the CAMA, Nigerian company law also fails to meet modern realities in
companies’ operations (Amao 2011). A significant development that highlights the
unresponsiveness of Nigerian corporate law system to these challenges are the gaps
in the code of corporate governance initiated in the country (Kajola 2008: 25). Whilst
other African countries that introduced the codes of corporate governance in the last
few years have followed a comprehensive model that includes other stakeholder
issues in varying degrees, and the Nigerian code of corporate governance (2003
version) is a significant exception maintaining the traditional shareholder-centric
model of corporate governance (Rossouw 2005: 97; Amao 2008: 102). The recent
Corporate Governance Codes are no exceptions and they are premised on a self-
regulatory model. For example, the Nigerian Code of Corporate Governance (NCGG)
2018 seeks to localise the ‘highest standards of corporate governance best practices
in Nigerian companies, especially those companies without industry sector codes
or regulations’ (Okike 2019: 25). This code is a principle-based rather than a rule-
based model, hence, it is self-regulatory in practice (Okike 2019). Furthermore,
the recently passed Companies and Allied Matters Amendment Bill 2018 does not
provide for a legalised CSR model in its provisions (Onyekwere 2019). However,
this bill was assented into law by the President of Nigeria in August 2020. The next
part of the chapter focuses on a case for legalised/mandatory CSR framework in the
oil and gas industry in Nigeria.
448 E. O. Ekhator and I. Iyiola-Omisore

4 The Case for Mandatory CSR in Nigeria

The interrogation of government responsibility for ensuring CSR amongst MNCs

appears contradictory, in view of the common perspective that CSR is a voluntary
led process driven by companies (Okoye 2012; McWilliams and Siegel 2001). This
general perception is increasingly contested due to the protests of several stakeholders
within the CSR agenda (Okoye 2012). Arguably, there is a need to adequately define
or outline an effective role for CSR as a model for embracing business and society
relationships. Some recent developments have led to the re-evaluation of the common
perspective; including the position of legal and regulatory scholars who support CSR
accountability and legitimacy (Okoye 2012). This emphasises a more visible role for
law and regulation (Okoye 2012; McBarnet et al. 2007). McBarnet et al (2007: 55)
point out that ‘social and legal means need not be seen as alternatives for furthering
corporate responsibility, but as complementary controls in a new style of corporate
accountability that involves both legal and ethical standards’.
As a result, governments of developing countries (including Nigeria) have sought
to control MNCs, to promote development, and curb irresponsible behaviour. This
section of the chapter seeks to address the question of how CSR is promoted in Nigeria
through the enactment of legislation (and bills) by the government and an analysis of
the effectiveness of these laws. This chapter argues for a mandatory variant of CSR
in the oil and gas sector in Nigeria.
This chapter aligns with the following position taken by Ihugba (2012: 69):
‘Compulsory regulation refers to legislative enactments or judicial judgements
prescribing roles and sanctions. The advocacy for compulsory regulation is seen
as a sure way to promote transparency and accountability and also regain the trust of
the public’. Arguably, when companies are left unchecked or unregulated, they can
become irresponsible and oppressive (Ihugba 2012: 69). This is evident in the Niger
Delta, wherein the oil MNCs are significantly located in Nigeria.
There have been many justifications for a mandatory/legalised model of CSR to be
developed in the oil and gas sector in Nigeria. Some of the reasons include the fact that
self-regulatory initiatives by MNCs in the oil and gas sector have been ineffectual
in the country (Ekhator 2016a). Hence, CSR initiatives are largely unsuccessful in
the Niger Delta region (Ekhator 2014a). MNCs are known for flagrantly disobeying
laws and damaging the Nigerian environment (Ekhator 2016b, 2014c). The plight of
the Ogoni people is apposite in this analysis. Shell started operations in Ogoniland
in the Niger Delta in 1958 but withdrew in 1993 due to socio-political protests
and to protect the lives of its employees (Ekhator and Anyiwe 2016). Twenty years
after the cessation of oil exploration activities, the Ogoni people are still living with
health problems arising from the activities of Shell in that community (UNEP Report
2011). In April 2013, Shell went back to the abandoned site to ascertain the state of
its properties and determine how best to decommission them (Ventures Publication
2013; Ekhator and Anyiwe 2016). On arrival, it was learnt that the death toll is still on
the increase in Ogoniland after so many years (Ventures Publications 2013). To date,
Corporate Social Responsibility in the Oil and Gas Industry… 449

Shell is still unable to operate in Ogoniland and the environment remains heavily
polluted and contaminated.
For the above reasons, this chapter advocates for a legalised or statutory CSR
model in the oil and gas sector in Nigeria. Furthermore, the Nigerian government
has endorsed mandatory CSR in some of its laws and bills. The next part of this work
focuses on laws promoting CSR in Nigeria.

4.1 Laws Promoting CSR in Nigeria

There are some laws promoting CSR in the country. This section highlights some of
these laws. The use of formal or regulatory CSR in the mining sector in Nigeria has
been a successful experiment (Ekhator and Anyiwe 2016; Akinsulore 2016). A major
strength of the Nigerian Minerals and Mining Act of 2007 is that it incorporates the
use of Community Development Agreements (CDAs) by mining companies in the
country (Odumosu-Ayanu 2012).
Section 116(1) of the Minerals and Mining Act of 2007 states thus:
Subject to the provisions of this section, the Holder of a Mining Lease, Small Scale Mining
Lease or Quarry Lease shall prior to the commencement of any development activity within
the lease area, conclude with the host community where the operations are to be conducted
an agreement referred to as a Community Development Agreement or other such agreement
that will ensure the transfer of social and economic benefits to the community.

CDAs are akin to Memorandum of Understanding (MOU) and General Memo-

randum of Understanding (GMOU) that are prevalent in the oil and gas sector
in Nigeria (Ekhator and Anyiwe 2016). The Minerals and Mining Act 2007 also
promotes public participation and consultation of host communities in CDAs. For
example, Sect. 117 of the Act states that CDAs shall: ‘… specify appropriate consul-
tative and monitoring frameworks between the Mineral title holder and the host
community, and the means by which the community may participate in the plan-
ning, implementation, management, and monitoring of activities carried out under
the agreement’. This provision is novel and absent in the previous mutations of the
Mining Act and there is no similar provision in the Petroleum Act (which governs the
oil and gas industry) (Akinsulore 2016: 98). Thus, the CDAs paradigm in the Mining
Act is premised on a CSR approach with emphasis on service provision (Odumosu-
Ayanu 2012). Furthermore, the Mining Act gives the right to communities to sue
companies that refuse to negotiate MOUs with relevant communities (Akinsulore
2016: 112). This is unlike the position in the oil and gas industry wherein MOUs and
GMOUs are not binding contractual agreements (Ekhator 2016a).
The Nigerian Extractive Transparency Initiative (NEITI) Act 2007 is another law
that promotes CSR in its provisions (Ihugba 2012). This law provides for the inclusion
of members of CSOs in the National Stakeholders Working Group (NSWG)—the
governing body of the NEITI to promote transparency and accountability in revenue
payments in the oil and gas industry (Ekhator 2014b). Furthermore, the NEITI has
450 E. O. Ekhator and I. Iyiola-Omisore

always engaged CSOs in its activities as a means of improving transparency and

opening the process to the Nigerian public (Ekhator 2014b). For example, ‘the NEITI
has organised a series of activities and engaged in consultation with CSOs in different
parts of the country to determine the roles of CSOs in the NEITI process’ (Ekhator
2014b: 49). Furthermore, some recent bills in the country have promoted mandatory
CSR in their provisions. The next part of the chapter will highlight some of these
recent bills.

4.2 Recent Bills Mandating CSR in Nigeria

Some recent bills in the country have promoted mandatory/legalised CSR in their
provisions. In order to provide comprehensive and adequate relief to host commu-
nities suffering from the negative impacts of corporate irresponsibility, especially
from the MNCs, a corporate social responsibility bill was introduced to the Nige-
rian National Assembly in 2008 (Amao 2011; Okoye 2012). This Bill was titled ‘A
Bill for an Act to provide for the Establishment of the Corporate Social Responsi-
bility Commission 2008 —popularly referred to as the ‘CSR Bill’ (Nwagwu 2016).
Although the drafting of the bill is apparently poor and some parts unclear (Amao
2011), it is important to examine the bill and the possible implications of its require-
ments for MNCs and companies. The Bill sought to establish the Corporate Social
Responsibility Commission, a regulatory body that would be responsible for the
control and regulation of the activities of corporate organisations in Nigeria (Nwagwu
2016). It was proposed that this body will be responsible for the formulation, imple-
mentation, supervision, and provision of policies and reliefs to host communities for
the physical, material, environmental, or other forms of degradation suffered due to
the activities of entities operating in affected communities (Oserogho and Associates
2014).
Section 1 of the CSR Bill proposed the establishment of Corporate Responsi-
bility Commission and under Sect. 5, the Commission is to create standards on CSR
initiatives based on international best practices consistent with international stan-
dards such as the OECD guidelines and ILO standards. This takes standard setting
away from the voluntary initiatives of companies (Okoye 2012). Osuji (2015: 277)
criticised the CSR Bill and he states that the Bill is ‘an amalgam of incompatibility
seeking in general terms to compel CSR without regard to its instrumental or ethical
basis’. Furthermore, Okoye (2012) points out that the provisions of this bill reveal
a move towards a stronger regulatory approach for CSR. The CSR Bill mandates
annual social and environment impact reporting of direct activities on companies
on communities, but puts the responsibility for ensuring this on the Commission
(Sect. 5(1)(h)). It is observed that this section does not change the reporting system
under CAMA, which provides for only financial reporting (Amao 2011). According
to Okoye (2012), the negative reaction (towards the Bill) was provoked by the finan-
cial sections contained in Sect. 5(1) (i) of the Bill which mandates corporate philan-
thropy. The main ground of the widespread opposition to the Bill was the legal
Corporate Social Responsibility in the Oil and Gas Industry… 451

compulsion by companies to pay a percentage of its profits and companies viewed

this as additional tax burden (Okoye 2012; Anyiwe and Ekhator 2016).
The Bill also attempts to increase the group of stakeholders to which corporations
are accountable (Amao 2011). Pursuant to Sect. 5 (1) (k), the CSR Commission will
ensure companies are accountable not only to employees and their trade unions, but
to investors, consumers, host communities, and the wider environment (Amao 2011;
Okoye 2012; Amodu 2017). This indicates the move towards effective stakeholder
engagement and signifies a move from the traditional form of shareholder primacy
as contained in Sects. 41 and 279 of the principal statute on companies in Nigeria
under the CAMA (Amao 2011). Thus, the CSR Bill represents a ‘perceived shift
from voluntary engagement to mandatory compulsion’ (Okoye 2012: 371).
Of important note is the shortcomings of the Bill. It is argued that the poor drafting
and ambiguity detract from the noble intents of the bill (Amao 2011). Consistent with
the Nigerian National Assembly’s preceding legislative enactments; the CSR Bill is
a reactive legislation and not proactive law. A proactive law acts in anticipation of
future problems, needs, or changes (Haapio 2010). Whilst the reactive law waits for
events to occur before the governments takes action. The Bill also faced strong
criticism for its archaic conception of CSR as corporate gift or charity (Amao 2011;
Amodu 2017). Another flaw in the proposed CSR bill is the establishment of a
CSR commission, an external CSR regulator with little knowledge of or access to
the internal operations of firms, which may have attendant consequences by way
of regulatory inefficiencies (Amodu 2017). Furthermore, the MNCs argue that they
have no moral or legal duty to communities or stakeholders beyond the payment of
taxes and royalties to government (Ekhator and Anyiwe 2016). Finally, due to the
concerns of the multinational companies in Nigeria, the CSR Bill is still in abeyance.
Recently (in 2018), a bill titled: ‘An Act to Amend the Financial Reporting
Council of Nigeria Act 2011 No. 6 to Prescribe Social Corporate Responsibility
Requirement by Companies and for Related Matters’ passed its second reading in the
House of Representatives in Nigeria. According to the sponsor of the bill, Abubakar
Amuda-Kannike ‘the bill would promote good governance through the allocation of
resources to execute corporate social responsibility of companies’ (Olatunji 2018).
This bill seeks to ‘establish mandatory percentages of corporate social requirements
by companies who have earned an average of N50,000.00 and above in profits for
three succeeding years’ (Olatunji 2018). Arguably, the criticisms of the erstwhile
CSR bill can be levelled against this current mutation. Many MNCs and businesses
will not accept a national or countrywide mandatory CSR model in Nigeria.
The Petroleum Industry Bill (PIB) is one of the most important bills in Nigeria’s
history (Ako and Ekhator 2016). The PIB has remained stuck in the National
Assembly since 2009. However, in December 2015, the PIB was jettisoned and
split into a number of distinct bills (Ako and Ekhator 2016). Section 116 of the PIB
provides for ‘the establishment of a fund to be known as the Petroleum Host Fund
(PHC Fund). PIB provides that each upstream petroleum company shall remit to
the PHC Fund on a monthly basis 10 per cent of its net profit to be utilised for the
development of the economic and social infrastructure within petroleum producing
communities’. Hence, the PIB promotes mandatory CSR in its provisions.
452 E. O. Ekhator and I. Iyiola-Omisore

The Petroleum Host and Impacted Communities Development Trust Bill

(PHICDB), which is one of the offshoots of the PIB, enjoins all oil companies to
establish the Petroleum Host Communities Development Trust (Community Trust) in
communities where they operate (Spaces for Change 2018). Thus, this bill promotes
CSR in its provisions. However, this provision has been criticised. For example,
this ‘new obligation not only imposes excessive administrative and financial burdens
on operators, but also duplicates the existing community development initiatives a
that number of oil companies have already implemented/still implementing under
their corporate social responsibility programmes, leading to duplication of efforts
and wastages’ (Spaces for Change 2018: 3).
Some have argued that the government wants to outsource its functions and respon-
sibilities to MNCs in the guise of CSR (Ekhator 2014a, b, c). This is evidenced by the
apparent neglect of the Niger Delta region by the government and the region is rife
with poverty and under-development (Ekhator 2013). Also, many social initiatives
or programmes developed by the federal government already exist in the country.
This is evident in the Niger Delta region, wherein many of the oil MNCs are located.
Furthermore, the Nigerian government has set up a plethora of social interventionist
agencies in the country dedicated to utilising the revenue from the operations or
activities of MNCs and the plight of the people living in the Niger Delta is still
precarious (Ekhator 2013). Many companies and scholars are against mandatory
CSR (in Nigeria) because it will lead to double taxation in their view (Onyek-
were 2015). For example, firms already pay different types of taxes in the country.
Examples of such taxes paid by companies includes Education Tax, Pay as You
Earn (PAYE), Companies Income Tax, and Nigerian Social Investment Trust Fund
amongst others (Umoru 2015: 257). Furthermore, some criminal statutes and poli-
cies that promote social services and welfare already exist in the country (Umoru
2015). These include Food and Drugs Act, Standard Organisation of Nigeria, and
Consumer Protection Council (recently christened as the Federal Competition and
Consumer Protection Commission) amongst others (Umoru 2015). Arguably, these
laws and policies have not positively affected the people. Notwithstanding the criti-
cisms of a mandatory/legalised CSR model in Nigeria, this chapter advocates for the
legalisation of CSR in the oil and gas sector.
The next part of the chapter suggests recommendations to enhance any legalised
CSR model that will be developed in the oil and gas sector in the country.

5 Recommendations

This chapter advocates for some suggestions or recommendations to enhance any

legislative model on CSR that will be developed in the oil and gas industry in Nigeria.
In defining the contributions companies should make as CSR in the country, the local
community and relevant stakeholders should be consulted before such actions are
taken (Ako et al. 2009). This should be given statutory flavour in any law that will
be enacted. Thus, any proposed CSR law should define who a stakeholder is. Hence,
Corporate Social Responsibility in the Oil and Gas Industry… 453

stakeholders (including host communities, CSOs, and other relevant stakeholders)

should be garnished with the requisite legal standing to sue MNCs if there are any
breaches in the proposed law. Furthermore, Akinsulore (2016: 97) claims that the
effect of the Mining Act 2007 is ‘to empower the community as an important stake-
holder, thereby validating the stakeholder thesis therein’. Also, any new law on CSR
in the oil and gas sector, should make CDAs, MOUs, and GMOUs binding and
enforceable in courts. This will improve access to environmental justice for commu-
nities and other relevant stakeholders affected by the impacts of the non-adherence
to the various CSR models in the Niger Delta.
Corporate/company law architecture in the country should be reformed to explic-
itly provide for a stakeholder variant of corporate governance in Nigeria (Amaeshi,
Adi, Ogbechie and Amao 2006: 86). Here, CAMA should be expressly amended
to incorporate a CSR provision or any proposed CSR law should amend CAMA in
this regard (Amao 2011; Amodu 2017: 126–127). Unfortunately, the recent revised
version of the CAMA has maintained the status quo and did not explicitly provide
for mandatory CSR in its provisions (generally see Halliday and Babalola 2019;
Oraegbunam and Ubanyionwu 2019). However, similar to the position in Nepal
(Pokhrel 2017), the Nigerian constitution should be amended to explicitly provide
for a mandatory CSR in the oil and gas sector in the country.
NGOs or CSOs should play a major role in any mandatory CSR process in Nigeria.
This is similar to the roles of civil society in the NEITI framework in Nigeria. Civil
society should play a role in the implementation of any new CSR law that will be
enacted in the country.
Arguably, the recent CSR bills in Nigeria has led to critical debates about the
potential of formalising community development initiatives, stakeholder engage-
ment, sustainability reporting, etc., and including CSR in government’s formal
strategy (Okoye 2012: 372). These debates are evolving in some developing coun-
tries including India, Nepal, Mauritius, and Indonesia (Zhao 2017). Indonesia passed
a reformed company law and investment law in 2007 to enshrine CSR in law (Zhao
2017). Similarly, Sect. 135 of India’s new Companies Act 2013 and its 2014 Compa-
nies Corporate Social Responsibility Policy Rules, 2014 (CRS Rules) provide that
companies should spend 2% of average net profit on CSR activities (Gatti et al. 2018).
Arguably, this is more realistic in terms of compliance by the companies. The passage
of the CSR Bill in Nigeria has been jettisoned due to its contentious provisions. The
response of companies to the CSR Bill has ranged from lukewarm to hostile (Amao
2011). On the mandatory nature of CSR in Nigeria, Okoye (2012: 374) suggests that
government should drive the development of CSR through legislation as it is their
primary responsibility to promote development. However, this should be done in a
facilitative manner, as the current attempt to make CSR mandatory through the CSR
Bill may be unsuccessful (Okoye 2012). This is partly because the bill lacks sophis-
tication in its use of law and partly because of the persistent opposition by companies
(Ekhator and Anyiwe 2016; Okoye 2012). In addition, Amodu (2017) submits that the
Nigerian government should take adequate steps towards the reform of the existing
laws relating to CSR in order to guarantee a more effective sustainability model and
CSR regime in the country.
454 E. O. Ekhator and I. Iyiola-Omisore

Furthermore, there is no binding treaty or framework regulating the activities of

MNCs in international law (Ekhator 2016a). However, a draft or proposed treaty
on business and human rights is in the offing and it is expected to be a binding
international treaty (Ekhator 2018). Unfortunately, this proposed treaty focuses on
human rights and not CSR. In the global sphere, the preferred approach is soft law,
which mainly comprises of the adoption of voluntary guidelines for companies and
businesses (Ekhator 2016a). Due to the ineffectual nature of CSR initiatives, some
scholars have advocated for the development of a binding treaty in the international
sphere (Ekhator 2018). The next part of the chapter is the conclusion.

6 Conclusion

CSR initiatives in the oil and gas sector in Nigeria are mainly anchored on voluntary
models. As discussed in the earlier parts of this chapter, the consensus in academic
literature is that the impacts of these CSR initiatives have not affected the Niger Delta
region positively. Many suggestions have been made to remedy or mitigate these
negative consequences. This chapter contends that a mandatory CSR law specific to
the oil and gas industry is one of the strategies that can be used to enhance CSR initia-
tives in the sector. Similar laws have been developed in some developing countries to
deepen the effectiveness of CSR initiatives. For example, some developing countries
(India, Mauritius, Indonesia and Nepal amongst others) have made CSR compulsory
or hard law (Pillay 2014; Zhao 2017). In Mauritius and India, laws have been enacted
to compel companies to set aside a percentage of their profits for CSR programmes
(Zhao 2017). In Nigeria, a CSR Bill, which was supposed to make CSR compulsory
or mandatory in the country, was shot down and never got passed into law. This
chapter contends that notwithstanding the criticisms of a legalised/mandatory CSR
framework in Nigeria, an oil and gas industry-specific law could be one of the ways to
mitigate the negative impacts of oil MNCs in the Niger Delta. Similar to the Nigerian
Minerals and Mining Act of 2007, a CSR law should be developed specifically for
the oil and gas industry incorporating the recommendations made in the penultimate
section of this chapter.
This chapter also suggests that CSOs should play a major role in the development
and implementation of any CSR law that will be developed for the oil and gas sector
in Nigeria. This chapter aligns with the position of Professor Islam, which states that
‘Whilst social movements have led regulators to enact new CSR regulation, regulation
on its own may not create much improvement of CSR. This means that continuous
monitoring of corporate compliance with CSR legislation by social activists is neces-
sary to achieve the regulatory objective of CSR’ (Islam 2018). Finally, this chapter
does not suggest that voluntary CSR should be jettisoned; this paper avers that both
mandatory and voluntary CSR (in the oil and gas industry in Nigeria) can work in
tandem to enhance community development in the Niger Delta region.
Although a one-size-fits-all approach does not apply to all jurisdictions, lessons
from Nigeria can serve as an example to represent many problems that are commonly
Corporate Social Responsibility in the Oil and Gas Industry… 455

shared by developing countries. Since the various approaches to CSR are inti-
mately connected to national economic structures, political and cultural traditions,
a transplantation of one national approach to another country is not easily achieved.
However, it might still be possible to learn something from the Nigerian experience
through the development of economic models, principles, and best practices, which
other countries can emulate. Arguably, other countries (especially developing coun-
tries) can learn from the mistakes or weaknesses of the CSR regime in the oil and gas
industry in Nigeria. For example, by adopting stand-alone CSR laws to enhance and
promote CSR in their countries may be one of the strategies to avoid such mistakes.

References

A Bill for an Act to provide for the Establishment of the Corporate Social Responsibility Commission
2008’ - popularly referred to as the ‘CSR Bill’, cited in Nwagwu, I. ‘The CSR bill and doing
Business in Nigeria’ (Business Day March 24, 2016) https://businessday.ng/analysis/article/the-
csr-bill-and-doing-business-in-nigeria/ (Accessed 6 June 2019)
Adeyeye, A. (2010). The limitations of corporate governance in the CSR agenda. Company Lawyer,
31(4), 114–118.
Amao, O. O. (2008). Corporate social responsibility, multinational corporations and the law in
Nigeria: Controlling multinationals in host states. Journal of African Law, 52(1), 89–113.
Amao, O. (2011). Corporate social responsibility, human rights and the law: Multinational
corporations in developing countries. Routledge.
Amao, O. (2014). Emergent state practice on the creation and practice of standards on corporate
social responsibility. State Practice and International Law Journal, 1(1), 117–137.
Amaeshi, K., Adi, A. B. C., Ogbechie, C., & Amao, O. O. (2006). Corporate social responsibility in
Nigeria: Western mimicry or indigenous influences? The Journal of Corporate Citizenship, 24,
83–99.
Akpan, W. (2006). Between responsibility and rhetoric: Some consequences of CSR practice in
Nigeria’s oil province. Development Southern Africa, 23(2), 223–240.
Akinsulore, A. (2016). The effects of legislation on corporate social responsibility in the minerals
and mines sector of Nigeria. Journal of Sustainable Development Law and Policy (The), 7(1),
97–115.
Ako, R. T., Obokoh, L. O., & Okonmah, P. (2009). Forging peaceful relationships between oil-
companies and host-communities in Nigeria’s Delta region: A stakeholder’s perspective to corpo-
rate social responsibility. Journal of Enterprising Communities: People and Places in the Global
Economy, 3(2), 205–216.
Ako, R., & Ekhator, E. O. (2016). The civil society and the regulation of the extractive industry in
Nigeria. Journal of Sustainable Development Law and Policy (The), 7(1), 183–203.
Amodu, N. (2017). Regulation and enforcement of corporate social responsibility in corporate
Nigeria. Journal of African Law, 61(1), 105–130.
Bowen, H. R. (1953). Social responsibilities of the businessman. New York: Harper & Row.
Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy
of Management Review, 4(4), 497–505.
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management
of organizational stakeholders. Business Horizons, 34(4), 39–48.
Carroll, A. B. (1999). Corporate social responsibility: Evolution of a definitional construct. Business
& Society, 38(3), 268–295.
Carroll, A. B. (2015). Corporate social responsibility: The centerpiece of competing and comple-
mentary frameworks. Organizational Dynamics, 44(2), 87–96.
456 E. O. Ekhator and I. Iyiola-Omisore

Carroll, A. B. (2016). Carroll’s pyramid of CSR: Taking another look. International Journal of
Corporate Social Responsibility, 1(1), 3–8.
Davis, K. (1967). Understanding the social responsibility puzzle. Business Horizons, 10(4), 45–50.
Edoho, F. M. (2008). Oil transnational corporations: Corporate social responsibility and environ-
mental sustainability. Corporate Social Responsibility and Environmental Management, 15(4),
210–222.
Egbon, O., Idemudia, U., & Amaeshi, K. (2018). Shell Nigeria’s global memorandum of under-
standing and corporate-community accountability relations: A critical appraisal. Accounting,
Auditing & Accountability Journal, 31(1), 51–74.
Ekhator, E. O. (2013). ‘Environmental protection in the oil and gas industry in Nigeria: The roles
of governmental agencies. International Energy Law Review, 5, 196–203.
Ekhator, E. O. (2014a). Corporate social responsibility and Chinese oil multinationals in the oil and
gas industry of Nigeria: An appraisal. Cadernos De Estudos Africanos, 28, 119–140.
Ekhator, E. O. (2014b). The roles of civil society organizations in the extractive industries
transparency initiative in Nigeria. Int’l Journal of Not-For-Profit L., 16, 47–52.
Ekhator, E. O. (2014c). Improving access to environmental justice under the African charter on
human and peoples’ rights: The roles of NGOs in Nigeria. African Journal of International and
Comparative Law, 22(1), 63–79.
Ekhator, E. O. (2016a). Regulating the activities of oil multinationals in Nigeria: A case for self-
regulation? Journal of African Law, 60(1), 1–28.
Ekhator, E. O. (2016b). Public regulation of the oil and gas industry in Nigeria: An evaluation.
Annalen Survey of Int’l & Comparative L., 21, 43–91.
Ekhator, E. O. (2018). Regulating the activities of multinational corporations in Nigeria: A case for
the African union? International Community Law Review, 20(1), 30–68.
Ekhator, E. O., & Anyiwe, L. (2016). Foreign direct investment and the law in Nigeria: A legal
assessment. International Journal of Law and Management, 58(1), 126–146.
Eweje, G. (2006). Environmental costs and responsibilities resulting from oil exploitation in devel-
oping countries: The case of the niger delta of Nigeria. Journal of Business Ethics, 69(1),
27–56.
Friedman, M. (1962). Capitalism and freedom. University of Chicago.
Frynas, J. G. (2009). Beyond corporate social responsibility: Oil multinationals and social
challenges (Vol. 10). Cambridge: Cambridge University Press.
Gatti, L., Seele, P., Cottier, B., & Vishwanath, B. (2018). Are we moving beyond voluntary CSR?
Exploring theoretical and managerial implications of mandatory CSR resulting from the new
Indian companies act. Journal of Business Ethics, 1–12. https://doi.org/10.1007/s10551-018-
3783-8.
Gilberthorpe, E., & Banks, G. (2012). Development on whose terms?: CSR discourse and social
realities in Papua New Guinea’s extractive industries sector. Resources Policy, 37(2), 185–193.
Halliday, C., & Modupe Babalola, M. (2019). Critical analysis of salient features of the companies
and allied matters act (Repeal and Re-enactment) bill 2018. The Journal of Property Law and
Contemporary Issues, 10(1), 111–119.
Haapio, H. (2010). Introduction to proactive law: A business lawyer’s view. Stockholm Institute for
Scandinavian Law, 49, 49–52.
Husted, B. W. (2015). Corporate social responsibility practice from 1800–1914: Past initiatives and
current debates. Business Ethics Quarterly, 25(1), 125–141.
Idemudia, U., & Ite, U. E. (2006). Corporate–community relations in Nigeria’s oil industry: Chal-
lenges and imperatives. Corporate Social Responsibility and Environmental Management, 13(4),
194–206.
Idemudia, U., & Osayande, N. (2016). Assessing the effect of corporate social responsibility on
community development in the Niger Delta: A corporate perspective. Community Development
Journal, 53(1), 155–172.
Ihugba, B. U. (2012). Compulsory regulation of CSR: A case study of Nigeria. Journal of Poloniae
& L., 5, 68.
Corporate Social Responsibility in the Oil and Gas Industry… 457

Islam, M. 2018. What is Corporate Social Responsibility—does it work? The Conversation

Available from https://theconversation.com/what-is-corporate-social-responsibility-and-does-it-
work-89710 [Accessed 5 June 2019)
Ite, U. E. (2007). Changing times and strategies: Shell’s contribution to sustainable community
development in the Niger Delta. Nigeria. Sustainable Development, 15(1), 1–14.
Johnson, H. L. (1971). Business in contemporary society: Framework and issues. Wadsworth Pub.
Co.
Jonker, J., & Marberg, A. (2007). Corporate social responsibility quo Vadis? Journal of Corporate
Citizenship, 27, 107–118.
Kajola, S. O. (2008). Corporate governance and firm performance: The case of Nigerian listed firms.
European Journal of Economics, Finance and Administrative Sciences, 14(14), 16–28.
Lisk, F., Besada, H., & Martin, P. (2013). Regulating extraction in the global south: Towards a
framework for accountability. Background research paper submitted to the high level panel
on the post-2015 development agenda. https://www.post2015hlp.org/wp-content/uploads/docs/
Lisk-Besada-Martin_Regulating-Extraction-in-the-Global-South-Towards-a-Framework-for-
Accountability-_FINALFINAL.pdf
Lompo, K., & Trani, J. F. (2013). Does corporate social responsibility contribute to human devel-
opment in developing countries? evidence from Nigeria. Journal of Human Development and
Capabilities, 14(2), 241–265.
Maiangwa, B., & Agbiboa, D. E. (2013). Oil multinational corporations, environmental irrespon-
sibility and turbulent peace in the Niger Delta. Africa Spectrum, 48(2), 71–83.
Mallin, C. (2019). Corporate Governance. Oxford.
McBarnet, D., Voiculescu, A., & Campbell, T. (2007). The new corporate accountability: Corporate
social responsibility and the law. Cambridge University Press.
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm
perspective. Academy of Management Review, 26(1), 117–127.
Muchlinski, P. (2001). Corporations in international litigation: Problems of jurisdiction and the
United Kingdom asbestos cases. International & Comparative Law Quarterly, 50(1), 1–25.
Mujih, E. (2012). Regulating multinationals in developing countries: A conceptual and legal
framework for corporate social responsibility. Gower.
Mitchell, L.E. (2001). Corporate irresponsibility: America’s newest export. Yale University Press.
Nwagwu, I. (2016) The CSR bill and doing business in Nigeria’ (business day March 24, 2016)
https://businessday.ng/analysis/article/the-csr-bill-and-doing-business-in-nigeria/. Accessed 6
June 2019.
Odumosu-Ayanu, I. T. (2012). Foreign direct investment catalysts in West Africa: Interactions with
local content laws and industry-community agreements. NC Central L. Reviews, 35, 65.
Okike, E. (2019). Corporate governance in commonwealth countries. International Centre for
Research in Accountability and Governance.
Okoye, A. (2009). Theorising corporate social responsibility as an essentially contested concept: Is
a definition necessary? Journal of Business Ethics, 89(4), 613–627.
Okoye, A. (2012). Exploring the relationship between corporate social responsibility, law and
development in an African context: Should government be responsible for ensuring corporate
responsibility? International Journal of Law and Management, 54(5), 364–378.
Olatunji, J. S. (2018). Tribune newspaper ‘reps pass bill to prescribe CSR for companies’ July 5,
2018. https://tribuneonlineng.com/153855/. Accessed 5 June 2019.
Onyekwere, J. (2019). (Guardian Newspaper Nigeria) ‘Koyinsola Ajayi interview: There is need to
harmonise business facilitation laws in Nigeria’ (7 May, 2019) https://guardian.ng/features/kon
yinsola-ajayi-there-is-need-to-harmonise-business-facilitation-laws-in-nigeria/. Accessed 6 June
2019.
Oraegbunam, I., & Ubanyionwu, C. J. (2019). Examining some gains and Pitfalls of Nigeria’s
companies and allied matters act: Urgent need for review. International Review of Law and
Jurisprudence, 1(2), 48–57.
458 E. O. Ekhator and I. Iyiola-Omisore

Onyekwere, J. (2015). (Guardian Newspaper Nigeria) ‘Fabian Ajogwu interview: Legislation on

corporate responsibility is taxation’ (29 June 2015) https://guardian.ng/features/law/legislation-
on-corporate-social-responsibility-is-taxation/. Accessed 6 June 2019.
Osemeke, L., Adegbite, S., & Adegbite, E. (2016). Corporate social responsibility initiatives in
Nigeria. In Key initiatives in corporate social responsibility (pp. 357–375). Springer, Cham.
Oserogho & Associates. (2014). Corporate Responsibility Bill’ (5 January 2014) https://www.ose
roghoassociates.com/articles/75-corporate-social-responsibility-bill. Accessed 6 June 2019.
Osuji, O. K. (2015). Corporate social responsibility, juridification and globalisation: ‘inventive
interventionism’ for a ‘paradox.’ International Journal of Law in Context, 11(3), 265–298.
Osuji, O. K., & Obibuaku, U. L. (2016). Rights and corporate social responsibility: Competing or
complementary approaches to poverty reduction and socioeconomic rights? Journal of Business
Ethics, 136(2), 329–347.
Owoeye, O. (2015). Corporate social accountability in developing countries: A recipe for the socially
responsible corporation. International Journal of Account Bus Manage, 1(1), 1–7.
Pillay, R. (2014). The Limits to self-regulation and voluntarism: From Corporate social responsi-
bility to corporate accountability. Amicus Curiae, 19, 10–13.
Pokhrel, K. (2017). Constitutional frameworks for corporate social responsibility in context of
Nepal. NJA LJ, 11, 281.
Renouard, C., & Lado, H. (2012). CSR and inequality in the Niger Delta (Nigeria). Corporate
Governance: The International Journal of Business in Society, 12(4), 472–484.
Rossouw, G. J. (2005). Business ethics and corporate governance in Africa. Business & Society,
44(1), 94–106.
Spaces for Change. (2018). Memorandum submitted to the house of representatives adhoc
committee on petroleum industry bills’ (May 2018) https://www.spacesforchange.org/wp-con
tent/uploads/2018/05/MEMORANDUM-SUBMITTED-TO-THE-HOUSE-REPS-COMMIT
TEE-ON-PETROLEUM-INDUSTRY-BILL.pdf
Stone, C. (2012). Where the law ends: The social control of corporate behaviour. Harper & Row.
Tuodolo, F. (2007). Corporate social responsibility, local communities and TNCs in the oil and gas
sector of Nigeria. Unpublished PhD Thesis, United Kingdom : University of Liverpool.
Tuodolo, F. (2009). Corporate social responsibility: Between civil society and the oil industry in the
developing world. ACME: An International E-Journal for Critical Geographies, 8(3), 530–541.
Umoru, G. (2015). Advancing citizenship for corporate entities in Nigeria. University of Benin Law
Journal, 16(1), 247–265.
UNEP. (2011). Environmental assessment of Ogoni Land Report. Available at https://www.une
nvironment.org/explore-topics/disasters-conflicts/where-we-work/nigeria/environmental-assess
ment-ogoniland-report. Accessed 6 June 2019.
Ventures. (2013). Shell back at Ogoni after two decades of absence. Available at https://venturesa
frica.com/shell-back-at-ogoniland-after-absence-of-two-decade/. Accessed 6 June 2019.
Waddock, S. (2004). Parallel universes: Companies, academics, and the progress of corporate
citizenship. Business and Society Review, 109(1), 5–42.
Zhao, J. (2017). Promoting more socially responsible corporations through a corporate law
regulatory framework. Legal Studies, 37(1), 103–136.
An Overview of Corporate Social
Responsibility in Kenya’s Extractives
Sector

Angela Khanali Mutsotso

Abstract Kenya’s oil & gas sector is quickly developing with industry players
predicting the date of first oil to be 2024 once the upstream and pipeline projects are
developed. Kenya has a robust mining sector with rare earth and soda ash accounting
for the largest mineral exports. Kenya is increasing investment in its extractives sector
and angling to position itself as a technical leader in the region by building its tech-
nical expertise. Companies operating in the extractives sector often negotiate their
economic and financial terms with governments gaining a legal right to operate and
separately negotiate with host communities for a social licence to operate. Compa-
nies must obtain both licences in order to run a successful operation. In this chapter,
we view corporate social responsibility (CSR) as a method for the company to obtain
a social licence based on the practice in Kenya where the national government was
previously not directly involved in informing and consulting communities. We shall
first conceptualise CSR in the Kenyan context, examine two case studies, identity a
few instances of the best and worst CSR experiences and conclude with an assess-
ment of the challenges companies face when engaging communities. The chapter
aims to inform the reader of the practice in Kenya with insights from the author’s
interviews and interaction with host community members, companies and govern-
ment officials, and finally, this chapter is intended to contribute to the literature on
CSR in the extractives industry in Kenya.

Keywords Corporate social responsibility · Base Titanium Kenya · Tullow

Kenya · Turkana County · Kwale County · Sustainability

A. K. Mutsotso (B)
Kenya Civil Society Platform on Oil & Gas, Nairobi, Kenya
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 459
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_26
460 A. K. Mutsotso

1 Introduction

In Kenya’s legal framework, there is no specific requirement for companies to carry

out corporate social responsibility (CSR) activities. The laws governing the sector
are seen to encourage companies to act in a socially responsible manner. Companies
are however expected to carry out social projects with host communities. Both case
studies examined in this chapter are of projects in marginalised areas, Kwale and
Turkana Counties.
In this chapter, we adopt a definition of CSR as projects carried out by companies
that do not directly result in company profits, but are carried out for the economic,
environmental and social benefit of resource host nations and project host commu-
nities (What is CSR? | UNIDO, n.d.). This chapter describes the approaches adopted
by companies based on demand from communities and under the current legal
framework.
In this section of the chapter, we briefly traverse CSR approaches and requirements
under the Kenyan legal framework, and in the next, turn to the practical examples by
describing approaches adopted within the two example projects. We shall conclude
this chapter with a review of the best and works experiences in CSR in the Kenyan
context and a review of the challenges that companies face when implementing CSR.
Much of the information about the two projects comes from information provided
on the websites produced by the two extractives companies and other desk-based
research.

1.1 CSR Features and Approaches in the Kenyan Legal Space

In the Kenyan extractives space, the legal framework highlights the conventional
approaches to CSR, which include establishing economic linkages, training and
technology transfer and infrastructural and social development through the usage of
collaborative plans and programmes.
In this part, we identify four approaches and features of CSR as provided for
under the Petroleum Act, 2019 and the Mining Act, 2016. We conclude this section
by discussing the sources of financing and enforcement of CSR requirements in
Kenya.

1.1.1 Company Centric Development Plans

When applying for licences, companies are now required to present internally devel-
oped overarching CSR plans; these detail their intended CSR approaches and activi-
ties to be carried out during the life of the licence. In Kenya, these plans as shown in
the extractives sector are not always called CSR plans but have an element of volun-
tariness, corporate responsible behaviour and provide a road map of all intended
An Overview of Corporate Social Responsibility … 461

CSR activities for the particular project within the licence period. These plans are
the government’s way to inform themselves, and the public of intended programmes
and ideally should allow for planning and collaboration between national and county
governments and companies, and communities and companies.
The Mining Act, 2016 at Section 47 requires holders of mineral rights to carry out
businesses in a socially responsible manner. Further, Section 101 (j) of the Mining
Act, 2016 requires holders of large-scale mining rights to submit Social Responsible
Investment Plans that they will undertake during their operations to the benefit of
host communities.
The Petroleum Act, 2019 does not require the companies to develop a CSR plan,
but it is envisioned in Section 125 that the company will involve the community in
their CSR programmes.

1.1.2 Establishing Economic Linkages: Local Content

Both the Petroleum and Mining Laws contain local content provisions. This is a
common feature of corporate responsible behaviour by companies in the extractives
sector and was practised before the current legal frameworks as a result of citizen
and political demand. Companies operating in Kenya are required to give preference
to Kenyan employees, both skilled and semi-skilled, preference to Kenyan service
providers and contractors, and Kenyan manufactured goods.
Section 50 of the Petroleum Act, 2019 details the different goods and services that
Kenyans and Kenyan-owned businesses should be prioritised on. Further Section 50
requires contractors to submit Long Term and Annual Local Content Plans to the
Energy and Petroleum Regulatory Authority (EPRA). The Model Production Sharing
Contract within the Petroleum Act, 2019 requires companies to give preference to
Kenyan employees and service providers.
The Mining Act, 2016 at Section 47 requires that Kenyans should be given pref-
erence of employment, and where this is not possible, the company is allowed to
engage expatriates. In such instances where expatriates are contracted, the compa-
nies are expected to work towards replacing the technical non-Kenyan staff with
Kenyan employees.

1.1.3 Technology Transfer and Trainings

Compared to the economic linkages feature, this is a novel feature especially and
is intended to build the country’s technical capacity. Section 47 of the Mining Act,
2016 contains provisions on partnership with universities and training of employees.
Mining companies are required to form partnerships with universities for research
and environmental protection purposes. Additionally, the companies should conduct
training and capacity building of employees regularly. It is important to note that the
Mining Act does not establish or envision a training fund as the Petroleum Act does,
but this function of training non-employees is left to the discretion of the company.
462 A. K. Mutsotso

The Petroleum Act, 2019 at Section 52 establishes a petroleum training fund

where all licence holders are required to contribute each year. Mutai (2019) notes
that as of 2019, this fund had a net worth of approximately 9 Million US dollars.
Through their monetary contributions, set in the different Petroleum Agreements,
companies contribute to the training and the development of technical capacity in
the upstream petroleum sector.
Clause 23 of the Model Production Sharing Contract (Model PSC) requires
contractors to develop a Technology Transfer Programme in line with the Energy
and Petroleum Policies. These programmes should build the technical capacity of
Kenyans. The Model PSC provides details on the contents of this programme.

1.1.4 Collaborative Plans and Approaches: Infrastructural and Social

Development

To effect other projects outside Local Content and Training and Development, the
legal framework foresees the adoption of collaborative plans developed by compa-
nies, county governments and communities. These plans allow for community infras-
tructure development, which strengthens the education, social, health and other
sectors to directly benefit the host community.
Section 109(j) of the Mining Act, 2016 established Community Development
Agreements (CDAs). These are signed between large-scale mining companies and
host communities. Large-scale licence holders are required to invest one per cent of
their gross annual revenues (Mining Act, 2016 (Community Development Agree-
ments) Regulations, 2017). Financing CDAs reduces their tax burden; however, there
is no indication on the recoverability of CSR costs in the mining sector. CDAs concep-
tualise and action development projects to the benefit of local communities. Decisions
are made at the CDA Committee, which has members from the local community,
national and county governments and the mining company. Currently, communities
living around the Kwale Mineral Sands Project operated by Base Titanium and those
around Tata Chemicals Magadi Soda Ash Mining operations are negotiating their
first CDAs. It is vital to note that this collaborative and participatory CSR approach
with specified amounts of investment is unique to the mining sector and is not legally
required in the upstream petroleum sector.
Tullow Oil who are developing Kenya’s maiden oil fields to allow for production
and export of crude oil through their South Lokichar Foundation Stage Development
(FSD) project released a 2019 Draft ESIA Report (Golder and Ecologics Consultants
Ltd 2019). In the draft report, they proposed the formation of a community develop-
ment plan (CDP). The CDPs are to be developed for each county and will guide their
community projects as well as facilitate community consultation and involvement
regarding project impacts. The CDP will mainly address issues of water, access to
electricity and other impacts and benefits from the South Lokichar FSD. The CDP will
be managed through a consultative process incorporating community, government
and company; the CDPs described above are contained in a draft environmental and
An Overview of Corporate Social Responsibility … 463

social impact assessment (ESIA). Thus, there is no final decision on their existence
by the company or government, and they will be company initiated.

1.2 Financing of CSR Projects

CSR projects are traditionally voluntary and financed by companies. In practice,

they are accounted for as operational costs borne by the company and are generally
classified as non-recoverable costs in natural resource contracts (Vermaelen 2011).
As the contracts of extractives companies are not publicly available in Kenya, we
rely on the provisions of the Model PSC for the petroleum sector and the mining
legislation to discuss the financing of CSR projects.
The Model PSC in the Petroleum Act, 2019 at clause 3.14.1.24 classifies corporate
social responsibility costs or social infrastructure costs as non-recoverable. As this
classification is not contained in the Petroleum Act, 2019 and Kenya’s upstream
petroleum contracts are not publicly available, it is difficult to assess whether the
costs from the CSR projects that will be described below run by Tullow and Africa
Oil are non-recoverable.

1.3 Enforcement

Enforcement of CSR in Kenya is done voluntarily by the companies as it is in their best

interest as it helps to secure a social licences to operate and harmonious community
and political relations. Additionally, most of the institutions tasked with enforcement
are still being developed, and the sector has not evolved to a size that the government
can justify hiring staff to track CSR projects specifically. In both the petroleum
and mining sector, the licensing authorities are required to ensure enforcement of
multiple requirements ranging from technical standards to environmental standards
and coordinate the overall development of the sector; thus, CSR monitoring is often
overlooked.1 Despite the legal underpinnings of different CSR approaches examined
in this first part of the chapter, extractives companies often proactively design and
implement CSR projects.
This section laid the ground for our exploration of CSR projects in Kenya. In the
next section, we shall review the CSR approaches adopted by companies operating
in the Kwale Mineral Sands Project and the South Lokichar Upstream Development.
These two case studies represent the most significant and most relevant upstream
petroleum and mining projects in Kenya presently.

1 Reference can be made to the Energy Act, 2019 Section 10 on the functions of Energy and Petroleum

Regulatory Authority and the Mining Act, 2016 Section 20 on the functions of the Director of Mines.
464 A. K. Mutsotso

You will note that CSR projects in both case studies began before the implemen-
tation of the laws discussed in this section; however, companies are redesigning their
projects to incorporate the structures within the current laws.

2 Overview of Companies Operating in Kenya’s

Extractives Sector

This section describes the CSR projects of two examples within the upstream
petroleum sector and mining sector. We shall first review the Kwale Mineral Sands
Project operated by Base Titanium as it is Kenya’s largest extractives project,
which contributes 108 million US dollars annually to the Kenyan economy (‘Base
Titanium—Project Economic Contribution’, n.d.). We then turn our attention to
the South Lokichar Upstream Development Project; Kenya’s maiden upstream
development. Exploration began in 2008, and first oil is expected in 2024. This
is Kenyan’s longest-running upstream project and will be the country’s maiden
upstream petroleum-producing project.

2.1 Kwale Mineral Sands Project (KMSP): Base Titanium

(BT)

The KMSP of Kenya Special Mining Lease No. 23 began in 1998 when Tiomin
conducted exploration and found commercially recoverable quantities (Ong’olo
2001). Between 1998 and 2009 Tiomin attempted to raise financing for the project
but due to constant disputes, which in some cases resulted in legal battles with
the community over land and disagreements with the government, were unable to
continue with the project (Njiraini 2009). Base Titanium (BT) acquired the project in
2011 and were able to successfully develop the KMSP and have facilities in Kwale
and Mombasa counties (Kihara 2011). This section describes BT’s approach in two
parts, first between 2011 and 2012 when BT embarked on finalising Tiomin’s CSR
projects, and secondly from 2012 when BT was adopting their own CSR approach
marked by the adoption of community and environmental policies.

2.1.1 Finalising Tiomin’s Programmes: 2011–2012

After the 2011 acquisition of KMSP, BT inherited about 13 CSR projects and commit-
ments from Tiomin. Below is a table of Tiomin’s commitment and their completion
status by the time of acquisition:
According to Odongo et al. (2019), Base Titanium embarked on their own CSR
initiatives and commitments, launching and completing 18 new CSR programmes.
An Overview of Corporate Social Responsibility … 465

Their CSR approach was broader and moved away from being fully infrastructural
development and covered health care, agriculture and animal husbandry, trainings,
scholarships for tertiary education (Odongo et al. 2019). The geographical scope
grew to cover Kwale (mine site) and Mombasa County (Likoni export site). The
change in approach to making commitments to the community can be deduced to
have been for two purposes—first to quell anxiety due to the transition, and secondly
to ensure the community perceived BT as a benevolent player.
Due to the underlying issues that arose in the 2000s, the most significant being
the land question, the CSR programmes were well received by a section of the
community. A larger demographic, however, was still unsatisfied with the compen-
sation given for the land where KMSP sits and demanded more from the company.
According to Opiyo (2006), Tiomin faced a lot of backlash over land access issues
with the local community, which put great strain on the operations.2

2.1.2 Base Titanium’s Novel Approach 2012–20203

Base Titanium focuses on CSR programmes that support their engagement with
communities. This section relies on the information from Base Titanium’s website.
The company runs a regularly updated and informative website, somewhat unique
within Kenya’s mining sector. In this sub-section, we shall review Base Titanium’s
CSR programme in three categories: (i) community engagement; (ii) environmental
management and (iii) economic linkages.

2.2 Community Engagement

Base Titanium has a policy that sets out their principles for community engagement
(Base Titanium Communities Policy 2012). In the policy, BT commits to meaningfully
engaging and empowering communities, working with the government, establishing
a social management system based on the Equator Principles and the IFC’s Sustain-
ability Framework, which includes the Performance Standards and minimising the
footprint of their activities. To operationalise their Communities Policy, BT runs an
Environment and Community Affairs Department. The department effects the policy
through the following programmes and processes.
Social Impact Assessment: BT periodically carries out studies on social and
health impact assessments as well as runs monitoring and management programmes.
According to Base’s website, (Base Titanium—Social Impact Assessment, n.d.) Base

2 There was numerous court cases including the Said Abdalla Budzo and 36 others versus Tiomin
(K) Limited and Another [2007] eKLR, 2007, where land compensation issues were brought before
the court.
3 Time frame is based on the signing of Communities and Environmental Policies in December

2012; thus, Base Titanium’s approach to CSR was markedly different from 2013.
466 A. K. Mutsotso

has entered into Community Development Management Plans (CDMPs) with its host
communities. These will be replaced by the Community Development Agreements
(CDAs) established under the Mining Act, 2016. The CDMPs enable BT to work
with communities and government to fashion CSR projects and create an open line
of communication.
Resettlement: In 2000 when the KMSP started, Kenyan law did not adequately
address resettlement and compensation issues. To resolve legacy land issues, BT
crafted several resettlement action plans (RAPs) and used them with communities
affected by the: (i) Special Mining Lease; (ii) Mukumudzi Dam; and (iii) water, road
and electricity lines access routes. Further, they reinterred 289 graves with commu-
nity consultation. While this is the responsibility of the company and the IFC Perfor-
mance Standards provide for the same, Kenyan law failed to appropriately address
land issues in the 2000s when BT operationalised its RAPs. Thus, their work on
resettlement can be credited to them as BT displayed corporate social responsibility
through their leadership to abide by international standards during the resettlement
process.
Community Engagement: BT has a Stakeholder Engagement Plan (SEP) that
guides their work and established the Affected Stakeholders Committee and the Sub-
County Liaison Committee, both established in 2013 (Base Titanium—Community
Engagement n.d.). BT has established 11 Affected Stakeholder Committees covering
the mine site, resettled communities as well as communities living in the export
area (Likoni) who represent various demographics. The three Sub-County Liaison
Committees are formed by affected communities, religious leaders and county and
national government officials. The Msambweni Committee represents communities
in the mining area, the Likoni Committee covers communities in the Likoni ship-
loading facilities, and the Matuga Committee links those living in the Ukunda-Likoni
transport corridor (Base Titanium—Community Engagement, n.d.). BT has estab-
lished a communication system with affected communities; whether these systems
assist in communication or shut out dissenting voices is disputed, as was noted by
Muchai (2019).
Community Programmes: Based on their communication and engagement
systems, BT has established four pillars for community programming. The first is
community infrastructure, which involves the construction of schools and healthcare
facilities (Base Titanium—Community Infrastructure, n.d.). The second is livelihood
upliftment programmes, the key of which is the Pavi Cooperative Society, which
assists local farmers who grow cotton and potatoes in Kwale County. Through this
programme, farmers access technical training and financial training to enable them
to access markets (Base Titanium—Projects & Livelihood Programmes, n.d.; see
Spencer 2019). The third is Community Health, where BT supports health authori-
ties, provides hospital supplies, runs health campaigns and conducts a HIV control
programme, prevention of mother to child transmission (PMTCT) (Base Titanium—
Community Health, n.d.). Fourth is their scholarship programme where BT partners
with institutions to give students access to secondary and tertiary institutions (Base
Titanium—Scholarships, n.d.).
An Overview of Corporate Social Responsibility … 467

2.3 Environmental Management

BT has a 2012 Environmental Policy, which is effected by its Environmental and

Social Management System (ESMS) (Base Titanium—Our Approach, n.d.). Their
2012 Environmental Policy provides a framework for environmental protection
through biodiversity protection, environmental leadership and measures to combat
the effects of climate change. Further, their management plan and monitoring
programmes ensure they meet the objectives of their ESMS.
BT runs several environmental programmes to lessen their ecological foot-
print. These range from biodiversity conservation programmes to research on rare
and endangered species and wetlands restoration (Base Titanium—Environmental
Programmes, n.d.). Key outcomes to note from their environmental management
programmes include:
The Coastal Forests of Eastern Africa Biodiversity Hotspot: The KMSP lies
close to this hotspot, and the biodiversity has been affected by the mining activity
and the Mukurumidzi Dam. BT, together with National Museums of Kenya, the
Kenya Wildlife Service and the Kenya Forest Service, conduct regular surveys and
support research on the status of various endangered species. These species include
the Shimba Hills Reed Frog, the Gigasiphon macrosiphon (a leguminous tree), the
Changamwe Caecilian (a worm-like soil burrowing amphibian), and the Euphorbia
tanaensis (a rare tree). In addition to the surveys, BT runs various nurseries to
propagate these endangered species (Base Titanium—Biodiversity & Conservation,
n.d.).
Kwale Mine Arboretum: BT runs an indigenous tree nursery, which as of 2019
hosted 275 species of indigenous trees. This contributes to promoting biodiversity
in the KMSP by contributing to revegetation of the area (Base Titanium—Rare &
Endangered Flora, n.d.).
Rehabilitation and Restoration: BT conducts rehabilitation on the Mukuru-
mudzi Dam embarkment and areas affected by the dam. Additionally, in 2017,
BT commenced rehabilitation of the tailings storage facility’s outer wall (Base
Titanium—Rehabilitation & Restoration, n.d.).

2.4 Economic Linkages

BT reports on the economic contribution of their projects on their website. In this

chapter, we rely on their reporting to discuss their CSR programmes. Their public
profile and information sharing is not a requirement under Kenyan law.
In 2019, BT invested 16 million US Dollars in the local community guided by their
Community Development Management Plan. Finally, BT has legacy projects, which
it intends to hand over to the local authorities at the end of mine-life. These include
the Mukurumudzi Dam and Msambweni boreholes, electricity transmission lines:
access roads and port facilities (Base Titanium—Project Economic Contribution,
n.d.).
468 A. K. Mutsotso

2.5 South Lokichar Upstream Petroleum

The South Lokichar Upstream Petroleum project is situated in Turkana County. It

is run by Kenya Joint Venture (KJV) Partners and Tullow Kenya BV (operator with
50% equity stake), Africa Oil (25% equity) and Total (25% equity) (Africa Oil Corp
2020). In 2012, the Government of Kenya announced the commercial discovery of
crude oil and the KJV has subsequently conducted exploration and appraisal and
is geared towards full-field development (Tullow Oil East Africa Operations, n.d.).
Both Tullow and Africa Oil have implemented CSR projects, as shall be elaborated
below.

2.5.1 Tullow Kenya BV

Tullow Oil Plc is a multinational Irish oil and gas exploration company with opera-
tions in 15 countries. In Kenya Tullow Kenya BV a subsidiary of Tullow Oil regis-
tered in the Netherlands as part of KJV. Tullow’s CSR journey in Turkana is unique.
In 2010, it revolved around their land acquisition, but subsequently the scope has
broadened to include health, education and economic empowerment, among other
programmes.

2.6 Community Land and CSR

In 2010, when the KJV partners obtained their exploration licences to work in Turkana
County, they first had to acquire land for exploration. At the time, untitled land was
regarded as government land; thus by virtue of holding an exploration licence, the
KJV had rights over the land. The KJV faced a challenge in Turkana as the land was
occupied and recognised under the 2010 Constitution as belonging to the indigenous
Turkana people. As a result of the discrepancy in land ownership, Tullow had to
negotiate with the landowners for land to drill exploration wells and for even more
acreage during the initial appraisal stage (Mullins and Wambayi 2017).
According to Oxfam’s 2014 report, Tullow would negotiate with the villages living
around the well-pad site, get permission to work on the land and in return would agree
on monetary compensation (Mullins and Wambayi 2017). The first record of this is
the compensation of approximately 7 million Kenyan shillings. The agreement with
the community was to deposit the money into an account and get the community’s
input on how the money should be utilised—schools, health care, animal care and
the like (Mullins and Wambayi 2017).
An Overview of Corporate Social Responsibility … 469

2.7 Formalisation of Well-Pad Committees

As Tullow’s activities gained permanence, and the feasibility of the project increased,
Tullow changed its approach to land acquisition. Tullow, the Turkana County Govern-
ment and the host communities came together to form well-pad committees who
would handle the compensation and consistent social investment by Tullow to the
affected villages and the broader Turkana community. These committees enabled
Tullow to consult the community when designing their CSR projects. During this
period, Tullow and Africa Oil ramped up their CSR and designed programmes that
were focusing on education, water provision and social infrastructure.

2.8 Tullow’s Broader CSR Activities

Tullow has a four-tiered approach to CSR, and on their website, they refer to this
as part of their sustainability. We analyse Tullow’s approach to CSR as they are the
operating partner in the KJV and have a significant presence in Turkana County and
Nairobi County. To support their approach to CSR, Tullow relies on three policies;
first, their Human Rights Policy, which states their commitment to implement the UN
Guiding Principles on Business and Human Rights and the Voluntary Principles on
Security and Human Rights. From a reading of their policy, it is evident that they have
a do-no-harm approach and intend to work with host communities to their benefit and
to secure a social licence to operate (Tullow Oil PLC Human Rights Policy Statement,
2017). Secondly, the Safe and Sustainable Operations Policy speaks to the company’s
work environment and internal environmental and social risks the project poses. This
policy contains both internal and external measures such as not exploring in World
Heritage Sites (Tullow Oil PLC Policy Statement: Safe and Sustainable Operations,
2017). Finally, the Code of Ethical Conduct touches on Grievance Management
Mechanisms as well as a section on host communities and stakeholders. In the Tullow
Oil PLC Code of Ethical Conduct, 2018, Tullow pledged to respect host communities,
manage their activities sustainably and contribute to the economic and social growth
of these communities.
Drawing for these three policies, we can make a direct connection with their
four-tiered sustainability strategy as the policies speak to economic, social and
environmental development and so do their core areas.
Below is an overview of Tullow’s CSR operations based on the webpage (Tullow
Oil: Sustainability, n.d.):
Shared Prosperity: This includes local content, skills development and social
investment. With regards to education, Tullow offers approximately 120 scholar-
ships to the Lodwar Vocational Technical Centre (LVTC) in addition to this Tullow
invests in various education projects, including building dormitories and providing
lab equipment. Tullow has worked with the Turkana County Government and other
470 A. K. Mutsotso

development agencies to drill boreholes, provide reticulation systems and run exper-
imental demonstration farms in Kapese to promote food security. According to a
media release by Tullow entitled ‘Water Has Been a Game Changer’ (2019), some of
their projects include the Kataboi Community Water Project (2014, Turkana North).
Nakukulas-Lokicheda Reticulation also resulted in the formation of the Kochodin
Water Resource Users Association (2014, Turkana South & East). Tullow also offers
business incubation support and training services through its contractors and requires
some international contracts such as the security firm it employs to train and allow
job shadowing by Turkana owned and staffed companies as described in Tullow’s
media release entitled ‘Guarding Our Future’ (2019).
Environmental Stewardship: Tullow’s activities are aligned to fostering climate
resilience and sustainable ecosystems. Tullow notes that their ESIAs are done in line
with IFC standards in Kenya. Tullow has indicated that it will conduct its Foundation
Stage Development ESIA in line with the IFC requirements, which are more rigorous
than the national requirements (Golder and Ecologics Consultants Ltd 2019).
Responsible Operations: This involves an internal component of safety and well-
ness and an external component of responsible production. When building production
facilities for the Early Oil Pilot Scheme (a scheme that tests the feasibility of produc-
tion), Tullow hired a local company to work with an international company from the
UAE. As a result of this partnership, 58 Kenyans were trained in the UAE and assisted
in building the Degassing and Early Production Facilities (Developing production
operators in Turkana, 2019). Through this initiative, Tullow is contributing to skills
and technology transfer.
Equality and Transparency: This encompasses good governance and promoting
equality. Tullow pledges to adhere to the Voluntary Principles on Security and Human
Rights and the Extractive Industries Transparency Initiative (Tullow Oil Equality and
Transparency, n.d.). In Kenya, Tullow publishes its government payment data but fails
to publish the payments for the entire KJV, which makes this insufficient.

2.8.1 Africa Oil Corporation

Africa Oil Corporation (AOC) is a Canadian company with producing and develop-
ment assets in Kenya and Nigeria and an exploration/appraisal portfolio in Africa and
Guyana (Africa Oil Announces the Closing of the Acquisition of Producing Assets
in Deepwater Nigeria 2020). AOC holds a 25% working interest in the KJV (Africa
Oil 2019). In this chapter, we discuss AOC’s CSR initiatives for two reasons; first,
it runs geographically broader CSR projects—compared to Tullow. Secondly, AOC
publishes Extractives Sector Transparency Measures Act, a 2015 Canadian Law4 this
is a legal requirement in Canada but not in Kenya and this significantly contributes to
the transparency of the KJV’s activities (Africa Oil Corp 2019). AOC’s payment data

4 (ESTMA) reports on their website.

An Overview of Corporate Social Responsibility … 471

is unique as it states the payments made by the three KJV partners to government as
opposed to Tullow, who only reports on the payments they made.5
As a member of the Lundin Group, AOC operates CSR projects in Turkana, Isiolo
and Marsabit Counties regularly tapping into the expertise of the Lundin Foundation
(Lundin Group: About Us, n.d.). The Foundation relies on member contributions to
make high impact investments within the host community and region of operations
and in Sub-Saharan Africa runs projects in Kenya, Ethiopia and Somalia (Puntland)
(Africa Oil Corp.—Corporate Responsibility—Creating shared Prosperity: Commu-
nity Development Highlights, n.d.). Their internal corporate responsibility policies
guide AOC’s CSR projects.
Africa Oil has a range of corporate responsibility policies and statements on their
website.6 A majority of these policies reinforce the ideas of community participa-
tion, environmental, health and security issues as well as policies that promote local
economic growth.
AOC’s CSR statement touches on the environment, ethics, dialogue and engage-
ment, sustainable social and economic benefit, transparency and good governance
as well as upholding of human rights (Africa Oil Corp.—Corporate Responsibility
n.d.). Additionally, the Community and Economic Development Policy states that
AOC adopts a three-tiered approach to their community development programmes,
which are community infrastructure and sustainable livelihoods and economic devel-
opment (Africa Oil Corp.—Corporate Responsibility—Community & Economic
Development Policy, n.d.).
AOC’s CSR activities are run in four thematic areas (Africa Oil Corp.—Corporate
Responsibility—Kenya, n.d.):
Community Health: AOC constructed the Laisamis District Hospital and sani-
tation facilities. Additionally, AOC runs Water Sanitation and Health Programmes
(WASH) in the broader Marsabit County.
Education and Skills: This involves the construction of classrooms, provision of
school supplies and granting of scholarships and bursaries in Isiolo, Turkana and
Marsabit Counties. In 2015, AOC signed a Memorandum of Understanding with
the Turkana County Government for the reviving of the Lodwar Youth Polytechnic,
which as of 2020 is functional and offers training to local youth (Turkana County
Government 2015). At the national level, AOC together with the Lundin Foundation
carried out a scoping study of education and skills needed of Kenya’s upstream oil
and gas sector. In essence, this is useful when designing CSR initiatives but also for

5 For instance, the AOCs ESTMA Report for the year ending 31 Dec 2017 puts the payments by the

three companies at 167,000 US Dollars for fees for Blocks 10BB and 13T but in Tullow’s Extractive
Transparency Disclosure within their Annual Report and Accounts for the year ended 31 December
2017 at pg 174 they state licence fees for Block 10BB and 13T to be 112,000 US Dollars.
6 These include (i) Corporate Social Responsibility Commitment; (ii) Health, Safety & Environ-

mental Policy; (iii) Security Policy; (iv) Ethics Policy; (v) Community Relations Policy; (vi)
Community & Economic Development Policy; (vii) Financial Transparency & Good Governance
Policy; (viii) ESTMA Reports; (ix) Human Rights Policy; (x) Key Health, Safety, Environmental
and Community Documents; (xi) Creating shared Prosperity: Community Development Highlights;
(xii) Country Overview; (xiii) Statements and (xiv) Feedback.
472 A. K. Mutsotso

planning by the national government. Finally, AOC supports staff from the Ministry
of Petroleum and the National Oil Corporation to attend Petrad Training (run by the
Norwegian Government).
Access to Energy: In 2012, the Lundin Foundation invested in M-Kopa, a mobile
technology company that enables rural customers to access energy products. The
products include home solar lighting and phone charging systems.
Sustainable Livelihood and Economic Development: In a bid to leave a lasting
footprint into the economic development of the local community, AOC facilitates
solar companies to set up local sales agents, occasional veterinary clinics in Kaisut,
and develop local sourcing chains to boost the economic participation of local
businesses in the upstream oil and gas sector.

3 Experiences with Community Engagement

Based on the examples in the Kwale Mineral Sands Project and the South Lokichar
Upstream Development Projects in the previous section, we shall now highlight
two outstanding examples of successful CSR approaches. In Kwale County, BT’s
collaborative approach is noted as a sustainable path for the community and the
company internally. In Turkana County, we review the KJV’s activities relating to
education and economic development and its impact on the community beyond the
upstream petroleum industry.

3.1 KMSP: Formation of Committees

When Base Titanium took over the KMSP in 2011, they continued the trend of
implementing CSR projects focusing on education and healthcare infrastructure. In
essence, this was done mainly to ensure completion of Tiomin’s commitments shown
in Table 1. During this period, BT adopted their predecessor’s approach of internally
designing projects and then presenting these to the community, as was noted earlier,
this was not very efficient as the company did not adequately cater to the needs of
the community.
As their operations developed, BT’s approach evolved, they adopted environ-
mental and community policies in December 2012 and established an Environ-
ment and Community Affairs Department. A key feature of their new approach
was the organised consultation of communities and the county government through
the formation of committees. In 2013, BT established the Affected Stakeholders
Committee and the Sub-County Liaison Committee as part of the implementation of
their Stakeholder Engagement Plan (SEP).
The Affected Stakeholder Committees (ASCs) are formed at a sub-county level
and are used by different affected groups. The ASC’s focus on communities within
the project footprint and members is selected by the communities in the specific area.
An Overview of Corporate Social Responsibility … 473

Table 1 Tiomin’s commitments and progress by 2011 when Base Titanium acquired the project
Tiomin commitments (Abuya 2016) Progress by 2011 (Odongo et al. Status
2019)
Construct two primary schools One primary school, Bwiti primary Partial fulfilment
school
Construct two secondary schools One secondary school completed Partial fulfilment
(Kiruku secondary school)
Construct two dispensaries One dispensary (Bwiti dispensary) at Partial fulfilment
the resettlement site
Construct one health clinic (at the Constructed Fulfilled
mining site)
Provide water supply at each One borehole at Mrima Bwiti Partial fulfilment
resettlement village
Construct two social halls One social hall at Mrima Bwiti (the Partial fulfilment
Bwiti community social hall)
Reconstruct Churches and Mosques Compensated residents for their Fulfilled
destroyed/lost Churches and Mosques

There are 11 ASCs, five of these are formed based on the location of communities
around the projects including those living at the host resettlement site; north and
south of the mine site; around the Mukurumudzi Dam; and the port in Likoni. Three
of the ASCs focus on the usage of shared resources such as roads or the ocean
(fisherfolk). Finally, a special ASC is set up by the Kaya elders, which contributes
to the protection of culture, and the final ASCs focus on conservation and security.
BT incorporates three Sub-County Liaison Committees covering the following
sub-counties: Msambweni (KMSP project area); Likoni (export port location); and
Matiga (communities in the transport corridor between Ukunda and Likoni). These
Sub-County Liaison Committees are bigger than the ASCs and consist of affected
stakeholders, women community leaders, members of the farmer cooperative, and
national and county government officials. From their composition, the Sub-County
Committees are similar to CDA Committees established under the Mining Act, 2016.
Once CDA committees are set up in Kwale, BT may dissolve their Sub-County
Committees and focus on working with the gazetted CDA committees.
These committees are vital in establishing and preserving a communication mech-
anism for the community to input into CSR and raise concerns over the company’s
operations. On the other hand, the company has an avenue to communicate and
consistently engage the host community. BT’s approach of working through commit-
tees (commencing in 2013) enriches their CSR projects as they receive direct input
and feedback, with the potential to create a sense of ownership by the community.
Arguably, the approach builds the social fabric of affected communities in a context
where extractives projects can be very divisive as sections of the community benefit
while others demand more from the company. However, within these committee
structures, there is space for dissenting views.
474 A. K. Mutsotso

To cement their work with the community and civil society, BT participates in
the Kwale Mining Alliance Working Group (KMAWG) (Ngei, n.d.). The working
group was set up by civil society and in July 2019, the community-based organisation
launched as a way to coordinate their interventions in Kwale and to give community
members a forum to raise concerns. In some instances, when concerns are raised,
the working group requests BT to respond directly with Base Titanium utilising
the working group as an additional platform to engage affected communities (Ngei
2020).
BT’s approach is proving to be efficient allowing for proper community consul-
tation, thereby forming a strong basis to ease into the era of CDA Committees
envisioned in the Mining Act, 2016.

3.2 South Lokichar Upstream Project

The Kenya Joint Venture Partners, Africa Oil and Tullow, have been running CSR
projects focusing on education and building livelihoods. Tullow officials have, on
numerous occasions, emphasised that the upstream sector will not provide many jobs
to the local communities and even for those the jobs will only be available during
exploration and appraisal. In February 2020, Tullow announced a massive layoff
programme as a result of poor performance globally but in Kenya, this is directly
related to the fact that they are moving to full-field development (Okoth 2020). This
state of affairs illustrates that the upstream sector ultimately requires very little labour
and cannot be entirely relied on by host communities to provide employment.
Projects such as Africa Oil’s work on refurbishing the Lodwar Youth Polytechnic
and Tullow offering scholarships to the Lodwar Vocational Technical Centre (LVTC)
are vital in building the technical capacity of youth from the local community. These
institutions allow for the youth to develop technical skills that can be used in Turkana
but even outside in a multitude of industries.
AOC’s sustainable livelihood programmes, which include facilitating solar
companies to set up local sales agents and developing local sourcing chains to
boost the economic participation of local businesses, are vital in building the local
economies. Such projects ensure that communities develop as a result of the upstream
sector but outside the sector sustainably.
The approach adopted by Tullow and Africa Oil will if adequately run in collab-
oration with the county government and local community go beyond the upstream
sector and allow the local economy to thrive. Such programmes help shift the focus
of communities from benefiting directly from the upstream sector allowing them to
build on linkages and create sustainable industries within themselves.
An Overview of Corporate Social Responsibility … 475

4 The Challenge of Defining Affected Communities and Its

Impact on CSR Practices and Community Involvement

As the governance of Kenya’s extractives sector is still growing and evolving, we

shall discuss the challenge for government and companies of defining the affected
communities. Defining these groups is vital as it dictates who should be consulted
when designing CSR programmes and who should be prioritised to benefit. The
law attempts to define who affected communities are defining them as either host
or local communities. These definitions are to be used when distributing extractives
revenue at the community level and further when designing and implementing CSR
programmes. We shall delve into the issue faced by companies and government when
defining community and using examples from the situations in the two case studies
to illustrate how this lack of a definition is straining the extractives projects. We shall
then propose some recommendations.

4.1 Mapping Stakeholders

As companies work towards securing a social licence to operate, they must map
out the different stakeholders and their power and influence over the project. In our
discussion in this chapter, we identified four classes of actors, as illustrated in Table
2. Power, in this case, denotes political or administrative power over the project and
influence denotes the level of impact from the project occasioned to different groups
in society.
National governments of the extractives host countries and those of the company
home country have high power over the project as they can impose restrictions
on companies or create good working environments through regulatory and legal
means. In some instances, they can enter into bilateral treaties for the benefit of the
extractives companies. These governments, however, have very little influence over
the company’s behaviours beyond incentivising them and also very little influence
over the affected communities and their politicians who hold the social licence to
operate and are directly impacted by the project.

Table 2 Stakeholder matrix

Influence Power
of power and influence
High Low
High Affected communities County government
Local members of Civil society
parliament
Low Host national General public
government International institutions
Home government
476 A. K. Mutsotso

County governments have low power over the project as the large-scale extrac-
tives addressed here are under the purview of the national government. Companies
involve the county governments because they speak directly to the people and in
some instance have a higher sway with the people compared to the national govern-
ment giving them high influence over the project. Most CSR activities incorporate
county government in the planning as this is efficient and easily gels in with the
county development plans. This approach allows the company to gain favour with
the national government and also the local communities. Civil society organisations
working within the extractives sector have low power as they are not duty-bearers in
any way. However, because of their objectives, track record and understanding with
the community have very high interest over the project. Communities can easily
interact with county governments and civil society as these institutions listen to them
and incorporate their issues in their programming.
The general public and international institutions are stated as being low power and
influence stakeholders, but in some instances, can quickly gain power and influence
over the project. These are mapped as stakeholders because they can quickly impact
the project and it is vital to keep them informed of the project.
Arguably, in the Kenyan contexts, the affected communities, including their polit-
ical leaders, have the greatest power and influence over the project. The geographical
proximity to the project results in them being directly impacted as they give up their
land and have to adjust to the social changes occasioned by the project. However, it
is difficult for the company to accurately define who the affected communities are. In
Turkana, this is due to the nomadic nature of Turkana Communities, and in Kwale,
this is due to the resettlements that have taken place since 1998 when Tiomin began
exploration. There is a temporal and geographical nature to these communities that
ought to be addressed in such a manner that the company is not overburdened and
that the communities affected the most are given higher priority when it comes to
beneficiation.

4.2 Who Should CSR Projects Prioritise?

While many thematic challenges can be found within the KMSP and the South
Lokichar Upstream Projects, the greatest of these is the fact that the definition of
affected communities does not cater to all that may be affected by the project. The
main focus of CSR is on communities living near the extractives project, but as shall
be illustrated below the definition and mapping of the local community must be
expanded to suit project-specific contexts.

4.2.1 The South Lokichar Upstream Development

The Petroleum Act, 2019 adopts a geographic definition defining affected commu-
nities as local communities who live within a particular sub-county. Section 2 of
An Overview of Corporate Social Responsibility … 477

the Petroleum Act, 2019 defined local community as ‘people living in a sub-county
within which a petroleum resource under this Act is situated and are affected by the
exploitation of that petroleum resource’. This definition is employed when referring
to participation once a licence is applied for, with regard to revenue sharing, and
community rights. From the usage of the phrase ‘local community’ in the Act, it
is deduced that the contractor shall engage the local community in various ways,
including prioritising them in their CSR programmes. In line with the Act’s defi-
nition, Tullow and Africa Oil’s projects were initially focused around well-pads
(from 2010) and the adjacent villages. Later Tullow and Africa Oil projects evolved
to cover the Turkana East Constituency and have now grown to cover Turkana,
Marsabit and Isiolo Counties. Specific projects only focus on Turkana County such
as the water provision, but education and economic empowerment projects focus on
all three counties. From their approach, it is evident that the community closest to
the upstream project are prioritised and rightfully so as they bear the most significant
social and resource burden when designing CSR programmes.
Tullow and Africa Oil’s multi-county approach is progressive, as it ensures
regional development. As the project moves on to full-field development and water
from River Turkwel will be diverted to the project, it is essential that the CSR approach
is expanded to include communities who rely on the river and will be affected by the
abstraction as another class of local communities (Golder and Ecologics Consultants
Ltd 2019). It is vital to include communities, in West Pokot and Turkana Counties,
whose ecosystems will change as a result of changes to water quantity to be catered
for in the same manner as communities who lose access to their land for the project.
The CSR approach employed by both the governments and company should cater
for both as water and land resources are vital to their livelihoods.
From the growth of the South Lokichar Upstream Project, it is evident that the
definition of the local community for the purposes of CSR and greater benefit-sharing
should also cover communities who lose access to resources aside from land, in this
case, water.

4.2.2 The Kwale Mineral Sands Project

The Mining Act, 2016 has a robust definition of community accounting for geograph-
ical proximity and resettled people. Section 2 of the Mining Act, 2016 defines
community as ‘a group of people living around an exploration and mining oper-
ations area; or a group of people who may be displaced from land intended for
exploration and mining operations’. The term community is used throughout the
Act with regards to consent for companies to gain licences, community development
plans, employment preference, community land rights, community investments and
royalty sharing.
Base Titanium’s programmes are designed to cover the mine site, resettlement site,
transport corridor, export port and supplemental infrastructure such as the Mukuru-
midzi Dam. This approach covers the entirety of the project, and its focus on auxil-
iary project infrastructure ensures the project affected people are catered for. This
478 A. K. Mutsotso

approach is equitable as all those impacted by the project are considered in the CSR
design. This efficiency can be credited to the fact that CSR projects in the KMSP
have run for the past two decades and also the progressive definition in the Mining
Act, which encourages the company to cater for all affected persons.

4.3 Resource Focused Definition of Local Community

The definitions in both the petroleum and mining laws are interpreted in practice
to include communities living next to the project site and those affected by the
development. The Petroleum Act’s definition is broader and covers all affected by the
exploitation, but in practice, projects for the ‘local community’ are focused on those
neighbouring the exploration sites. The Mining Act’s definition covers those in close
proximity and those displaced due to the operations. In practice, Base Titanium’s
approach is comprehensive and covers most communities affected by the project
affected by land loss. Going forward, it is vital that companies and government in
interpreting the definition of local community account for communities who lose
land and other natural resources, including water. Communities are affected during
projects as they lose access to resources vital to their culture and livelihood. As
illustrated in Lamu Port, communities who lose access to other resources aside from
land should also be prioritised and not seen as secondary groups.7 In the Lamu Port
Case, communities who were displaced from their land to make way for the Lamu
Port had been compensated. However, fisherfolk whose yield would reduce as a
result of the port construction had not been compensated. The High Court awarded
the fisherfolk compensation of approximately one million US dollars.

5 Conclusion

At the beginning of this chapter, we settled on a definition of CSR, which incor-

porated aspects of CSR from Kenyan extractives law. We also discussed sources of
financing for CSR projects and enforcement mechanisms. It was determined that the
CSR projects in the Kenyan extractives sector are company driven and it is in the best
interest of these companies to design, implement and complete these projects. We
used two case studies, the Kwale Mineral Sands Project operated by Base Titanium
and the South Lokichar Upstream Development operated by Tullow and Africa Oil.
We established that Base Titanium has had the benefit of running CSR programmes
for a decade and building on their predecessor’s decade learning of CSR and commu-
nity engagement. BT’s approach is advanced as it incorporated committees consisting
of the local community, politicians and local government before this was a legal

7 Mohamed Ali Baadi and others v Attorney General & 11 others [2018] eKLR is referred to as the
Lamu Port Case.
An Overview of Corporate Social Responsibility … 479

requirement. Tullow and Africa Oil started their project in 2010, and their approach
evolved from using CSR for land-related issues to a more holistic programme. The
CSR approach adopted by South Lokichar Upstream project is arguably forward-
looking and works towards moving community attention from seeking employment
within the petroleum sector while developing the linking sectors. The CSR activities
focus on education, training and livelihoods. Tullow and Africa Oil’s programmes
are in line with legal learning to develop capacity through the upstream sector.
We looked at the outstanding examples of executing CSR from both case studies.
From Kwale, the approach of using committees is vital in ensuring communities
and county governments input into the CSR programme; his way, the company
is informed of what projects to undertake. This also goes a long way in building
community decision making structures, essential in other sectors and other parts
of community life. However, there are still many concerns within the community
over the committee members whose concerns are legitimate. This chapter in no way
claims that Base Titanium’s CSR activities are adequate or the community as a whole
is satisfied; such a conclusion needs field research and data (see Spencer 2019). From
the upstream petroleum sector, the projects established that the focus on training and
economic development by Tullow and Africa Oil is a sustainable approach. Their
projects help the local community build skills that they can use in other sectors
without relying on the petroleum sector, given the sector needs minimal human
resources during production. For this CSR approach to be genuinely sustainable and
have a lasting impact, it is vital that the county and national governments partner
with the company to sustain the programmes once the company leaves and to help
the local economies grow, thus absorb the skilled individuals.
We identified the major challenge relating to CSR in the sector as the usage of
the geographical definition of local community. We advanced arguments on why this
must be expanded to encompass communities that are directly impacted as a result of
disturbances to their communal resources, including land and water resources. The
definition should include all resources touching on land adjacent to the extractives
site and include other resources users such as water users. This way, when designing
CSR programmes, companies are more likely to be issued with a social licence to
operate by all impacted communities.

References

Abuya, W. (2016). Mining conflicts and Corporate Social Responsibility: Titanium mining in
Kwale Kenya. The Extractive Industries and Society, 3(2), 489. https://doi.org/10.1016/j.exis.
2015.12.008
Africa Oil Corp. (2020). Africa Oil Corp report to shareholders December 31, 2019 (p. 3). Retrieved
from https://www.africaoilcorp.com/i/pdf/2019-Q4-and-YE-Report.pdf
Africa Oil. (2019). Africa Oil Corporation, 2018 annual report and accounts (p. A-7). Retrieved
from https://www.africaoilcorp.com/i/pdf/2019-02-28-AOI-AIF.pdf
Africa Oil announces the closing of the acquisition of producing assets in Deepwater Nigeria.
(2020). Retrieved from https://news.africaoilcorp.com/releases/entry/122771
480 A. K. Mutsotso

Africa Oil Corp.—Corporate responsibility—Community & Economic Development Policy.

Africaoilcorp.com. Retrieved March 8, 2020, from https://www.africaoilcorp.com/s/corporate-
responsibility.asp?ReportID=584655
Africa Oil Corp.—Corporate responsibility—Creating shared prosperity: Community development
highlights. Africaoilcorp.com. Retrieved from https://www.africaoilcorp.com/s/corporate-respon
sibility.asp?ReportID=598181
Africa Oil Corp.—Corporate responsibility—Kenya. Africaoilcorp.com. Retrieved March 8, 2020,
from https://www.africaoilcorp.com/s/corporate-responsibility.asp?ReportID=598182
Africa Oil Corp.—Corporate responsibility. Africaoilcorp.com. Retrieved March 8, 2020, from
https://www.africaoilcorp.com/s/corporate-responsibility.asp
Africa Oil Corp. (2019). Extractive Sector Transparency Measures Act—2018 annual report.
Retrieved from https://www.africaoilcorp.com/i/pdf/2018-aoi-estma.pdf
Base Titanium—Biodiversity & conservation. Basetitanium.com. Retrieved March 6, 2020, from
https://basetitanium.com/environment/environmental-programmes/biodiversity-conservation
Base Titanium Communities policy. (2012). Retrieved from https://basetitanium.com/governance/
company-policies?download=8:communities-policy
Base Titanium—Community engagement. Basetitanium.com. Retrieved March 2, 2020, from https://
basetitanium.com/community/engagement
Base Titanium—Community health. Basetitanium.com. Retrieved March 7, 2020, from https://bas
etitanium.com/community/community-programmes/community-health
Base Titanium—Community infrastructure. Basetitanium.com. Retrieved March 4, 2020, from
https://basetitanium.com/community/community-programmes/community-infrastructure
Base Titanium environmental policy. (2012). Retrieved from https://basetitanium.com/governance/
company-policies?download=11:environmental-policy
Base Titanium—Environmental programmes. Basetitanium.com. Retrieved March 3, 2020, from
https://basetitanium.com/environment/environmental-programmes
Base Titanium—Our approach. Basetitanium.com. Retrieved March 3, 2020, from https://basetitan
ium.com/environment/our-approach
Base Titanium—Project economic contribution. Basetitanium.com. Retrieved March 3, 2020, from
https://basetitanium.com/kwale-project/project-economic-contribution
Base Titanium—Projects & livelihood programmes. Basetitanium.com. Retrieved March 3,
2020, from https://basetitanium.com/community/community-programmes/community-projects-
livelihood
Base Titanium—Rare & endangered flora. Basetitanium.com. Retrieved March 3, 2020, from https://
basetitanium.com/environment/environmental-programmes/rare-endangered-flora
Base Titanium—Rehabilitation & restoration. Basetitanium.com. Retrieved March 4, 2020, from
https://basetitanium.com/environment/environmental-programmes/rehabilitation-restoration
Base Titanium—Scholarships. Basetitanium.com. Retrieved March 3, 2020, from https://basetitan
ium.com/community/community-programmes/scholarships
Base Titanium—Social impact assessment. Basetitanium.com. Retrieved March 3, 2020, from
https://basetitanium.com/community/our-approach/sia
Developing production operators in Turkana. (2019). Tullowoil.com. Retrieved March 7, 2020, from
https://www.tullowoil.com/media/case-studies/developing-production-operators-in-turkana
Golder and Ecologics Consultants Ltd. (2019). Draft environmental and social impact assess-
ment report for the foundation stage of the South Lokichar development for the upstream oil
production in South Lokichar. Nairobi: Tullow BV Kenya. Retrieved from https://www.tul
lowoil.com/Media/docs/default-source/operations/kenya-eia/esia-report_foundation-stage-of-
south-lokichar-development.pdf?sfvrsn=2
Government Printers. Mining Act, 2016 (Community Development Agreements) Regulations
(2017). Nairobi.
Guarding Our Future. (2019), (2), 40–41. Retrieved March 7, 2020, from https://www.tullowoil.
com/Media/docs/default-source/operations/ustawi/tullow-kenya_ustawi-_march-2019.pdf?sfv
rsn=2
An Overview of Corporate Social Responsibility … 481

Kihara, G. (2011). Titanium mining firm to begin work in six months. Daily Nation. Retrieved
March 8, 2020, from https://www.nation.co.ke/business/Titanium-mining-firm-to-begin-work-
in-six-months/996-1095300-v2s7t5z/index.html
Lundin group: About us. The Lundin Group. Retrieved March 8, 2020, from https://www.thelundin
group.com/about-us/
Muchai, J. (2019). Base Titanium denies sidelining communities in mineral exploration. Kenya
News Agency. Retrieved March 3, 2020, from https://www.kenyanews.go.ke/base-titanium-den
ies-sidelining-communities-in-mineral-exploration/
Mullins, D., & Wambayi, J. (2017). Testing community consent: Tullow oil project in Kenya
(p. 23). Oxford: Oxfam GB. Retrieved from https://cng-cdn.oxfam.org/kenya.oxfam.org/s3fs-
public/file_attachments/FPIC%20Report-November%202017.pdf
Mutai, E. (2019). Sh900m lies unused in petroleum training fund. Business Daily. Retrieved
March 1, 2020, from https://www.businessdailyafrica.com/economy/Sh900m-lies-unused-in-pet
roleum/3946234-5197276-4kas6dz/index.html
Ngei, S. Kwale Mining Alliance Working Group [PDF]. Transparency International—Kenya.
Retrieved March 8, 2020, from email communication
Ngei, S. (2020). Research on the impact of Base Titanium’s activities in Kwale County from the
perspective of civil society [in person]. Nairobi.
Njiraini, J. (2009). Tiomin caught between a rock and hard place. Standard Digital. Retrieved March
8, 2020, from https://www.standardmedia.co.ke/article/1144023414/tiomin-caught-between-a-
rock-and-hard-place
Odongo, G., Abuya, W. O., Masese, E., & Jamin, M. M. (2019). The fate of CSR projects when
ownership changes takes place from One Extracting Company to another. Journal of Sociology,
1(2), 14-28.
Okoth, E. (2020). Tullow job cuts in Kenya deepen oil export doubts. The East African. Retrieved
March 8, 2020, from https://www.theeastafrican.co.ke/business/Tullow-job-cuts-deepen-oil-exp
ort-doubts/2560-5449274-kqgd1r/index.html
Ong’olo, D. (2001). International investment and environmental issues: The case of Kenya’s Kwale
mineral sands project (p. 2). Jaipur: OECD. Retrieved March 3, 2020, from https://www.oecd.
org/env/2075490.pdf
Opiyo, K. (2006). Tiomin threatens to quit over land access. The East African. Retrieved March 4,
2020, from https://www.theeastafrican.co.ke/business/2560-252130-uvibli/index.html
Said Abdalla Budzo & 36 others V Tiomin (K) Limited & Another [2007] eKLR (High Court 2007).
Spencer, R. (2019). Resourcing rural livelihoods in Kenya: Intersections between mining, agriculture
and development, CASE—Reference no. 719-0064-1. Retrieved from March 10, 2020, from
https://www.thecasecentre.org/educators/products/view?id=166276
Turkana County Government. (2015). Turkana County Government enters a partnership with
Lundin Foundation. Retrieved from https://www.turkana.go.ke/index.php/2016/10/24/press-rel
ease-lundin-foundation-tcg/
Tullow Oil East Africa Operations. Tullowoil.com. Retrieved March 8, 2020, from https://www.tul
lowoil.com/operations/east-africa/kenya
Tullow oil equality and transparency. Tullowoil.com. Retrieved March 7, 2020, from https://www.
tullowoil.com/sustainability/equality-and-transparency
Tullow oil PLC code of ethical conduct. (2018). Retrieved from https://www.tullowoil.com/Media/
docs/default-source/1_About_us/2018-tullow-oil-code-of-ethical-conduct.pdf?sfvrsn=9
Tullow oil PLC human rights policy statement. (2017). Retrieved from https://www.tullowoil.com/
Media/docs/default-source/1_About_us/policies/tullow-oil_human-rights-policy-2017.pdf?sfv
rsn=14
Tullow oil PLC policy statement: Safe and sustainable operations. (2017). Retrieved from https://
www.tullowoil.com/Media/docs/default-source/1_About_us/policies/tullow-oil_safe-andsustai
naible-operations-policy.pdf?sfvrsn=16
Tullow oil: Sustainability. Tullowoil.com. Retrieved March 2, 2020, from https://www.tullowoil.
com/sustainability
482 A. K. Mutsotso

Vermaelen, T. (2011, June). An innovative approach to funding CSR projects. Harvard Business
Review. Retrieved March 8, 2020, from https://hbr.org/2011/06/an-innovative-approach-to-fun
ding-csr-projects
Water Has Been a Game Changer. (2019), (2), 18–25. Retrieved March 7, 2020,
from https://www.tullowoil.com/Media/docs/default-source/operations/ustawi/tullow-kenya_ust
awi-_march-2019.pdf?sfvrsn=2
What is CSR? | UNIDO. Unido.org. Retrieved March 8, 2020, from https://www.unido.org/our-
focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-respon
sibility/corporate-social-responsibility-market-integration/what-csr
Practice of Corporate Social
Responsibility (CSR) in Extractives
Sector in Indonesia

Yudo Anggoro, Adita Pritasari, Rivana Mezaya, Dematria Pringgabayu,

and Dany Muhammad Athory Ramdlany

Abstract Corporate social responsibility (CSR) has been receiving wide attention
as this practice implies the efforts of corporations and industries to contribute to
society. While the practice of CSR is expected to promote economic and social
development, CSR practices in extractives sector, especially in developing countries,
invites debates from stakeholders. The debates are mostly related to the negative
image of the extractives sectors in harming the environment and exploiting local
people. From the corporation side, debates are related to what kinds of CSR the
community desires and how much money corporations for their CSR activities spend.
This chapter explores the practice of CSR in the extractives sector in Indonesia, where
the extractives sector has been the backbone of the economy for years. It starts with
some reviews on the extractives sector and its operations in Indonesia, then the best
and worst experiences in CSR practices in the extractives sector, and finally provides
the main challenges that the extractives sector is facing and strategies to overcome
those challenges. This chapter concludes that CSR practices in the extractives sector
are sometimes performed to minimize the negative image of the industries. Often
corporations perform CSR activities in order to be perceived as having good business
practices by the community.

Y. Anggoro (B) · A. Pritasari · D. Pringgabayu · D. M. A. Ramdlany

School of Business and Management, Institut Teknologi Bandung, Bandung, Indonesia
e-mail: [email protected]
A. Pritasari
e-mail: [email protected]
D. Pringgabayu
e-mail: [email protected]
D. M. A. Ramdlany
e-mail: [email protected]
R. Mezaya
Business Ethics, Law and Sustainability, School of Business and Management,
Institut Teknologi Bandung, Bandung, Indonesia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 483
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_27
484 Y. Anggoro et al.

Keywords Corporate social responsibility (CSR) · Extractives sector · Indonesia ·

Sustainable development · Community · Developing countries

1 Introduction

As one of the growing economies in the world, Indonesia has various industry sectors
that generate economic activities. Among those sectors, companies that operate in
extractives sector make significant contributions to the economy through taxes. For
example, in 2017, PT Adaro Indonesia, one of the major coal mining companies
in the country, has paid taxes 39,309 million USD or around IDR 5.4 trillion. This
placed PT Adaro Indonesia as the number one taxpayer from the corporation category
in Indonesia. From the private category, some top individual taxpayers also come
from the extractives sector such as Arifin Panigoro who owns PT. Medco Energy
International, Garibaldi Thohir (Adaro Energy) and T.P. Rachmat (Triputra Group).
These companies mostly operate in the coal and mining sector in Indonesia.
Due to those facts, the extractives sector has an important role to develop the
economy in Indonesia. However, even though the extractives sector has a huge impact
on state income in Indonesia, the public has heavily criticized those companies. Most
of the critiques address the environmental impact of the exploration area. Other
negative view is directed to the minimum contribution of this sector to society.
In order to turn around these negative sentiments, the extractives sector puts
serious effort to develop CSR. CSR practices of the extractives sector have the main
objectives to benefit people, either within the company or within people outside of
the company. Through CSR activities, the overall goal of sustainable development is
the long-term stability of the economy and environment (Sigam and Garcia 2012).
In Indonesia, some extractives sector companies consistently conduct CSR for
the community. In order to increase the awareness of society about the importance of
CSR activity, some CSR awards have been granted to companies that have made extra
efforts in developing the community where the company operates. An example of this
CSR award is the Indonesia’s Best Corporate Practices award that gives appreciation
to the extractives sector in the category of corporate philanthropy and responsible
business practice. The winner is selected because their CSR programs are effective
to improve the community life and to preserve the environment. In this award, there
are three basic aspects to process evaluation of the TOP CSR award, which are ISO
26000, Creating Shared Value (CSV) and Good Corporate Governance (GCG).
The best experience with community involvement can be observed from the local
communities themselves when they accept the activities of extractives sector in their
community. On the contrary, the bad experiences with community involvement might
indicate that the extractives sector is unsuccessful to implement sustainable devel-
opment principles, and the local communities feel aggrieved and harmed by the
presence of extractives sector and their activities.
There are some examples where extractives sector creates negative impact on the
surrounding community. Some notable examples include the case of conflagration in
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 485

Balikpapan, the deadly abandoned mining pits in Samarinda and Kutai Kertanegara,
and the illegal drilling in Jambi, which caused the deaths of some people in those
incidents. Another negative example of the extractives sector is the poor conditions
in Papua province because of a prominent mining company that has been exploiting
local environments in large scale for decades. The Indigenous people in Papua, called
Amungme and Kamoro, explain that the mining activities in their hometown do not
provide any benefits but environmental disaster.
Because of the negative reputations of the extractives sector, the companies are
necessary to build business sustainability through CSR (Suastha 2018; Slack 2012).
Hence, there are challenges that the extractives companies are facing about CSR prac-
tices and community involvement such as assessments of project costs and benefits,
project and technology selection, respect for community consent and performance
incentive structures. The companies have to recognize that CSR is more than a way for
companies to manage their business processes to produce an overall positive impact
on the community at large. That communities sit adjacent to the extractives sector
activities must be the priority of CSR, the companies need to provide sustainable
development to them as “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs” (Brundtland
Report in Our Common Future 1987).
There are some extractives sector companies in Indonesia that have success-
fully implemented CSR activities to local communities, including, for example,
Indika Energy, Medco Energy International, Pertamina and Vale Indonesia. The CSR
practices of these companies can be viewed as best practices in Indonesia on how
the extractives sector can perform CSR programs that successfully engaging local
community in developing their areas. The success of this CSR program will affect the
positive images of the companies and help them to achieve business sustainability.

2 Extractives Sector

The extractives sector can be defined as processes involving various activities that
lead to the extraction of raw materials from the earth (such as oil, metals, minerals and
aggregates), processing and utilization by consumers (Gilberthorpe and Banks 2015).
This process occurs in the host country and the country of origin of the company, and
the global consumer market. The global value chain produced and the distribution
of values along the production chain and stakeholders can be influenced by local
policies, which are increasingly becoming strategic factors in investment decisions
and public policy formulation for the development of this extractives sector. Under-
standing these impacts requires an understanding of the structure of the extractives
sector (oil, gas and mining), which consists of activities ranging from exploration to
sales to end consumers (Buur 2013).
The extractives sector has significant potential to change an environment, society
and economy (Renwick et al. 2018). But not infrequently, the transformation in
the extractives sector can actually lead to conflicts or disputes between resources
486 Y. Anggoro et al.

originating from developers and the local community, which results in hindering
or giving disruption to company licenses to operate—especially those related to
operational costs for companies, local communities and the wider community (Acuña
2015).
The extractives sector is important instruments for creating wealth for developing
countries. For some countries that are rich in natural resources, the extractives sector
contributes more than 50% of GDP (Renwick et al. 2018) However, various benefits
that can be obtained by resource owners will be limited due to many factors, including
the characteristics of the industry and capital-intensive requirements to develop the
industry. The scope of the positive and negative impacts of the extractives sector is
very specific in terms of the context and differs from extractive activities, location,
economic environment and the quality of governance. These impacts can be influ-
enced at any value chain level by local policies adopted in the host country. Likewise,
it is very important to understand these impacts and their dynamics in order to draw
up the right design rules and policies.
The impacts of the extractives sector itself are very well known. Since the 1990s,
there have been a multitude of case studies and critical analysis of the impacts of
the extractives sector. The biggest risks are borne by those in places where natural
resources are taken (communities and countries), while the greatest benefits are
enjoyed by those who take them (companies and investors) (Lohde et al. 2015).
In general, the economic condition of an area that is the location of extractives
sector follows the extractives sector phase: exploration, construction, operation, post-
operation. During the exploration phase, the economic benefits that arise are very
small because the company is only looking for natural resources to be utilized. There
is not necessarily a discovery of resources—an oil and gas exploration usually have a
success factor of under 10%—and if found it is not necessarily technically and finan-
cially feasible to proceed to the next phase (Davis and Franks 2011). Because of this
situation, the company rarely provides any economic benefits to the region/country
where exploration is carried out.
However, if discovered natural resources are sought, and technically may be
exploited, and exploitation is calculated to bring economic benefits, the company will
enter the next stage, namely construction. Of course, this is carried out, at least ideally,
when the licenses whether from the Government and from the society around the
company’s operational places have been granted. In this phase, the economic impact
of the extractives sector will increase. Employment opportunities increase rapidly,
before falling back in the operating phase. Likewise, local business opportunities to
become suppliers of materials and services are needed. However, in aggregate, the
economic value of this phase is not large due to the short period (Canel et al. 2010).
The biggest economic benefits for the country are obtained during the period
of operation or exploitation, through taxes and non-tax state revenues. For certain
groups of people who are able to meet labour requirements and business contracts,
this phase also provides great opportunities. However, groups of people who can
fulfil it are usually very few. Thus, the dominance of labour and contracts in this
phase is usually non-local. Even if the local number of labours can look big, they
usually occupy a low level.
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 487

In recent years, the economic benefits of the extractives sector in Indonesia have
been increasing for many extractives sector that recognize the importance of carrying
out CSR, especially in the form of community development. Through this commu-
nity development, the company deliberately targets local communities to receive
benefits through employment opportunities, business development and projects for
the community (Slack 2012).
Enter the next phase, namely post-operation, the economic benefits also shrink.
Worse than just shrinking, many of the extractives sector that leave the area with
all valuable resources are exhausted, while there are no other resources or replace-
ments that can be utilized by the local community. If the majority of the people
are also migrants to find work in the extractives sector, they will immediately leave
the location once extraction is complete. If the Government does not allocate finan-
cial benefits during the operation to ensure that life can proceed afterwards, it is
almost certain that post-operation cities will decline economically. The ghost town
phenomenon is commonly found throughout the world (Graves et al. 2009).
In the exploration phase, social impacts can be minimal, unless the company
fails to approach the community around their operational area. The problem is that
public acceptance in this period will determine whether the company can get support
in the next phase. Most companies that think that Government licenses (legal and
actuarial licenses to operate) are adequate without community support (social license
to operate) will experience continuous problems. The best practices teach that social
licenses are at least as important as legal licenses, if not more important (Graves et al.
2009).
In the next phase, negative social and environmental impacts continue to grow.
The construction phase does provide employment and business opportunities, but it is
also known as a trigger for labour conflicts and business struggles. The influx of other
workers in large numbers also increases the incidence of conflict. Environmentally,
this phase also has a significant impact. Although the site of the extractives sector
is usually much smaller than the agricultural industry (e.g. palm oil plantations), the
environmental impact far exceeds site size.
Nevertheless, of course, the greatest social and environmental impacts come in
the phase of operations or exploitation. Tensions and conflicts with the community
because of land acquisition by means of coercion and deception occur far too often.
The shrinking employment opportunities make it difficult for people to fulfil their
needs because at the same time the prices of goods soar around any extractives sector’s
operating area. Most human rights violations occur in this phase too, because protests
from the public have not been responded to with an approach that honours human
rights. Meanwhile, loss of biodiversity; water, land and air pollution; other natural
resource depletion occurs at a high speed, and often is not reversed.
488 Y. Anggoro et al.

3 The Extractives Sector in Indonesia

Indonesia possesses is endowed with abundant natural resources providing a strategic

extractives sector. The gas industry in Indonesia is the most abundant gas supplier in
Southeast Asia with a total export of around 45% of production (Publish What You
Pay Indonesia 2018). For the oil and gas sector, the Ministry of Finance noted that oil
had contributed IDR 72,665.72 Billion, around 34% of the realization of non-tax state
revenues (PNBP) from January to July 2018. The results exceeded the target of the
state budget realization of IDR 59,582.70 Billion (around 121.94%) (Pahlevi 2018).
On the other hand, mining is also one of the strategic extractives sector by contributing
to non-tax state revenues (PNBP) reaching IDR 33.5 Trillion in September 2018
and is expected to reach IDR 43 Trillion by the end of 2018 (Suhartadi 2018).
Although, according to Suhariyanto, Head of National Statistics Agency, the mining
and quarrying sector in the previous year contracted negatively 0.49% because two
large companies, namely PT Freeport Indonesia (PTFI) and PT Amman Mineral Nusa
Tenggara (AMNT) ex-PT Newmont Nusa Tenggara, had experienced production
decline up to 60% since January 2017 along with the expiration of concentrate
export licenses for companies. These conditions also have an impact on weakening
economic growth in the provinces of Papua and West Nusa Tenggara (NTB) (Fauzi
2017).
Despite this, the extractives sector still faces stigma. The community largely
perceives that the extractives sector harms people and the environment rather than
provides benefits. According to Komnas HAM (the National Commission on Human
Rights), the extractives sector in East Kalimantan has violated the human rights
and harmed the environment. Until June 2016, 243 people had died as a result of
drowning in ex-coal mine holes, 22 of which were children: in Samarinda (fifteen
children), Kutai Kertanegara (eight children) and Pasir Panajem Utara (one child).
East Kalimantan is the leading producer of coal. There are 1488 Mining Business
License (Izin Usaha Pertambangan or “IUP”) issued by the Regional Governments,
Provincial Governments and District/City Governments. A large number of these
permits and mines in densely populated areas have left many ex-mine holes with
toxic water and heavy metal contamination. In 2016, Samarinda’s green open space
was only around 5%, while Law No. 26/2007 on Spatial Planning mandated a green
open space of at least 30% of the city area. This condition shows how mining as part
of the extractives sector has a negative impact on society and the environment. Even
though Law Number 4 of 2009 concerning Mining, Minerals and Coal has regulated
the holders of IUP and Special Mining Business License (Izin Usaha Pertambangan
Khusus or IUPK) must guarantee the application of environmental quality standards
in accordance with the characteristics of an area. These companies are also obliged to
preserve the function and carrying capacity of the water resources in question by the
provisions of legislation (Komnas HAM 2016). If this continues, the environmental
crisis cannot be avoided.
The environmental damage is not the only impact of the extractives sector.
Conflicts often occur because of the different perceptions among stakeholders and
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 489

the community. Many findings highlight the negligence and lack of coordination
by the management of extractives sector companies that have been the cause of
conflicts between companies and local communities (Bebbington 2010; Bracking
2009; Davis and Franks 2011; Maconachie and Menzies 2015). The village offi-
cials in each region are expected to be representatives of the community in such
conflicts; however, they are often considered the puppets of mining companies. The
situation is aggravated by the existence of gaps rooted in injustices of the investment
returns distribution. Conflicts could also lead to human rights violations. According to
Zeid Ra’ad Al Hussein, the United Nations High Commissioner for Human Rights,
Indonesia’s extractives sector is full of human rights violations. His statement is
based on complaints from civil society from Sumatra to Papua. The mining and
logging of large companies have become the main causes of human rights viola-
tions, such as farmers, workers and Indigenous peoples (Suastha 2018). Morowali
District in Central Sulawesi is one example of a place where the conflict has occurred.
Morowali is a fertile area in nickel minerals, so this district is nicknamed “Nickel
Land”. However, the majority of Morowali people who are farmers are not provided
enough training opportunities to become workers in mining companies, and even the
wages are not feasible for those who can work. The mining companies in Morowali
prefers to recruit foreign workers or local workers from other cities, whereas the
communities expect that mining companies should be able to improve the welfare
of farmers, labourers and communities living around the mine (Sabintoe 2016).
This conflict can worsen when mining occurs on customary land. The existence of
differences in paradigms, perceptions, and the meaning of local wisdom values are the
main triggers for conflict. Mining companies consider the land and natural resources
in an economic and business perspective, while Indigenous people view land as
their source of life and their culture, therefore they must maintain it. For instance,
the conflict that occurred in Central Kalimantan, PT AGL, is considered to have
annexed the Dayak tribal land. The Indigenous community has been relying for years
on agricultural land, which has now turned into a mining pit or palm oil plantation.
The land was a source of livelihood for Dayak people because it provides welfare
and virtue. The creation of various forms of local wisdom across generations is due
to the strong agrarian culture that has been practiced for generations by villagers. In
2012, residents of Murung Raya District sacrificed a pig by conducting a traditional
ritual called hinting pali to exclude the mining companies that destroyed sacred
areas in the Tanah Siang Selatan District. Hinting means boundary, while pali means
prohibition or taboo. The ropes installed by residents in palm oil plantations showed
the boundaries of the area claimed by them. Referring to traditional consensus, those
who violate or damage the boundary will be subject to customary sanctions from
ancestral spirits. Like the “police line”, hinting pali was installed with the intention
of begging the ancestors to guard the boundary area. In 2016, residents of Tumbang
Mantuhe, Gunung Mas Regency, also erected hinting pali in palm oil plantation areas
(Luthfy 2018).
The above examples illustrate the need for the extractives sector in Indonesia to
develop the country’s economy from upstream to downstream under the mandate
outlined by the 1945 Constitution Article 33, Paragraph 3 that the nation has to
490 Y. Anggoro et al.

manage natural resources effectively to maximize its social welfare benefits. The
different perceptions that lead to this conflict need to develop anticipatory steps as
soon as possible. Comprehensive anticipation efforts to prepare a problem-solving
plan based on a win–win solution and future-oriented. One step that can be conducted
is to run a participatory CSR program.

4 CSR in Indonesia

CSR is a common concept for an extractives sector in Indonesia today. CSR indicates
that a company’s responsibility is not only the economic objectives and outcomes
but also the social and environmental objectives and outcomes for the wider commu-
nity that the company is situated within. Consequently, a company must not only
contribute to its shareholder base, as in generating profits, it also has to satisfy
the needs of its other stakeholders. These stakeholders include all elements of a
community that the company has relationships with, such as suppliers, customers,
employees, Government, surrounding communities and broader society.
CSR generally refers to transparent business practices that are based on ethical
values, compliance with legal requirements, and respect for people, communities,
and the environment (Chandler 2001). In the business context, a company needs to
be a “good neighbour” within its host community, as intended by the CSR concept.
In this technology era, globalization has blurred country borders. Fierce competi-
tion is increasing between skilled employees, consumer loyalty and investors, align
with the company’s effort to protect their brand reputation. In order to make its
business sustainable, every company must pay attention to the relationships with its
workers, customers and also its host communities. CSR management in the global
context has moved fast from the phase of planning and implementation to evalua-
tion and control phase. Since November 2010, the International Standard Organiza-
tion (ISO) has officially issued ISO 26000 as guidance for executing CSR planning
and implementation. Meanwhile, to help CSR evaluation and control, many compa-
nies publish their CSR Report based on a standard issued by the Global Reporting
Initiative (GRI).
Indonesia is the largest economy in Southeast Asia and currently is the only
country in the region that became a member of G-20 (a group of 20 of the
world’s largest economies). Indonesia also has many corporations operating in
natural resources-related business, such as mining, forestry and plantations. Thus, the
need for companies to become sustainable and to optimize economic contribution,
environmental performance and social responsibility is high in Indonesia.
While the international context of CSR provides many guidelines and definitions
(e.g. ISO 26000, OECD Guidelines for Multinational Enterprises, Global Reporting
Initiative, Sustainable Development Goals, etc.), each country has different CSR
implementation according to their cultural context. With Indonesia currently being
one of the fastest growing economies in the world, the national CSR agenda repre-
sents a number of challenges that highly differ from those of, for example, Europe
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 491

or the USA. Hence, Visser in Country Scan CSR in Indonesia (2009:474) defines
CSR in emerging economies as “the formal and informal ways in which business
makes a contribution to improving the governance, social, ethical, labour and environ-
mental conditions of the emerging economies in which they operate, while remaining
sensitive to prevailing religious, historical and cultural contexts”.
Initially, CSR was not familiar for Indonesian companies, including state-owned
companies, even though charities and philanthropic activities were a common prac-
tice. However, in 1998, after the Reformation era, the increase in Government
involvement aided the CSR movement in Indonesia. Public participation has been
possible in the decision-making system, including monitoring if the companies show
irresponsible actions towards environment and society. The Ministry of SoE issued
a Minister Decree No. Kep-216/M-PBUMN/1999 on 28 September 1999, followed
by the enactment of Law No. 19/2003 concerning SoEs and the issuance of the SoE
Ministry Regulation No. Per-05/MBU/2007 concerning SoE’s partnership with small
enterprises and environmental management programs. All law and regulations stated
that every SoE had to allocate 4% of its net profit on the partnership with small and
medium enterprises and environmental management programs, equally 2% each for
partnership programs and for environmental management programs.
In 2017, the Government and the parliament of the Republic of Indonesia passed
Law No. 40/2007 regarding Corporation. Article 74 of the Law said that all compa-
nies operating in and/or related to natural resources have to follow social and envi-
ronmental responsibilities. Different from previous laws and regulations that were
applicable specifically to SoEs, this law applied to all companies either Govern-
ment, private domestic or foreign-owned companies. There was also an initiative
from the National Center for Sustainability Reporting, a joint effort of several non-
Governmental organizations and professional associations started in 2005, to conduct
the Indonesia Sustainability Reporting Award (ISRA) to give an award to companies
that had published sustainability reporting.
For many Indonesian companies, economic success is the main baseline require-
ment needed to be achieved. The voluntary CSR adoption is usually led by national
and multinational companies; they have many programs that help the objective of
Government, to achieve better welfare of society in Indonesia. They fulfil their phil-
anthropic responsibilities by setting aside budgets for partnerships and community
development. These funds are then distributed to different branches of the company
across the countries to address common societal issues including public health, access
to education, economic empowerment, infrastructure, etc. For example, companies
from oil and gas sectors such as Exxon Mobil, Pertamina, ConocoPhillips and
Chevron have long-term community development programs that are aligned with
their project strategy including the national/local content strategy.
Nevertheless, there are still several key issues in Indonesia as reported by CSR
Netherlands, stated as follow:
492 Y. Anggoro et al.

4.1 People

Labour condition of CSR in Indonesia is still recognized having some issues such as
child labour, unfair minimum wages per sector, incompliance of health and safety,
discrimination towards ethnic minorities, and human rights. The Indonesian popu-
lation, in general, has a strong hierarchical structure driven by status and wealth
causing a gap between rich and poor.

4.2 Planet

There are some issues related to Land Use in extractives sector. Deforestation or
burning forests to create land for, among others, the palm oil industry causes smoul-
dering peat and carbonized soil. Furthermore, it leads to air pollution. This has a
great impact on the health of neighbouring communities. Deforestation also causes
friction with local communities, and Environmentis placing increasing pressure on its
natural resources as we can see that Indonesia is one of the world’s richest countries
in natural resources and biodiversity, but the growing population and economy. One
of the main causes can be found in agriculture, mining and fishing. CSR possesses the
responsibility of companies for their impact on society, especially in environmental
impacts. It must provide community projects or nature reserves and create public
policy dialogue and institutions towards more sustainable development and land use,
respectively.

4.3 Profit

Corruption as a highly organized and widespread phenomenon in Indonesia. It

remains difficult to completely eradicate corruption, even more, it happens in all
stages of the bureaucracy process: design, implementation and supervision. The
Indonesian market is tightly protected. There is a rule that within international compa-
nies for each foreign employee, 10 Indonesians must be employed as a counterbal-
ance. Market disruption and false competition generally occur through price fixing.
The Komisi Pengawas Persaingan Usaha (KPPU) was installed as a supervisory body
to control fair competition. However, currently, the KPPU is now also subjected to
discussions regarding corruption.
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 493

5 Evidence of CSR Practices in the Extractives Sector

in Indonesia

In order to gain a deeper perspective on the CSR practices in the extractives sector
in Indonesia, some interviews have been performed with several key stakeholders
in the industry. The respondents come from industry, academia, Government and
non-Government organization (NGO) backgrounds. For the industry, respondents
come from one of the largest copper mining companies in Indonesia and one large
state-owned oil and gas company. From the Government side, respondents include
Government officials in the Ministry of Energy and Mineral Resources who are in
charge of supervising community development activities managed by private sectors.
Program of community development is one form of CSR actualization that focuses
on the development of human resource. The presence of the extractives sector in the
midst of community life with its various activities raises socio-economic inequal-
ities of local community members, so community development could improve the
competitiveness and independence of local communities. The Government regu-
lation requires corporations, especially in extractive resource industries, to spend
some proportions of their operational budget to perform community development
activities. The Government refers to this as the corporate responsibility for society
and environment. The Government expects that one of the goals of this community
development activity can be used to recover the exploration site to meet environment
standards.
Based on the Government regulations, corporations are required to spend a
minimum of 2% of their operational expenses towards their community development
programs. Some big companies in Indonesia are renowned for their generosity in
spending more for community development projects. These projects can range from
providing employment for local people, developing infrastructure, building schools
and roads, to providing scholarships for students in the local area. For the mechanism
to allocate funds for community development activity, the company’s management
needs to include this activity in the company’s annual plan and budgeting. Once the
commissioners approve the plan and budgeting, the activity can be performed.
Some notable companies that are often doing community development projects
in big scale for example are Freeport Indonesia in Papua province, Vale in South
Sulawesi province and Pertamina, the state-owned oil and gas company. Freeport
Indonesia (formerly is a subsidiary of Freeport-McMoran Inc., but since December
2018 the Indonesian Government bought 51.23% of the shares), one of the largest
copper and gold mining companies in the world, has been operating in Indonesia
since 1967. Its main operation for copper and gold mining is in Tembagapura
highland (Grasberg mine), Papua province. Since its first operation in Indonesia,
Freeport operation has sparked controversies from many people. The controversies
are mostly related to the exploitation of environment in the mining site and the contin-
uous conflict between the company and the local people. For example, Freeport has
been accused of damaging the environment in Papua. The environmental damage
494 Y. Anggoro et al.

includes the water pollution of Ajkwa and Otomona rivers due to tailing waste, and
deforestation of Papua rainforest.
The local people in Papua often demand Freeport to contribute more to develop the
local community since the community where Freeport located is considered under-
developed. This situation is quite common in Indonesia, where most of the operation
sites of the mining companies are located in rural areas, which have poor infrastruc-
ture facilities and a lack of accessibility. As a result, local communities expect the
extractives sector to generate more positive spillover effects to their surroundings.
For the case of Freeport Indonesia, in order to have more alignment with the
local community, the company has attempted to create a community development
program that is based on sustainability principles. Especially after the Government
of Indonesia became the majority owner of the company in December 2018, the
company has committed to develop smelter for further processing of the copper
ore. This smelter is expected to have a processing capacity of 2–2.6 million tons of
copper ore per year. With this amount of processed copper ore, Freeport Indonesia
can increase the value of its output. On the other hand, the commitment of Freeport to
develop a smelter in Indonesia is to meet Government regulation in banning exports of
unprocessed raw materials. This regulation has forced mining companies to process
their mineral ore further before exporting it to other countries.
Another commitment from Freeport Indonesia is to invest US$20 billion in the
Grasberg copper and gold mine until 2041, which is the end of the Freeport contract
in Papua. In order to ensure the development of local communities, from the 51.23%
of the Government of Indonesia’s share at Freeport Indonesia, 10% of it is given to
Papua provincial Government. For developing local communities in Papua, Freeport
Indonesia has spent more than US$15 billion in various projects including educa-
tion, gender equality, infrastructure, health and environment protection. It is now the
largest private sector employer in Papua province. In the education sector, Freeport
provided scholarships to more than 11,000 students to study at all education levels,
from elementary to doctoral programs.
The objectives of all these CSR activities initiated by Freeport Indonesia are to
ensure that the company meet the sustainable development principles especially in
the field of education (number 4), health (number 3), economics (number 8) and
cultural development (number 16) as well as to have alignment with the values of
local people in the community (PT Freeport Indonesia 2016). The company expects
that all these CSR initiatives might increase the image of the company to the local
community, and to the public in general. The approach taken by the company to
ensure the success of their CSR programs is mostly by making contact with top
Government officials so that the Government supports the programs and maintains
a network with community leaders. Having a close relationship with community
leaders is important since Indonesian society is a communal society where patronage
still plays an important role in collective decision-making.
Another example of CSR practice in the extractives sector in Indonesia is CSR
implementation performed by Vale Indonesia. Established in 1968 as PT International
Nickel Indonesia and since renamed to PT Vale Indonesia, it is the biggest nickel
producer in Indonesia. Vale Indonesia produces about 75,000 tons of nickel per year,
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 495

contributing 5% of the world’s nickel supply. However, the huge success of Vale
Indonesia has brought about enormous consequences for the environment where
the mining operations are. For example, air pollution is often cited by residents
complaining their house roofs get dirty and the alteration of water hydrology caused
by changes in weather.
Those issues are the trigger of CSR practices at PT Vale Indonesia. The company
has commitment to preserve the earth through environmentally friendly technology.
First is hydroelectric power plant (PLTA), Vale Indonesia operates three PLTA with
the total capacity 365 Megawatt located at Larona, Balambano and Karebbe. The
function of these hydroelectric power plants is to operate furnaces that process and
smelter nickel seeds, thereby minimizing the use of fossil fuels.
Second is land reclamation as post-mining rehabilitation including nursery and
biodiversity programs. The technique of land reclamation is to use backfilling systems
as a soil exfoliation process. Vale Indonesia rehabilitates more than 100 ha of lands
per year and produces about 700,000 seeds. Until 2017, the total rehabilitated lands
is 4.154 ha. Third is the building of a baghouse to absorb dust emissions and electro-
static precipitator (ESP) as dust sedimentations. Through this facility, in 2019 Vale
Indonesia plans to decrease SO2 emissions from 0.86 kg SO2 /kg Ni to 0.80 kg SO2 /kg
Ni. Fourth is Lamella Gravity Settler (LGS). It integrates 17 settling ponds with the
capacity of 16 million cubic metres in order to process water waste effectiveness and
safeness to water flows.

6 Conclusion

The main challenges that the extractives sector are facing related to CSR practices
in Indonesia are mostly around public acceptance and difficulties in dealing with
the Government—social and political licenses to operate. Many people in Indonesia
believe that the presence of the extractives sector is purely about the exploitation
of resources while giving little benefits to the society. The public demand more
contributions from extractives sector such as providing job opportunities for local
people, developing local communities and providing basic infrastructure in the local
areas surrounding mining operations. Related to the challenges with the Government,
unclear regulation is still the main factor for extractives sector in dealing with the
Government. There are many regulations in the extractives sector that cause ineffi-
ciency in governance. Other problems at the Government level include a rent-seeking
mentality in some sections of Government highlighting that corruption is rampant.
Even though some challenges prevail in the extractives sector, some major corpo-
rations are still willing to expand their operations in Indonesia. These companies
range from multinational, local and state-owned companies. For the multinational
companies, the fact that there are many opportunities in this sector in Indonesia is the
main factor they invest in the country. For the state-owned companies, their reason to
operate is mainly to fulfil the obligation from the State to manage the strategic indus-
tries in the country. Some of the major companies that are still operating in Indonesia
496 Y. Anggoro et al.

include Freeport Indonesia (copper mining), Vale Indonesia (nickel), Pertamina (oil
and gas) and Chevron Indonesia (oil and gas).
From the community side, despite the fact that some people still oppose the
operation of extractives sector in their community, this sector still has some lucrative
offerings. An opportunity to work in the company and to learn new things in the
sector still attracts many local people to work in the industry. From the Government
side, much work needs to be completed in this sector. Firm regulation is the key to
maintain the healthy business climate of the industry. Therefore, the Government
needs to work hard to reform the regulations in energy and extractives sector so that
companies will be attracted to invest their money and other resources in Indonesia.

References

Acuña, R. M. (2015). The politics of extractive governance: Indigenous peoples and socio-
environmental conflicts. The Extractives Industries and Society, 2(1), 85–92.
Bebbington, A. (2010). The extractives sector and stunted states: Conflict, responsibility and insti-
tutional change in the Andes. In Corporate social responsibility: Discourses, practices and
perspectives (pp. 97–115).
Bracking, S. (2009). Hiding conflict over industry returns: A stakeholder analysis of the extractives
sector transparency initiative. Brooks World Poverty Institute: University of Manchester.
Buur, L., Therkildsen, O., Hansen, M. W., & Kjær, M. (2013). Extractive natural resource
development: governance, linkages and aid (No. 2013: 28). DIIS Report.
Canel, E., Idemudia, U., & North, L. L. (2010). Rethinking extractive industry: Regulation, dispos-
session, and emerging claims. Canadian Journal of Development Studies/Revue canadienne
d’études du développement, 30(1–2), 5–25.
Chandler, S. G. (2001). Introduction: Defining corporate social responsibility, ethical performance
best practice.
Davis, R., & Franks, D. M. (2011). The costs of conflict with local communities in the extractive
industry. In Proceedings of the First International Seminar on Social Responsibility in Mining,
Santiago, Chile (Vol. 30, pp. 7576–7581).
Fauzi, Y. (2017). Ekonomi Tumbuh, Industri Tambang Malah Melorot. Retrieved January 30,
2019, from CNN Indonesia. https://www.cnnindonesia.com/ekonomi/20170505144748-85-212
583/ekonomi-tumbuh-industri-tambang-malah-melorot.
Graves, P. E., Weiler, S., & Tynon, E. E. (2009). The economics of ghost towns. Journal of Regional
Analysis and Policy, 39(2), 131–140.
Gilberthorpe, E., & Papyrakis, E. (2015). The extractives industries and development: The resource
curse at the micro, meso and macro levels. The Extractives Sector and Society, 2(2), 381–390.
Lohde, L., Armstrong, C., & Nyhan Jones, V. (2015). The art and science of benefit sharing in the
natural resources sector. Washington, DC: International Finance Corporation.
Luthfy, R. M. (2018). Adat dan Konflik Pertanahan. Retrieved February 19, 2019, from Koran
Jakarta https://www.koran-jakarta.com/adat-dan-konflik-pertanahan/.
Maconachie, R., Srinivasan, R., & Menzies, N. (2015). Natural resources, extractive industry
investment, and social conflict.
Pahlevi, R. (2018). Mengenai Produksi Minyak Bumi Indonesia, Ini Faktanya. Retrieved February
16, 2019, from Liputan 6. https://www.liputan6.com/bisnis/read/3633451/mengenai-produksi-
minyak-bumi-indonesia-ini-faktanya.
PT Freeport Indonesia (October 2016). Ajang Perkenalan Program Sosial Perusahaan. Retrieved
from PT Freeport Indonesia. https://ptfi.co.id/id/news/detail/promoting-company-social-pro
grams.
Practice of Corporate Social Responsibility (CSR) in Extractives Sector … 497

Publish What You Pay Indonesia. (2018). Penelitian: Peta Masalah dan Tata Kelola
Industri Gas Indonesia, di Sepanjang Rantai Nilai Industri Ekstraktif . Retrieved
from PWYP Indonesia. https://pwypindonesia.org/id/penelitian-peta-masalah-dan-tata-kelola-
industri-gas-indonesia-di-sepanjang-rantai-nilai-industri-ekstraktif.
Renwick, N., Gu, J., & Hong, S. (2018). China and African Governance in the Extractives Indus-
tries. In International Development Policy Revue internationale de politique de développement,
10(10.1).
Sabintoe, M. (2016). Dampak Kehadiran Perusahaan Tambang Terhadap Kehidupan Petani di
Morowali. Retrieved February 19, 2019, from Partai rakyat Pekerja. https://www.prp-indonesia.
org/2016/dampak-kehadiran-perusahaan-tambang-terhadap-kehidupan-petani-di-morowali.
Sigam, C. & Garcia, L. (2012). Extractive Industries: Optimizing value retention in host countries.
Retrieved from https://unctad.org/en/PublicationsLibrary/suc2012d1_en.pdf.
Suastha, R. D. (2018). PBB Sebut Industri Ekstraktif Indonesia Sarat Pelanggaran HAM. Retrieved
February 2, 2019, from CNN. https://www.cnnindonesia.com/internasional/20180208021554-
106-274696/pbb-sebut-industri-ekstraktif-indonesia-sarat-pelanggaran-ham.
Suhartadi, I. (2018). Peluang dan Tantangan Sektor Pertambangan pada 2019. Retrieved February
22, 2019, from Berita Satu. https://id.beritasatu.com/energy/peluang-dan-tantangan-sektor-per
tambangan-pada-2019/182758.
Slack, K. (2012). Mission impossible? Adopting a CSR-based business model for extractives
industries in developing countries. Resources Policy, 37(2), 179–184.
The UN Interagency Framework Team for Preventive Action. In Toolkit and guidance for preventing
and managing land and natural resources conflict: Extractive industries and conflict. Retrieved
from https://postconflict.unep.ch/publications/GN_Extractive_Consultation_ES.pdf.
Visser, W. (2009). Corporate social responsibility in developing countries. The Oxford Handbook
of Corporate Social Responsibility.https://doi.org/10.1093/oxfordhb/9780199211593.003.0021.
World Commission on Environment and Development (1987). Our common future: The world
commission on environment and development. Oxford University Press.
Corporate Social Responsibility:
Brazilian Case

Silvia Andrea Cupertino, Hirdan Katarina de Medeiros Costa,

and Marcia Regina Konrad

Abstract The purpose of this study was to analyse the related regulations: special
purpose company in the transport of natural gas through pipelines, noting that
Brazilian legislation is stumbling, with no specific regulations in the gas sector.
We sought to analyse the corporative governance applied to such types of corporate
models, pointing to the need for improvement in the gas sector, understanding that
there is a legal loophole to its application in this sector.

Keywords Specific purpose company · Corporate governance · Natural gas

1 Introduction

The Brazilian administrative reforms of the 1990s saw the State direct its infrastruc-
ture activity to the regulatory area, departing from its role as entrepreneurial State. In
view of this change in State activity, it is necessary to insert control instruments, so
that the public service is effectively provided to the population. Thus, we have seen
a shift in Brazilian public management that focuses on public governance tools.
The gas sector in Brazil is strongly regulated and oriented by standards. Its gover-
nance focuses on the actors involved and available decision-making and implemen-
tation structures by a public agency or a private entity. It is a governmental institu-
tional arrangement that seeks innovative solutions to the deepening of democracy
through the articulation of the economic-financial, institutional-administrative and
socio-political dimensions, establishing partnerships with civil society and the private

S. A. Cupertino (B) · H. K. de M. Costa · M. R. Konrad

University of São Paulo, São Paulo, Brazil
e-mail: [email protected]
H. K. de M. Costa
e-mail: [email protected]
M. R. Konrad
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 499
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_28
500 S. A. Cupertino et al.

market. Thus, it presupposes a democratic project insofar as it considers the impor-

tance of civil society in the formulation of public policies (Ronconi 2011). The
performance in promoting the delivery of public services to the Company should
be based on efficiency and transparency instruments for greater social control and
reduction of information asymmetries.
Thus, the strategy adopted by the national regulation in Brazil was the use of
the Specific Purpose Company (SPC) model in the formatting of public service
concessions. Its benefit is the segregation of the equity of the corporate persons
and the partners who performed the activity. In such a model, there may be a close
partnership between the State and the private sector, and in the case of public service
concessions, between private individuals and between state and private companies,
with the regulation implemented by the regulatory body. For Féres (2004), the SPC
can be classified as a joint venture, creating a person distinct from the partners to
achieve a common purpose. It points out that the Public–Private Partnership Law
states that it can assume any corporate type. In the SPC’s negotiating scheme, the
State is subject to the control of the individual.
Therefore, the application of the SPC model in the Brazilian gas sector is a tool to
ensure insertion of best management practices in utilities companies, which concili-
ates strategic objectives of the organisation and the engagement among its members,
leading to the implementation of the principle of transparency and public gover-
nance as a type of state management. An important aspect for the analysis of Special
Purpose Companies1 is the scope of corporate governance as an instrument to confer
management transparency and to attribute reliability to foreign investment in partner-
ships in the area of natural gas transportation. Thus, a more in-depth study is required
of this Brazilian model that is currently used by gas transportation concessionaires
through pipelines in order to point to ways for more efficient regulation that complies
with corporate governance rules.
According to Petrobras (nd), this model was used in 2005 when created by
‘Transportadora Gasene S/A’, a finance project in which the company was created
for a specific goal: raise funds to implement a project and to individualise costs,
revenues and results, allowing a clear view of the business and the perception of
risks to partners and potential funders. Since the late 1990s, Petrobras has been
using this same SPC model for the development of its E&P, gas transportation and
refining projects, such as Marlim 1999; Cabiúnas 2000; Espadarte-Voador-Marimbá
2000; Barracuda/Caratinga 2000; Albacora Japan 2000; Albacora Petros 2001; New
Marlim 2001; Snapper-Carapeba-Garoupa-Cherne-Congro 2002; Knitwear Project
2002; Project Urucu-Manaus 2004; Marlim Leste 2004; Mexilhão 2005; REVAP
2006, Petrobras 2015).
At the same time, as Lantos (2001) points out, the development of the corpo-
rate social responsibility (CSR) concept involves four components: economic, legal,
ethical and altruistic duties; proposing that ethical CSR, grounded in the concept
of ethical duties and responsibilities, is mandatory and good for business and
society. Corporate social-environmental responsibility comes from the notion that

1 A ‘Special Purpose Company’ is created for a specific goal and has a determined time of existence.
Corporate Social Responsibility: Brazilian Case 501

firms should be accountable to society’s long run needs and wants by minimising
harms (ethical CSR) and promoting benefits for society (altruistic and strategic CSR)
where social responsibility should orient various stakeholders in achieving economic
performance, ethical performance and social performance.
Moir (2001) reviewed the literature on CSR noting that it “has strong divides
between normative or ethical actions and instrumental activities” and revealed an
increasing focus both by business on CSR and by society on the actions of the
private sector. This led to the development of methods to identify the responsibility
of companies to society, their structures, how these structures impact rights to well-
being and adequate models to fulfil legal and ethical needs by stakeholders and their
engagement as a way of determining precise activities. We consider the Specific
Purpose Company (SPC) as a legal and ethical tool in order to reach a reliability to
foreign investment in partnerships in the area of natural gas transportation.
The inclusion of best management practices in utility companies addresses the
organisation’s strategic objectives and engagement among its members. This leads
to the implementation of the principle of transparency, where timely and reliable
information should be disclosed to the general public, rather than only to regulated
stakeholders. Best management practices also lead to the implementation of the
principles of equity (where fair and appropriate treatment is given to all stakeholders)
and accountability (full responsibility of the directors with respect to their actions
during their periods of operation).
The model adopted by the Brazilian Constitution of attributing to third parties the
provision of certain essential public services requires the adoption of control prac-
tices and mechanisms for measuring the quality of the activities developed by the
concessionaires. In this sense, good governance practices have the scope of adding
value to society, providing access to the capital market, contributing to the perma-
nence of companies in the face of positive results (Bernardino 2014), which generates
greater funding, resources and conversion of such gains into tariff modality.
The viability in implementing the infrastructure of gas transportation depends on
a proper legal structure in order to create a robust environment to allow large private
capital to invest in construction and operation of natural gas transportation plants.
Therefore, rules oriented to specific characteristics of this activity are necessary to
provide greater stability and means to view returns and reasonable risk for private
investment (Prisco 2010). As a result of the national expansion of the natural gas
sector, the logistics of transportation of such a product in order to meet the needs
of the country stand out, taking into account the need to expand the national gas
network. In this chapter, we study natural gas industry in Brazil as a case, which is
expecting to increase its contributions to the Brazilian energy mix, particularly, after
pre-salt discoveries.
502 S. A. Cupertino et al.

2 Brazilian Case: Natural Gas Sector and Public

Governance (PG)

Public governance focuses on the actors involved and available decision-making and
implementation structures by a public agency or a private entity. Therefore, under
the application of the regulatory impact analysis instrument, regulatory governance
is directed to the means and instruments used by the regulator to achieve efficiency,
transparency and legitimacy (Dantas and Maciel 2019).
For Bernardino (2014), good governance practices have the scope of adding value
to society, providing access to the capital market, contributing to the permanence
of companies in the face of positive results, which generates greater fundraising
and conversion of such gains into tariff modality. The Brazilian Federal Audit
Court (2014) understands that governance is directed, monitored and encouraged
to organisations and involves relationships between society, senior management and
employees or employees and control bodies. It should aim to gain and preserve
society’s trust through an efficient set of mechanisms to ensure that actions taken
are always aligned with the public interest. Therefore, Federal Audit Court Ruling
No. 2261 of 2011, among others, sets out as good practice the implementation of
minimum transparency requirements in the agency’s decision-making process.
In this sense, Decree No. 6.062 of March 16, 2007, which established the
Programme for Strengthening Institutional Capacity for Regulatory Management—
PRO-REG, in its Article 2, gave PRO-REG the means to formulate and implement
integrated measures aimed at strengthening a regulatory system to facilitate the full
exercise of functions by all actors, and the ability to formulate and analyse public
policies in regulated sectors. It also established compliance with improvements in
coordination and strategic alignment between sectoral policies and the regulatory
process; strengthening the autonomy, transparency and performance of regulatory
agencies; and the development and improvement of mechanisms for the exercise of
social control and transparency within the regulatory process.
Brazilian policies are implemented by law. The current regulatory model proposed
by Law 11.909/2009 is not enough to delineate many aspects of the legal regime for
the concession of gas transportation by pipelines of general interest, this activity
still depends on the detailed discipline of the matter, which will arise from rules of
contracts to be signed between Administration and individuals. Even so, it is possible
to discern in Law 11.909/2009 the basic outline of the legal-economic structure of
this adjustment and its regulatory apparatus (Prisco 2010).
According to Article 4, paragraph 2 of Law 11.909/2009, the federal legislation
of Public–Private Partnerships (Law 11.079/2004) is applicable to the natural gas
transportation pipeline model, as well as to be able to apply the General Law of
Concessions (Article 3, paragraph 1 of Law 8.987/1995). Under this aspect, it is
necessary to study the ways that Specific Purpose Society can be used, in the way
that it is determined in Article 9 of the Public–Private Partnership Act.
It should be noted that the term ‘Specific Purpose Company’ (SPC) appeared
in the legal order of the country in Law 11.079, of December 30 of 2004, which
Corporate Social Responsibility: Brazilian Case 503

established the public–private partnerships regime, in Article 9, which requires the

constitution of such company before the conclusion of the agreement, with the need
to comply with corporate governance standards.
Its rule is also given by Article 981 of the Brazilian Civil Code, which explains
that it is possible to set up a business company aiming at the development of a very
restricted activity and in some cases may have a certain term of existence, usually
used to isolate the financial risk of the activity developed. As a rule, it has a specific
goal to be achieved (Article 50, item XVI, of Law 11.101/2005).2
As a business model where there is segregation of funding for project implemen-
tation and individualisation of costs, revenues and results, it is verified that there is
no specific legislation for SPCs in the field of gas transportation, but it is widely used
in concessions that seek to provide public services, such as the gas transportation
service.
The transportation of gas by pipeline requires high investment and presents low
flexibility, its cost being determined by its length, route and volume to be transported
and 50–60% of the total costs of assembly and expropriation costs. However, with
the falls seen since 1985, pipeline transport has become more competitive even for
distances over 5000 km (Piquet and Miranda 2009).
In this sense, investment in such a model is possible, but there is a need to improve
the business exploitation model, in order to adapt the Specific Purpose Company to
the gas market and to enable the segregation of the explorer of activity from activity
itself. It is considered that the SPC model benefits transparency because it gives the
regulator greater possibility to carry out a more adequate inspection, and in case of
return of the activity to the granting power, the equity is ready for that purpose.
When integrating operation in the gas logistic field, it is essential that an SPC
develops a project that is presented in a clear and objective way, in addition to
its operations plan and its financial plan, which must have total transparency on
fundraising, a level of compliance that meets regulatory requirements.
The natural gas transportation logistics should primarily aim to guarantee the
supply of natural gas to the plants belonging to the Priority Thermoelectricity
Program (PPT). According to Technical Note 002/03/SCG and based on the
Petroleum Law, it should be carried out by independent enterprises that possess
administrative, technical and operational capacities, as well as technical elements
of their own support, decision-making autonomy and advanced level of compliance.
This will result in periodic publications of their financial statements in the most
appropriate and transparent way possible, which makes the importance of corporate
governance evident, given the explicit context, since this is based on the dialogue
between regulators, companies, market and society.

2 Law 11.101/ 2005. Art. 50. The following are among the means of judicial recovery, observing
the legislation pertinent to each case, among others: (…) XVI—constitution of a special purpose
company to adjudicate, in payment of credits, the assets of the debtor.”.
504 S. A. Cupertino et al.

The structuring of projects in gas-nets must fully comply with technical-financial

requirements of the National Petroleum Agency (NPA) and of the legislation in force
through observation of applicable norms, regulations and objectives and principles
established by law without disregarding ways to encourage the development of the
natural gas market in Brazil.
From this perspective, the design of the natural gas distribution sector implies the
consideration of possible contractual mechanisms to stimulate the competition or
the maintenance of more closed contracts from the competitive point of view of the
capital needs to build a network at a stage very nascent (or practically non-existent)
(Costa 2006: 27).
The proposal of a gas transportation model must be fully compatible between
its structure and the organisation model of the natural gas sector according to Law
9.478/97 and Law 11.909/2009. The project must foresee flexibility when strategic
adaptations are needed, however, without losing focus on its main objective and
its characteristics. It is important to note that financial engineering characteristics
of those involved in SPCs should always be subject to critical attention, through
continuous analysis and monitoring that ratify their solidity and suitability.
The project should present as fundamental to the integration among the members
involved, so that there is a common vision about all its implications, such as the
development of the natural gas transport infrastructure, the national interest, the
generation of employment and income, the technological development, relations
between financial gains and competitiveness, and, of course respecting the regulatory
model established by the Oil Law and the Gas Law.
Therefore, the SPC’s employment is adequate, but the model that uses it needs
legal improvement. It is necessary to develop studies related to the regulation of
SPCs in the natural gas transportation sector through gas pipelines and its relation to
rules of public governance. In this way, as a guide to an investigative and analytical
view, this theoretical study and its theoretical-conceptual model establish the current
legislative framework. It builds on the work of authors such as Álvares et al. (2008),
Sabbag (2015), Santos (1999, 2011), Steinberg (2003).
Another aspect of public governance is corporate governance because it is applied
in companies that are in regulated sectors, such as the gas sector. This sector, which is
still nascent in Brazil, requires professionalisation and insertion of robust and effec-
tive management practices. This means that corporate governance (CG) is not only
applicable but is an extremely desirable practice because what makes its adoption
imperative is that the system represents “competitive and innovative postures, which
do not constitute extravagances of the favourable times, but necessities for survival
in moments of transition and global changes” (Santos 1999: 37).

3 Gas Logistics and Corporate Governance

Good corporate governance practices were instituted in Brazil by Decree 6.021 of

January 22, 2007 and conceptualised as a set of practices involving, among others,
Corporate Social Responsibility: Brazilian Case 505

relationships between shareholders or quota holders, boards of directors and audi-

tors, or equivalent function bodies, senior management and independent auditors,
with the purpose of optimising company performance and protecting the rights of
all stakeholders with a view to maximising the economic and social results of the
performance of state-owned federal enterprises. In this sense, corporate governance is
optimised through transparent management (Papariello 2008). According to Álvares,
Giacometti and Gusso (2008), the organisational structure of corporate governance
is composed of the Board of Directors, Committees of the Board of Directors, Fiscal
Council, Family Council, Executive Management and Holdings.
The Brazilian Institute of Corporate Governance (IBGC) guides CG as a manage-
ment system that incorporates organisations, their monitoring and the relationship
between stakeholders, shareholders and control bodies in search of continuous
improvements aligned with their interests, preserving and optimising its organisa-
tional value and consequently achieving its economic efficiency and permanence. As
a management system, corporate governance presents four principles: transparency,
fairness, accountability and corporate responsibility. These principles are supported
by an organisational structure responsible for decision-making processes related to
the strategic orientation of the organisation that is supported by solid and dynamic
structural conditions.
The SPC should provide business management with emphasis on the four prin-
ciples of corporate governance as this will allow the viability of new investments,
maximisation of the use of existing infrastructure and (of gas production to Brazil
and abroad) tariff planning that results in a clear plan reflecting the real costs involved
in the associated logistics processes and strengthening the role of the transporter.
It is necessary to discuss on the alternatives for raising funds, as well as the total and
unrestricted attendance to the regulatory events so as not to impede the introduction
of new competitors in the gas sector in the country. It is not enough to recognise the
economic and financial importance of the project. The national commercial interests
and the regulatory objectives of the NPA and other relevant legislations need to be
allied with them.

4 Corporate Social-Environmental Responsibility

Due to the intensification of social and environmental issues, natural gas companies
seek to improve their public image via CSR initiatives. Improvements in gas industry
production processes are required to minimise environmental impacts and risks. Due
to this necessity of market and environmental legislation demanded by society, several
tools, techniques and methodologies of environmental management emerge.
Over the years, countries have progressively adopted different approaches to
tackling social problems, environmental degradation and pollution, ranging from
simply ignoring the problem to diluting or dispersing pollution, so that its effects are
less harmful, to apparent pollution control using end-of-pipe treatment, as well as
avoiding pollution and waste at source through a clean production approach.
506 S. A. Cupertino et al.

Cleaner production is defined as the continued application of integrated environ-

mental prevention strategies applied to processes, products and services to increase
overall efficiency and reduce risks to humans and the environment (UNIDO/UNEP
1995). Development of products involves reduction of negative impacts throughout
its life cycle, from raw material extraction to final disposal, while for service indus-
tries, cleaner production involves the incorporation of environmental considerations
into the design and provision of services.
In addition, a change of attitude on the part of the directors of companies, managers
and employees is fundamental to gain the maximum in cleaner production. It is impor-
tant to emphasise that cleaner production not only involves a change of attitudes, but
also a technological change. In many cases, the most significant benefits of this
practice can be achieved through lateral thinking (De Bono 2000).
Corporate social-environmental responsibility and sustainable development are
no longer restricted to organisational matters. Companies adopt practices with a
view to sustainable development through environmental actions and strategies, in
which companies must contribute to economic, environmental and social progress in
order to ensure sustainable development (Lomes and Azevedo 2019; OECD 2000).
Nowadays, companies in the gas sector are aware of the need for less polluting
technologies applied in their production processes as a tool to implement CSR.
Brazilian companies in the natural gas sector are aware of the need to implement
practices of cleaner production, with the intention of applying preventive and inte-
grated environmental action plans to the processes, products and services, in order
to increase efficiency and reduce risks to humans and the environment (Moraes et al.
2007).
The largest producer, Petrobras, developed projects in socio-environmental
responsibility. As reported by its Social Responsibility Policy (2019), a project was
developed to prevent, eliminate, control or mitigate the impacts directly or indirectly
caused by its operations, by verifying the changes in the social and environmental
milieus, being established during the whole life cycle of its production process. It
also develops social and environmental programmes and projects, contributing to the
communities where they operate and collaborate on conservation of the environment
and improvement of living conditions.
Another initiative was developed by Shell Brazil. It has developed the Sustainable
Development Diagram, a set of sanitation, safety, environmental and social perfor-
mance standards, under which the company establishes and maintains commitments
that consider social and environmental issues as well as the involvement of the
communities impacted by it (Shell 2016).
Parnaíba Gás Natural maintains corporate management of sustainability, respon-
sible for the monitoring of all socio-environmental actions, which acts in accor-
dance with current legislation and adoption of environmental and social quality stan-
dards to constantly improve its indicators on health, safety, environment and social
responsibility (Eneva 2016).
The know-how of the natural gas sector reflects improved efficiency as a result of
its experience adopting best management techniques and improvement of companies’
practices and procedures. Usually, the application of technical know-how results in
Corporate Social Responsibility: Brazilian Case 507

the optimisation of existing processes (Christie, Rolfe and Legard 1995). The gradual
progression from ignoring rather than avoiding has culminated in the realisation by
gas companies that it is possible to achieve cost savings in industry and, in addition,
to improve the environment for society, which characterises the objective of cleaner
production.
Consequently, with the low price of oil, there is a direct effect on the amount of
investments and activities in this sector. In short, less investments means less skilled
labour. When the amount of work increases, there is a shortage of skilled labour
available. This vicious cycle creates a complex environment to work in as the price
of oil affects the amount of work and investments. But in the scenario when a skilled
workforce is needed, it is not easily available as the investment was not made and
prepared for.

5 Conclusion

The development of an appropriate legal structure that will enable the entrance of
large amounts of private capital required for the construction and operation of the
natural gas transmission facilities is the basis for making feasible the gas transport
infrastructure, since the investment depends on stable and attractive regulatory frame-
works in terms that could encourage the entrepreneur to see a possible and attrac-
tive economic return. The SPC should be based on the four principles of corporate
governance because this will allow the viability of new investments and the maximi-
sation of usage of existing and future infrastructure. In corporate governance, CSR is
where many SPCs in the gas sector are developing projects in environment and social
areas in order to meet market expectations, international mandates for responsibility
in promoting development and public governance rules. Brazil has environmental
legislation, such as the National Solid Waste Policy, Law 12.305/10, Technical Note
CGPEG/DILIC/IBAMA nº 01/11, among others, in conjunction with the cleaner
and more stable industries in Brazil that seek to minimise the generation of waste,
establish temporary targets and increase the range of direct and indirect job creation
opportunities in its many thousands of processes, as well as the decision-making
processes for actions and maintenance of projects in the gas sector.
Companies that adopt cleaner production methodologies benefit the social and
natural environment, reflecting lower costs through the efficient use of both raw
materials and energy and by reduced spending on environmental liabilities, as well
as assisting local development. The increasingly fierce competition among natural
gas companies makes them seek the necessary adaptations to meet consumers in their
increasingly social and environmental demands and the legal obligations imposed by
the control bodies. To do so, companies devise strategies that fit these requirements,
in addition to promoting their competitiveness and continuity in the market. The
adoption by gas companies of a conscious posture of their social and environmental
actions, through the use of appropriate concepts and techniques, lead to the adoption
of a new paradigm and the development of a new market position.
508 S. A. Cupertino et al.

As mentioned above, an SPC is the result of joining efforts to achieve a specific

enterprise, so it is imperative to adopt clear and objective rules, where there is
complete transparency in their actions and high commitment to organisational
compliance. The cases chosen above show that there are many companies focusing
attention on actions of social and environmental responsibility. This initiative relates
to internationally established norms and agreements and is also aligned to Brazilian
legislation and the social expectations identified by the society. However, there are
not many experiences in Brazil in the natural gas sector.

Acknowledgements We acknowledge the support of the RCGI Research Centre for Gas Innova-
tion, sponsored by FAPESP (2014/50279-4) and Shell. In addition, we acknowledge the support of
CAPES and National Agency of Petroleum, Natural Gas and Biofuels through Human Resources
Program n. 04.

References

Álvares, E., Giacometti, C., & Gusso, E. (2008). Governança Corporativa: um modelo brasileiro.
Rio de Janeiro: Elsevier.
Brasil. MME. Matriz Energética Nacional 2030.
Brasil. (2014). Tribunal de Contas da União. Referencial básico de governança aplicável a órgãos
e entidades da administração pública/Tribunal de Contas da União. Versão 2 - Brasília: TCU,
Secretaria de Planejamento, Governança e Gestão. 80 p.
Brazil Chevron. (2019). Meio Ambiente. São Paulo: Brazil Chevron, s.d. Available in https://brazil.
chevron.com/-/media/brazil/our-businesses/documents/Brazil_fact-sheet-6-20.pdf. Access on
February 17, 2019.
BRASIL. Lei n.º 11.909, de 04 de março de 2009. Regulates activies related to the transportation
of natural gas, referred to in art. 177 of the Federal Constitution, as well as on the activities of
treatment, processing, storage, liquefaction, regasification and commercialization of natural gas;
amends Law No. 9,478, of August 6, 1997.
BRASIL. Law nº 11.079, of december 30th of 2004. Institutes general rules for bidding and
contracting public-private partnerships within the scope of public administration.
BRASIL. Law n.º 8987, of february 13th of 1995, that regulates Provides for the concession
and permission regime for the provision of public services provided for in art. 175 of the
Federal Constitution. Available on http://www.planalto.gov.br/ccivil_03/leis/L8987compilada.
htm. Access on Oct 08 2020.
BRASIL. Law n.º 12.305, of August 2nd of 2010, tha institutes the National Solid Waste Policy.
Available on http://www.planalto.gov.br/ccivil_03/_ato2007-2010/2010/lei/l12305.htm. Access
on Oct 08 2020.
BRASIL. Law n.º 10.406, of january 10th of 2002. Insitutes Brazilian Civil Code. Available on
http://www.planalto.gov.br/ccivil_03/leis/2002/L10406compilada.htm. Access on Oct 08 2020.
BRASIL. Decrete n.º 6062, of march 16th of 2007. Institutes the Institutional Capacity Building
Program fo. Regulatory Management - PRO-REG. Available on http://www.planalto.gov.br/cci
vil_03/_Ato2007-2010/2007/Decreto/D6062.htm. Access on Oct 08 2020.
BRASIL. National oil, Natural gas and Biofuel Agency. Technical Note n.º 002/03/SCG, march
18th of 2003. Available on http://www.anp.gov.br/images/movimentacao-estocagem-comercial
izacao/transporte-gas-natural/estudos-notas-tecnicas/nota-tecnica-002-2003.pdf. Access on Oct
10 2020.
Corporate Social Responsibility: Brazilian Case 509

BRAZIL. Brazilian Institute of Environment and Renewable Natural Resources. Technical Note
CGPEG/DILIC/IBAMA N.º 1, 2011. Available in http://www.oads.org.br/leis/3546.pdf. Access
on Oct 10 2020.
Costa, H. K. M. (2006). A regulação do livre acesso na distribuição de gás natural canalizado: o
caso de São Paulo. Dissertação de Mestrado. Instituto de Energia, Universidade de São Paulo,
São Paulo.
Eneva. (2016). Parnaíba Gás Natural. Sustentabilidade. Rio de Janeiro: Eneva. Available in http://ir.
eneva.com.br/conteudo_pt.asp?idioma=0&conta=28&tipo=57773. Access on February 19, 2019.
Féres, M. A. (2004). As sociedades de propósito específico (SPEs) no âmbito das parcerias público-
privadas (PPPs): Algumas observações de direito comercial sobre o art. 9º da lei n. 11.079, de 30
de dezembro de 2004- Revista Jurídica da Presidência.
Lomes, J. S., & Azevedo, T. C. (2019, April). Corporate social responsibility: dissemination of
bahian companies in the global compact. REBRAE, [S.l.], 12(2), 171–188. ISSN 2175-3350.
Available at https://periodicos.pucpr.br/index.php/REBRAE/article/view/25270. Date accessed
December 9, 2019. http://dx.doi.org/10.7213/rebrae.v12i2.25270.
Moir, L. (2001). What do we mean by corporate social responsibility? Corporate Governance,
1(2), 16–22. https://doi.org/10.1108/EUM0000000005486, http://dx.doi.org/10.1590/S1519-707
72010000100004. Access on December 10, 2019.
Moraes, C. A. M., Gaspar, R., Rocha, L. K., Brehm, F. A., & Garcia, A. C. (2007, July–September).
Aplicação de ferramentas do programa de produção mais limpa na gestão de resíduos. Revista
Tecnologia em Metalurgia e Materiais, 4(1), 59–63.
OCDE. (2019). Declaração sobre o Investimento Internacional e as Empresas Multinacionais.
Disponível em https://www.oecd.org/corporate/mne/38110590.pdf. Acessado em 10 dez 2019.
Papariello, B. M. (2008). Governança Corporativa em Agência Reguladora: a Experiência
Australiana Comparada com a Brasileira.Brasília, 18p. Trabalho de conclusão de curso de
Especialização em Mercado Financeiro e Investimentos (artigo)—Universidade de Brasília.
Princípios da Boa Governança para as Universidades: Um olhar do Canadá. IBGC em foco, nº 54,
p. 17–20, Jan./Fev./Mar. 2011. Disponível em: http://www.ibgc.org.br/download/newsletter/IBG
C54_Final.pdf. Acesso em 01 de agosto de 2016.
Petrobrás. (2016). Petróleo Brasileiro. Termo de Compromisso: comprometimentos assumidos pela
Petrobras no sentido de aproximar-se do modelo regulatório previsto na Lei nº 9.478/97. Rio de
Janeiro: Petrobr. Disponível em http://www.anp.gov.br/?dw=2035. Acesso em 01 de agosto de
2016.
Petrobras. (2019a). Política de Responsabilidade Social. RJ: Petrobras, s.d. Available in http://
www.petrobras.com.br/lumis/portal/file/fileDownload.jsp?fileId=8A245DA25ADA9EA201
5BABC2A0330546. Access on February 19, 2019.
Petrobras. (2019b). Esclarecimento sobre Sociedade de Propósito Específico do gasoduto Gasene.
Disponível em http://www.petrobras.com.br/fatos-e-dados/esclarecimento-sobre-sociedade-de-
proposito-especifico-do-gasoduto-gasene.htm. Acessado em 09 dez 2019.
Petrorio. (2019). Meio Ambiente. Rio de Janeiro: Petrorio, s.d. Available in http://www.pet
roriosa.com.br/seguranca-meio-ambiente-e-responsabilidade-social/meio-ambiente. Access on
February 17, 2019.
PETROBRAS. (2020). Social responsibility policy. Available in https://petrobras.com.br/data/
files/8A/14/5A/E3/CDB03710A3C3FE272418E9C2/Politica_de_Responsabilidade%20Social_
RS.pdf. Access on Oct 08 2020.
Prisco, A. V. (2010). A concessão da atividade de transporte dutoviário de gás natural: notas ao
regime jurídico básico da Lei n º 11.909/2009. Revista de Direito Público da Economia.
Ronconi. L. (2011). Emancipação, 2011-revistas.apps.uepg.br.
Sabbag, E. M. (2015). Direito tributário essencial (3ª edição). São Paulo: Saraiva.
Santos, N. M. B. F. (1999). Fatores-Chave de Sucesso no Processo de Internacionalização das
Escolas de Administração. Administração em Diálogo - Programa de Estudos Pós-Graduados
em Administração PUC-SP, São Paulo, 1(1), 23–37. Disponível em http://revistas.pucsp.br/index.
php/rad/article/view/12505. Acesso em 01 de agosto de 2016.
510 S. A. Cupertino et al.

Shell. (2016). Sustainability Report 2016. Hague: Shell Global. Available in http://reports.shell.
com/sustainability-report/2016/introduction/sustainability-governance.html. Access on 19. Fev.
2019.
Steinberg, H. (2003). A dimensão humana da governança corporativa: pessoas criam as melhores e
piores práticas. São Paulo: Gente.
UNIDO/UNEP. (1995). Manual de avaliação de P + L.. Porto Alegre: CNTL/SENAI.
Villacorta-Hernandez, M. A. (2014, June). Abandono legislativo del objetivo de alcanzar la
independencia en la auditoría de cuentas. Cuadernos de Contabilidad, 15(37), 215–237.
Available from http://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0123-147220140
00100009&lng=en&nrm=iso. Access on September 19, 2016.
Corporate and Social Responsibility
in Iran

Zoha Abdolalizadeh and Elham Beygi

Keywords Corporate Social Responsibility · Local communities · Mining

Industry · Environmental Protection Programs · Law and Regulations

1 Introduction

The energy business comes with societal fallout. Gas and oil companies more than
ever need to work within complex and regulated institutions to better balance social
norms with the expectations of governments and societies. Corporate social responsi-
bility (CSR) is a mechanism by which businesses pursue self-interest without over-
looking—and by even promoting—social benefits to stakeholders, as well as the
interests of all engaged parties. These include employees, suppliers, customers and
local communities, and this strategy results in increasing stakeholders’ utility func-
tion. In this light, efficiency gains a new definition where all concerned benefit, and
the knock-on effect is felt when money is spent or donated to improve the utility of
others. The notion of responsibility is a very important element in CSR, which sets it
apart from other kinds of finite chained efficiencies. Companies bear a responsibility
to acknowledge a society’s expectations and to respect its social norms.
This chapter is concerned with CSR in the context of the oil and gas industry in
Iran. Mine Social Responsivity as a branch of CSR is discussed first, followed by
examples of several active projects that have been somewhat successful from a CSR
perspective. Then, the discussion and significance of regulations and policies will be

Z. Abdolalizadeh (B)
Dana Energy Company, Tehran, Iran
e-mail: [email protected]
E. Beygi
McMaster University, Hamilton, Canada

© The Editor(s) (if applicable) and The Author(s), under exclusive license 511
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_29
512 Z. Abdolalizadeh and E. Beygi

addressed by analysing existing legal enforcing mechanisms in the national domain

of gas and oil industry in Iran. In identifying the problems of almost each and every
piece of relevant regulatory policies, this chapter concludes that Iran’s oil and gas
industry falls far behind developed existing schemes of social responsibility. Society
should encourage extra-legal and governmental measures, because the governing
body creates many obstacles to an ethical and sustainable future.
Here, we discuss the concept of CSR contextuality, defined as “every corporation
in a specific country is under the influence of a prevailing institutional framework that
has been formed during history”,1 and thus, the issues that define social responsibility
vary, depending on the particular setting and circumstances.
Many believes that Iran’s socio-economic stand is not ready for implementing
western concept of CSR,2 while there is an assumption that asserts that CSR initiatives
are different in every society depending on their cultural, social and political context.3
In Iran, CSR has traditionally been manifested in religion, and moral norms
of society such as the institution of Waghf (an Islamic concept where loans from
employers must be made interest-free), Zakat (or “alms giving”, one of the Five
Pillars of Islam, giving of 2.5% of one’s possessions (surplus wealth) to the poor
and needy4 ) and Khoms (according to Shia jurisprudence, one-fifth of certain items
which a person acquires as wealth must be paid as an Islamic tax). However, these
kinds of religious or moral responsibilities have been limited to donating money,
building schools, mosques and holy shrines.5 Also, employers have played a patriar-
chal role in relation to their employees and helped them in times of illness, as well as
providing funds for marriage and house-buying. In the absence of a social security
system, these provisions have played an important role.
In fact, during Iran’s early years of industrialisation, the vibrant role of religion
and tradition served as the main driving force behind widespread social support on
the part of employers. Given the dominant left-Islamic-leaning paradigm of Iran’s
economic and political environment after the Islamic revolution, industrial owners
and investors began to be viewed skeptically. They were shrouded under an atmo-
sphere of insecurity, going so far as to being fully marginalised for almost 20 years.
Many financiers were even held accountable for their investments. This scepticism
cast a shadow over the traditional social responsibility business owners had provided.
Iran’s first conference on corporate social responsibility—organised by some
industry associations, such as the Chamber of Commerce, the Confederation of
Industry, several private companies, as well as NGOs—was the starting point for
discussing the concept and literature of this subject in Iran. The intensifying compet-
itive business environment led many of the country’s top companies to consider
this concept. With the emergence of environmental quality certifications and organ-
isational excellence certificates, the concept became incorporated into corporate

1 Chapardar and Khanlari (2011).

2 Modabber (2013).
3 Chapardar and Khanlari (2011).
4 The Shia double this to 5% of one’s possessions.
5 Omidvar (2011).
Corporate and Social Responsibility in Iran 513

management processes. Gaining these certificates, in addition to leading companies

to greater productivity, also provided businesses with a competitive advantage. In
addition, the need Iranian industries to find external partners was one major impetus
to embrace the modern concept of CSR.6
A questionnaire7 revealed that although Iranian industrial owners have always
complained about the government’s interventionist policies, most (75%) of the
respondents agreed with the formulation of laws and regulations on corporate social
responsibility; 92% saw the promotion of corporate social responsibility to be the
principle role of government and governmental policies; 56% considered the main
role of government to promote corporate social responsibility, and 37% held that the
responsibility of monitoring business activities in CSR fell under the Institute for
Standardisation and Industrial Research Organisation.
The impetus behind Iranian companies moving towards corporate social respon-
sibility can be summarised and categorised as follows8 :
Improving the public opinion of the company’s external image, as well as that of
consumers, employees and investors;
Targeting and integrating the company’s current scattered activities in the field of
corporate social responsibility in order to link and synergize CSR activities to other
processes within the organisation;
Promoting organisational excellence.

2 Mine Social Responsibility

Mine Social Responsibility (MSR) refers to the steps mining companies take to
reduce the negative impacts of their industry, and to improve the living conditions
(economic, social and environmental) of the beneficiaries. These include personnel,
local communities, local and state organisations, corporate investors, and generally
everyone affected by the project. These actions sometimes go beyond legal obliga-
tions, contracts and agreements, and are usually investments in infrastructure as well
as social and human capital. Each MSR program must be individually tailored to the
conditions of the mining project and the needs of those who will benefit, an aspect
continually evaluated for effectiveness. With the ultimate goal of achieving sustain-
able development, most MSR projects focus on three main areas: the environment,
the community and the economy.9
At the same time, MSR programs require mining companies to submit periodic
and regular activity reports on social, economic and environmental issues. These
help to raise awareness among local communities, stakeholders, and the government

6 Yoshanloey and Johar (2013).

7 Omidvar (2011).
8 Omidvar (2008).
9 “Mining Social Responsibility” Published by Intelligent Mine Monitoring Organisation.
514 Z. Abdolalizadeh and E. Beygi

about the company’s positive impacts and constructive actions, and also enhances
the dialogue between the mining company and its beneficiaries.
The principles and objectives of implementing mining social responsibility
programs are: acceptance of responsibility and management; applying ethical busi-
ness practices; respect for human rights; commitment to project risk assessment and
evaluation; the employment of people in the host community and other stakeholders;
protecting the health and safety of workers and the local population; helping the
development of community and social welfare; and protection of the environment.
In order to achieve these goals, mining companies must consider the following
policies in their strategies and programs: to make their entire business approach based
on social responsibility; to consider commitment and participation in addressing the
needs of society, government, personnel and the environment beyond the life of the
mine; making social responsibility part of their organisation’s identity; and taking
steps towards achieving sustainable development goals.
Implementing social responsibility plans, as well as reducing or eliminating
numerous risks (such as local conflicts, environmental problems, labor protests and
mining closures), offers additional benefits. These include improving the mining
company’s brand reputation, increasing sales and customer loyalty, reducing oper-
ating costs, better financial performance, the ability to attract talent and retain
employees, organisational growth and access to capital. Top mining organisations
operate in remote areas and are therefore some of the location’s economic determi-
nants, providing jobs for local people and improving their welfare. For this reason,
the mining industry should pay particular attention and promote social accountability
by making the sustainability of current and future ecosystems a priority.
Last year, IMIDRO’s executive chief rendered a bylaw in which he asked all the
organisation’s subsidiaries, offices and projects to outline their social responsibility
plans for the communities around them. Here are a few examples of active mining
companies in the area of CSR, along with their activities.10

2.1 Gol Gohar Mining and Industrial Company

Gol Gohar mine is located in Sirjan, in the southern region of Iran. It is the largest
known iron ore mine in the Middle East, with a geological reserve of 1019 million
tons, a definitive reserve of 1000 million tons and a potential reserve of 219 million
tons. Its mining products are iron ore pellet, iron ore concentrate and granulated
rock. The Gol Gohar mining company is one of the most active and successful in
CSR’s realm, running a range of health, cultural and sports projects in the area, with
US$5 billion in social responsibility invested in the region, according to Gol Gohar’s
CEO.11

10 Gol Gohar, Chador Malu and Sarcheshmeh companies are among the biggest and wealthiest
companies in mining industry of Iran.
11 http://www.geg.ir/.
Corporate and Social Responsibility in Iran 515

Some of the main programs and their local impacts are12 :

1. Gol Gohar Hospital: the company plans to build a specialised hospital. It began
initial studies in September 2016. This project is designed to have on-site depart-
ments of cardiology and angiography, radiotherapy, radiology, physiotherapy,
orthopedics, obstetrics, gynecology, infertility, paediatrics, as well as general
and internal surgery. The hospital is predicted to serve a unique role in the city’s
health services and surrounding areas.
2. Green Belt of Sirjan-Gol Gohar Road: the goal of this project is to beautify and
improve the quality of this landscape by expanding the tree and shrub cover of
this route, to control dust, optimise the use of water from rainfall and floods, and
prevent soil erosion. The Gol Gohar mining and industrial area and its access
road are located in Iran’s desert areas. Because of recent droughts in the region,
environmental measures are necessary to prevent soil erosion. Gol Gohar under-
took research studies that showed the most successful way to deal with wind
erosion and desertification was to establish sustainable vegetation. Desert area
surveys found seedling operations to be the most effective option. Planting trees
and shrubs along the roadside improved the environment, and protected it from
floods and winds. The Green Belt project launched one-way roads in the first
phase, with an approximate length of 25 km, and a working width of 20 m. It
should be noted that Tehran University’s International Wildlife Research Centre
acted as a consultant to this project.
3. Gol Gohar Football Club: the company established a sports club in 1988. It runs
different divisions, and the football team became famous when it was promoted
to the Persian Gulf Pro League last season. Of note is the Gol Gohar Sport
Complex, the club’s home venue, and a well-equipped complex that includes a
stadium with a 3200-seat capacity, several sports halls and an indoor swimming
pool.
4. Charitable Activities: with the arrival of the holy month of Ramadan, a basket
of foodstuffs valued at approximately US$37,000 was distributed among the
beneficiaries of the Imam Khomeini Relief Foundation and Welfare Committee of
Sirjan. In addition, the company helps survivors of natural disasters. For instance,
it provided survivors of the Zemestan-Yurt winter coal mine disaster with support
amounting to US$285,000, and victims of the Kermanshah province earthquake
with US$150,000. In cooperation with the Imam Khomeini Relief foundation,
the company also launched the Gol Gohar garment supply centre to provide jobs
for women who are head of households.
5. Sanitation: Gol Gohar has made significant contributions to providing sanitation
facilities in the region. It played a key role in setting up the municipal wastewater
organisation and participated with other companies in the area to establish a
wastewater network. The company also partnered in the construction of the Sirjan
drinking water treatment plant.

12 “Take a look at the list of Gol Gohar’s investments in social responsibility; The Significant Role

of Gohar Gohar in Industrial and Social Development of Region and Country” Report Published
by Gohar Press, 2018.
516 Z. Abdolalizadeh and E. Beygi

6. Cultural and Social infrastructures: the organisation carried out various cultural
measures, such as helping with construction in Masjid, restoring and upgrading
the only theatre hall in Sirjan, upgrading a care centre for people with disabilities,
active participation in festivals, conferences and various cultural events, as well
as supporting Sirjan’s scientific community.
7. Environmental Protection: the company runs several schemes to reduce its
environmental damage. The most important are the pelletizing plant degassing
project; the production of ammonium sulphate fertilizer at a rate of 200,000 tons
per year; dewatering of tailings in two phases (which results in a water return
of 200 litres per second); and creating a green belt of 5000 hectares around Gol
Gohar.

2.2 Chador Malu Mining and Industrial Company

Chador Malu Mining and Industrial Company started operating in 1992 to explore,
extract and exploit Chador Malu iron ore mines located in Yazd Province. The
company also produces concentrate, pellet and granulated iron ore (coarse-grained
and fine-grained) and apatite concentrate. This company works extensively in the
field of CSR, collaborating with various institutions and organisations. According
to the company’s statistics, it has invested more than US$1 billion so far in the city
of Ardakan, and employed more than 8000 people. This accounts for 98% of the
native workers, as well as creating 35,000 indirect jobs.13 It has thus become one
of the most influential industrial units in Yazd Province, undeniably improving the
quality of life for its citizens. In addition, the company has taken a proactive approach
towards environmental protection, including a recently signed agreement with the
Department of Environment to take part in plans to protect a rare species of Asian
cheetah.
Some other significant initiatives are14 :
1. Environmental Measures: the company undertakes multiple actions to protect
the environment and reduce the impact of its contaminating industrial activities
as follows:
• Planting more than 300 hectares of fruit orchards in Chadermo Industrial
Complex in Ardakan, Yazd;
• 218 hectares of arboriculture of resistant species in desert conditions in the
Chadermo Industrial Complex;
• Using dust collector equipment and bag filters in the Ardakan pelletizing plant
to reduce environmental pollutants;
• Creating a waterfall for animals and wildlife in the desert;
• Contributing to the provision of park rangers to the area;

13 http://www.chadormalu.com/.
14 Ibid.
Corporate and Social Responsibility in Iran 517

• Constructing buildings for the park rangers of the Fig Valley (Darre Anjir)
wildlife refuge;
• Buying and installing equipment to run an air pollution monitoring station in
Ardakan;
• Use of a wet system in iron ore processing plants to reduce dust particles
entering the environment; and
• The installation of auxiliary equipment to prevent the emission of noise, air,
sewage and industrial pollutants from the pelletizing plant.
2. Health and Sanitations Infrastructures:
• Construction of a sewage treatment plant in the city of Ardakan;
• Industrial water supply from domestic wastewater;
• Implementation of household waste separation program;
• Controlling plant wastewater and environmental factors with periodic envi-
ronmental monitoring; and
• Washing wastewater treatment tanks to control their sludge and to prevent air
pollution and unpleasant sludge odour.

2.3 Sarcheshmeh Copper Complex

Sarcheshme copper mine, located in Rafsanjan county in Kerman province, is the

second largest copper reserve in the world, and the complex is the biggest in Iran.
This mine is run by the National Iranian Copper Industries Company (NICICO),
which takes a progressive approach towards CSR, focusing on cultural and research
activities.15
The main cultural measures are:
3. Holding various art competitions in the region for photography, painting and
Quran reading;
4. Providing digital applications to reduce paper consumption;
5. Donating books (more than 300 were given to the Rafsanjan prison library and
medical centres last year);
6. Holding different art courses to teach copper craft skills. The complex provides
this opportunity for local people to better their earning potential; and
7. The company has an agreement with Vali e Asr University to fund research
projects.
The complex also provides great sport facilities in the region. Along with construc-
tion of the Sarcheshmeh Copper Sports Club in 1975, sports facilities were added for
football, cricket, tennis, golf, volleyball, swimming and ping pong, and wrestling was
also added after the revolution in 1979. There are currently four separate buildings
under the supervision of 100 professional coaches, with 26 different sports provided
in the men’s section and 14 in the women’s section.

15 https://sarcheshmeh.nicico.com/.
518 Z. Abdolalizadeh and E. Beygi

2.4 Environmental Impact

Although these examples show the commitment of major companies to CSR, there are
other examples that illustrate the neglect and inadvertency of CSR by many others.
Micro-mines have both degraded nature and disrupted the rural lifecycle, leaving
nothing left except lifeless bush. There has been severe harm to the environment, the
ignoring of local requirements and conflicts with landholders. Some of the instances
are reviewed here to identify the root of the problem and to point out a range of
causes:
1. The protected area of Mount Beyrami, with its rich diversity of flora and fauna,
and numerous deep gorges and springs, sits at the highest elevation of Bushehr
province. The variable altitude of the area has created three distinct climatic
segments, making it a unique and rare natural phenomenon. This mountain also
supplies drinking water to several cities, both large and small, in the region. The
Government issued a marble mining permit which is still the subject of discussion,
while mining-related activities, such as road construction, were prevented by
park rangers from the Department of Environment. Environmental activists who
oppose the mining project believe that the proposed operations will harm the
unique ecosystem that plays a cultural and economic role in the lives of local
people.16
2. When the permit was issued to exploit the Khonar silica mine, local people
and officials tried to prevent it from going ahead. Khonar mine is located in
a conservation area of Semnan province. The Governor of the city of Sorkhe
indicated that only 5,000 hectares throughout the area remain intact, and mining
permits have been issued all around, making Khonar the only pristine local area.
Its wildlife has been protected by a hunting ban for 20 years. A number of
local people gathered in the surroundings of the Khonar conservation area to
protest the mining licensing, as they were concerned about the possibility of water
contamination affecting neighbourhood villages.17 As a result of the Department
of Environment protests and public pressure, the permit was revoked.18

16 https://www.irna.ir/news/83392064/%D9%BE%D9%88%DB%8C%D8%B4-%D9%86%D8%

AC%D8%A7%D8%AA-%D8%AE%D9%88%D8%A7%D8%B3%D8%AA%D8%A7%D8%
B1-%D9%84%D8%BA%D9%88-%D9%85%D8%AC%D9%88%D8%B2-%D9%85%D8%
B9%D8%AF%D9%86-%D8%B3%D9%86%DA%AF-%D9%85%D8%B1%D9%85%D8%B1%
DB%8C%D8%AA-%D8%AF%D8%B4%D8%AA%DB%8C-%D8%B4%D8%AF%D9%86%
D8%AF, Published on 07/13/2019.
17 https://www.isna.ir/news/98081810916/%D8%AA%D8%AC%D9%85%D8%B9-%D8%A7%

D8%B9%D8%AA%D8%B1%D8%A7%D8%B6%DB%8C-%D8%A8%D9%87-%D9%81%
D8%B9%D8%A7%D9%84%DB%8C%D8%AA-%DB%8C%DA%A9-%D9%85%D8%B9%
D8%AF%D9%86-%D8%AF%D8%B1-%D8%AA%D9%86%D9%87%D8%A7-%D9%85%
D9%86%D8%B7%D9%82%D9%87-%D8%A8%DA%A9%D8%B1-%D8%A8%D8%A7%D9%
82%DB%8C%D9%85%D8%A7%D9%86%D8%AF%D9%87-%D8%B3%D8%B1%D8%AE%
D9%87, Published on 11/18/2019.
18 https://www.doe.ir/.
Corporate and Social Responsibility in Iran 519

3. A video of the Imam of Joshaghan Ghali village protesting the inauguration of

a new mine in the mountains around the city was posted on social media and
went viral. The Imam threatened officials that he would close Friday prayers if
the mine began operation. Joshaghan Ghali is a village on the hillside of Karkas
Mountain in Isfahan province. Mining activities have been going on for several
years, but recently came very close to the urban area, and the nature of the
surrounding area has been extremely affected. Some village youngsters edited
a documentary where they illustrated the problems that the miners’ profitability
had brought to the city’s natural resources and environment. Mining had badly
damaged the local economy, as the locals are mostly ranchers who raise livestock.
Rangeland restoration regulations that prevent damage of the natural environment
were disregarded in the area and resulted in livestock permits in the region being
revoked. The film showed the impact on livestock production, the failure to
meet requirements for criminalisation of environmental degradation, the lack of
enforcement of environmental laws, the reason for supporting wholesale raw
materials, the signs of mining development activities and the evidence of over-
limit extractions.19
4. Even areas near and close to Iran’s capital, Tehran, have not been protected from
harmful mining operations. Shemiranat, which has the best countryside near
the city, suffers from the effects of mining activities. Mountain damage, noise
pollution, soil erosion, environmental pollution and unsafe roads leading to mines
are among some of the destructive impacts. The local economy is dependent on
tourism; in the past, more than 10,000 visitors came to the area, but these numbers
are rapidly declining.20
The review of these examples are consequential since they illustrate the most
important practices and themes of CSR in Iran. In fact, it shows that Iran has signif-
icant distance with the modern concept of CSR identified legally as an independent
kind of responsibility alongside with civil and criminal liability.21 Moreover, current
Iranian CSR has not been institutionalised at the community level, for individuals
and companies, and it is not seen as a targeted interaction between the company and
the community which is consciously established to operate as an independent social
system. Besides, the problem of lack of transparency as well as limited access to
the information exists among Iranian companies which makes a serious barrier in
the way of development of CSR concept in Iran. Companies perform CSR as a right

19 https://snn.ir/fa/news/788583/%D8%B5%D8%AF%D8%A7%DB%8C-%D8%A7%D8%B9%

D8%AA%D8%B1%D8%A7%D8%B6-%D9%85%D8%B1%D8%AF%D9%85-%D8%AC%
D9%88%D8%B4%D9%82%D8%A7%D9%86-%D9%82%D8%A7%D9%84%DB%8C-%D8%
B1%D8%A7-%D8%A8%D8%B4%D9%86%D9%88%DB%8C%D8%AF-%D8%AA%D8%
AE%D8%B1%DB%8C%D8%A8-%D9%85%D8%AD%DB%8C%D8%B7-%D8%B2%DB%
8C%D8%B3%D8%AA-%D9%88-%D8%A8%DB%8C%E2%80%8C%D8%A7%D8%B9%
D8%AA%D9%86%D8%A7%DB%8C%DB%8C-%D8%B4%D8%B1%DA%A9%D8%AA%
E2%80%8C%D9%87%D8%A7%DB%8C-%D9%85%D8%B9%D8%AF%D9%86%DB%8C,
Published on 09/03/2019.
20 Kianoushrad (2018.
21 Nouri and Saeed (2015).
520 Z. Abdolalizadeh and E. Beygi

thing to do to compensate their damage or in the best case to share some small part
of their benefits with the people who are their host and give them their resources.22
while the concept of opportunity for better life or access to better living conditions
for people is not usually considered as the main purpose of CSR. Thus, the things
that are performed as CSR by companies have been kept their traditional essence
of moral-religious origin which cannot fulfil the criteria of the modern legal CSR
concept. The important characteristics of this historical content are that these activi-
ties have been performed as benevolent activities without any obligation and most of
them have been carried out in secret. These features are still relevant today and this
is why talking about CSR as an independent legal institution in Iran is not justified.
Although the instances above have various aspects including environmental, cultural
and social, the traits of these activities are the same as traditional ones.

3 Legislation and Regulations Relevant to CSR in Iran

Corporate Social Responsibility might at first seem to be a belief system, or even

a beneficial practice to ensure a humanitarian approach is combined with profitable
practices. But it is not difficult to trace the disastrous impacts of activities by giant
companies in underdeveloped communities, such as child labour in Indonesia and
East Timor.23 In the modern profit-driven era, CSR practices need to be enforced by
mechanisms to secure their execution, and links to many legal areas exist, including
international, corporate and contract law. Regulatory measures within each domain
of governance significantly contribute to the development of CSR. In this section,
the most important legal aspects of CRS will be examined in the national context of
Iran:

3.1 Guidelines to report CSR according to GRI standard

published by Ministry of Petroleum24

The purpose of this guideline is to:

1. Strengthen a properly functioning infrastructure through relevant executive
organisations in populated centres, such as cities and villages close to operation
sites;
2. Provide opportunities to increase employees’ interests to work and live close to
the operation sites and to grow healthy interactions with nearby residents;

22 Bazrafkan and Taghi (2018).

23 https://unevoc.unesco.org/fileadmin/user_upload/pubs/AB4_ChildLabour.pdf
24 https://csr.mop.ir/portal/file/?301400/https://csr.mop.ir/portal/file/?301400/

.pdf.
Corporate and Social Responsibility in Iran 521

3. Shape or support sustainable livelihood of local communities;

4. Contextualize cooperation between people, governing body and the oil industry;
5. Use the potential that active NGOs bring in various realms such as social, cultural
and environmental activities;
6. Prevent exploitation of local resources and stop taking advantage of local
communities;
7. Provide a context for constructive interaction between local and non-local
subcultures;
8. Maintain natural resources and vulnerable species; and finally,
9. Attract foreign investment in the oil industry.
These seemingly promising goals lack specification and clarity regarding signifi-
cant issues such as human rights and the inequality of power. Although these guide-
lines are a good first step in ensuring equality and protection of people and planet,
they are not nearly sufficient. The execution of such policies in Iran are still vague,
overlooked and complicated. However, based on evidence from the oil and gas sector,
many changes have taken place over the last decade in terms of acknowledging and
even using the capabilities of CSR to meet increasing business expectations.

3.2 CSR Manuals Published by Ministry of Petroleum25

As global demand for fossil fuels increases, so does the investment in oil and gas
exploration and production facilities. The Ministry of Petroleum published four
manuals aimed at the four main principal companies affiliated to the Ministry of
Petroleum: National Iranian Gas Company (NIGC), National Iranian Oil Company
(NIOC), National Iranian Petrochemical Company (NPC) and National Iranian Oil
Refining and Distribution Company (NIORDC).
A map of Iran’s oil and gas reserves shows that most of these sites are located
in rural areas with inadequate civil development and pre-established infrastructure.
These manuals are designed for the specifics discussed at the councils of Ministry
of Petroleum with respect to the environmental effects of the oil industry. They aim
to influence public thought and build public trust to better manage interaction with
local communities and to improve work quality in the oil sector.
Nine articles are covered in the four manuals. The general language does not take
the specifications of each site into consideration, and no concrete and clear steps are
provided on how to ensure the mentioned goals are to be realised. Analysing the first
article, we see that only a vague definition of local communities and empowerment
is given. For instance, Article 1.1 defines local communities as “people with distinct
identity who reside in various sites where oil industry’s activities take place and
whose actions have direct or indirect impact on oil industry’s activities”. It is unclear
what characterises a distinct identity, or to what extent and how their activities might

25 https://csr.mop.ir/portal/home/?generaltext/287500/287987/301781/.
522 Z. Abdolalizadeh and E. Beygi

or might not influence the oil industry. Or, how we can distinguish between direct
and indirect effects.
Aside from the vague definitions briefly laid out in the first article, others are
also conveyed in ambiguous and unclear language. For instance, Article 7 requires
all relevant corporations to report their method of CSR to the Supreme Council of
Ministry of Petroleum, the CSR section. It turns out there is no such distinctive sector
of the ministry, but is instead the same Council of the Ministry of Petroleum whose
members include the CEOs of the four principal companies. It is clear that serious
measures to ensure the quality of these reports have not taken place. But this circular
structure is not obvious until we take a closer look at the underlying and potential
interpretations of the articles.
These manuals may indeed provide something beneficial; as examples in the
previous section revealed, we have witnessed considerable improvement in shaping
new infrastructures and civil developments through CSR in Iran’s oil and gas industry.
But CSR has a long way to go to advance sustainable consumption and production.

3.3 The Relationship Between Tax Laws and CSR

The relationship between corporate social responsibility and tax laws is significant
in order to understand the function of CSR in Iran’s oil and gas industry. More
specifically, the relationship between CSR and possible harmful tax practices—that
create problems in the execution of proper tax laws—should be discussed. Iran’s
tax system has numerous issues that would require a lengthy discussion irrelevant to
the scope of this chapter, so the focus here is to examine whether the corporate tax
regime is aligned with the requirements of CSR in the oil and gas industry.
According to the 2018 Global Oil and Gas Tax Guide, the standard corporate
income tax rate for resident companies is 25%.26 To contextualize the importance of
the relationship between tax laws and CSR, the specificities of oil and gas companies
should be taken into account. This industry deals with several kinds of hazards,
including environmental, safety, health-related and ultimately financial risk. The
production process burdens society, and more directly imposes nearby communities
with costs such as air pollution, oil spills and ultimately habitat degradation and
destruction, known as “the oil or resource curse”.27 It is not surprising that the public
has ambivalent feelings about energy development, and that these accomplishments
are accompanied by some sort of legal mechanism to ensure their execution. While
requiring CSR from gas and oil companies to be reasonable, we need to see how this
requirement is related to tax laws.

26 https://www.ey.com/Publication/vwLUAssets/ey-global-oil-and-gas-tax-guide/$FILE/ey-glo

bal-oil-and-gas-tax-guide.pdf.
27 See e.g., Paul Collier, Essay: Laws and Codes for the Resource Curse, 11 YALE HUM. RTS.

&DEV. L.J. 9 (2008).

Corporate and Social Responsibility in Iran 523

There are two faces of the tax coin; it can be considered one of the many expendi-
tures companies must pay, or it can be seen as an economic contribution to society.
Companies like to minimise their costs, and if a consistent and meticulous system is
in place where its business is conducted, then companies will try to maximise their
corporate taxes.
A strict legal approach is not advocated here, but a consistent and open tax system
suggested instead, with an apparatus in place to evaluate the execution of the princi-
ples of CSR within the parameters of each company’s needs and plans. This is lacking
in Iran’s tax legislation. Despite efforts in 2000 to reform some of these laws, all the
practical measures brought minimal, constructive influence in promoting CSR within
the oil and gas sector. This was due to inconsiderate and negligent policy makers
who took an inconsistent approach. Also, many projects that were supposed to be run
and supported by people were now budgeted by the government, and became depen-
dent on governance bodies. In addition, many cultural or charity-run organisations
reviewed the Ministry of Intelligence guidelines which created many inconsistent and
non-systemic limitations. Depending on the political party to which the Ministry’s
decision-makers at the time belonged, and their own belief system, they might agree
or disagree with a business plan. Companies are therefore unable to clearly calculate,
foresee and plan their programs.

3.4 The Mining Act

Another regulatory instance of attempting to acknowledge CSR in the oil and gas
industry can be found in Chapter Three of the Mining Act which refers to Exploita-
tion, and Note 5 of its Article 14 which says: “holders of exploitation permits who
endeavour for optimal exploitation and conservation of mineral deposits, enhancing
productivity, research, development and exploration and preservation of environment
in their mines shall be exempted up to twenty per cent (20%) from payment of royalty
upon confirmation of the High Mine Council”.28
This note attempts to take a small step towards promoting CSR disciplines. But
there are still internal obstacles to executing Note 5. The most noticeable is that it
only pertains to environmental preservation, the most traditional, yet very important
element of CSR. This Act is silent about non-environmental aspects.

Various Bylaws
As this chapter intends to give a fair picture of the CSR endeavours taking place in the
context of Iran’s oil and gas industry, it also addresses some other scattered bylaws
that in one way or another contribute to inclusion of corporate social responsibility
requirements.

28 Iran’s Mining Act, Accessible on http://en.tccim.ir/Content/media/image/2016/06/110_orig.pdf?

t=636025349930009690.
524 Z. Abdolalizadeh and E. Beygi

3.4.1 The Agreement Between the Iranian Department of Environment

and the National Iranian Association of Gas (NIA) 2016

This agreement was made to benefit the nation by providing sustainable economic
systems, increase job opportunities and remove obstacles for employment with the
motto of green exploitation. Under it, the NIA is responsible to provide a thorough
estimation of the costs it will impose on local communities in sites where they conduct
business and evaluate the social benefits as well as stakeholders’ profit.

3.4.2 Outlook of Iranian Mines and Mining Industries Development

and Renovation Organisation (IMIDRO)29

This document intended to convey the government’s outlook of sustainable devel-

opment in the mining industry. It has nine statements that are too general, vague
and unconstructive to even be evaluated. For instance, the document’s first statement
wishes to have: “a developed country in 2026” or the ninth state writes: “entrepreneur
and having sustainable employment”.
There are, of course, more policies, agreements or documents that can be inter-
preted as an endeavour to include CSR principles, but none are close to being suffi-
cient, let alone the fact that corporations in developed countries go beyond CSR to
address local and societal concerns as they conduct their business.

4 Conclusion

This chapter examined the extent to which CSR principles were applied in the
context of Iran’s oil and gas industry. Studying various companies revealed that
setting aside regional livelihoods and environmental concerns—and despite various
limitations—some attempts have been successful in providing services for local
affected communities, and even those at large. The Gol Gohar Mining and Indus-
trial Company, for instance, runs several projects, from environmental protection
programs to developing cultural and social infrastructure, to building the Gol Gohar
Football Club and Gol Gohar Hospital. Chador Malu Mining and Industrial Company
and Sarcheshmeh Copper Complex are also examples of corporations who have
successfully implemented CSR requirements into their business practices.
Not all established firms have been successful or even considered their social
responsibility. Overlooking the duty owed to local communities and the environment
in the protected areas of Mount Beyrami, Khonar Silica Mine, and Shemiranat has
resulted in catastrophic and harmful consequences, as well as devastating costs for
society at large. Mediation by the Department of Environment and consistent protests
by local communities in Khonar were able to revoke mining permits.

29 Accessible on http://www.imidro.gov.ir/general_content/157- .html.

Corporate and Social Responsibility in Iran 525

After studying examples on both sides of Iran’s Mining industry spectrum, a

closer look at existing regulations, laws and policies was taken to see what might
encourage the inclusion of CSR. Although several legislations and regulations that
could potentially promote corporate social responsibility were found, they are mostly
ignored in practice. Various reasons were listed as to why legal procedures have been
unsuccessful in robustly promoting CSR. The wording was vague and ambiguous,
such as in the guidelines to report CSR according to GRI standards (published by
Ministry of Petroleum); CSR Manuals published by the Ministry of Petroleum; the
limited and restrained requirements in The Mining Act; the lack of specifics by
the Outlook of Iranian Mines and Mining Industries Development and Renovation
Organisation (IMIDRO); and insufficient clarity and inconsistency within the tax
laws.
Legal as well as practical attempts have unsuccessfully addressed the requirements
of CSR policies in Iran. Unlike developed countries, the Iranian business scene has
not established corporate social responsibility as a matter of mandatory practice, and
extra-legal measures might be helpful in rectifying this. Perhaps a widening range of
control methods set by the public sector, rather than the political and legal domain, can
bring about a new corporate responsibility. This chapter concludes by considering
the possibility that institutionalised corporate social accountability could possibly
be achieved by Iran’s collective civil society, outside the sphere of governmental or
business sectors.

References

Bazrafkan, M. I., & Taghi, M. (2018). A critical study of corporate social responsibility and devel-
opment (an ethnographic study in Assaluyeh region). Social Development Quarterly, 11(4),
37–70.
Chapardar, H., & Khanlari, R. (2011). Iranian corporations and corporate social responsibility: An
overview to adoption of CSR themes. SAGE Open 1–15, 1(3), 2.
Kianoushrad, S. (2018, September 23). Destruction of the Mountain in favor of the Mine. Hamshahri
Newsletter.
Modabber, F. (2013). Implementing corporate social responsibility policies in a developing
country—A study of Iran, Durham theses, Durham University. Available at Durham E-Theses
Online: http://etheses.dur.ac.uk/8457/.
Omidvar, A. (2008). Government policy in promoting corporate social responsibility. Journal of
Corporate Social Responsibility. (Strategic Research Center).
Omidvar, A. (2011, August 19). Corporate social responsibility of companies in Iran. Donyaye
Eghtesad Newsletter, No. 2485.
Nouri, & Saeed, J. J. (2015). The concept of corporate social responsibility in the Laws of Germany,
France, England and Iran: with a Comparative Approach. Comparative Law Studies, 5(2), 603–
627.
Yoshanloey, & Saeed, J. J. (2013). The concept of corporate social responsibility in the Laws of
Germany, France, England and Iran with a comparative approach. Comparative Law Studies
Journal, 5(2), 603–627.
The Approach to Corporate Social
Responsibility in the Extractive
Industries in Trinidad and Tobago
and Guyana

Alicia Elias-Roberts

Abstract This chapter outlines the legal framework of corporate law and the
approach to CSR in Guyana and Trinidad and Tobago. It discusses ExxonMobil
Guyana’s general approach towards CSR. It also discusses the worst experience with
community involvement in the extractive resources industries in Guyana and one of
the best experiences of CSR in the Caribbean, namely Trinidad and Tobago’s Mayaro
Initiative for Private Enterprises Development (MIPED) programme. Additionally,
an analysis of the main challenges that the extractive resources industries are facing
with respect to CSR practices is highlighted. The conclusion analyses the compati-
bility of Guyana’s Green State Development Strategy and sustainable development
under the CSR and evaluates Trinidad and Tobago’s NSCSRP.

Keywords Corporate social responsibilities · Trinidad and Tobago · Guyana ·

Green state · Oil and gas law

1 Introduction

Corporate social responsibility (CSR) can be conceptualized as a mechanism through

which companies align with and shape sustainable development in a country where
they are doing business.1 In recent years, the Government of Guyana developed a
Green State Development Strategy: Vision 2040,2 which has the potential to signif-
icantly affect CSR and investments in the private sector in that country. The Green

1 Shahet al. (2016) at 237.

2 Government of the Cooperative Republic of Guyana (2019).
3 Republic of Trinidad and Tobago, Ministry of Trade, Industry, Investment and Communications

(2015).

A. Elias-Roberts (B)
Faculty of Law, University of the West Indies, St. Augustine, Trinidad and Tobago
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 527
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_30
528 A. Elias-Roberts

State Development Strategy: Vision 2040 outlines an approach to CSR, which incor-
porates sustainable development. The Government of Trinidad and Tobago has also
taken a step in the right direction and developed a National Strategic Corporate
Social Responsibility Policy (NSCSRP), which serves as a facilitative framework to
encourage Strategic CSR practices in Trinidad and Tobago.3 The NSCSRP outlines
the major national priorities or focal areas for CSR and identifies strategies that
companies can adopt to address these gaps in Trinidad and Tobago. While Guyana
has a general policy document and Trinidad and Tobago has a more specialized policy
document concerning CSR, the current legal framework in both jurisdictions does
not incorporate sustainable development as an element for investors or directors of
companies to consider when discharging their duties.
This chapter will focus on the petroleum extractive industries in both Guyana and
Trinidad and Tobago. Guyana has over 60 years of experience in extractive indus-
tries,4 with experience in bauxite, stone, sand, gold and diamond mining. However,
Guyana is a new frontier oil and gas country.5 On 15 May 2015, the ExxonMobil
operator found oil at a depth of 18,730 feet (5700 feet of water), 120 miles off
the coast of Guyana and the first major announcement of a significant discovery
of oil was made in Guyana. The well, named Liza 1, has since been followed by
several other successful discoveries. The initial reports stated that the discovery had
about 1.8 billion barrels of high-quality crude oil.6 However, the total recoverable
gross resources for the block as of August 2019 is estimated to be approximately
10 billion barrels of oil equivalent.7 All the successful wells in the Stabroek deep
water exploration block contain recoverable high-quality or ‘sweet’ crude, which
fetches a premium because it is less costly to refine.8 While Guyana has great poten-
tial to become a major petroleum producer in the Caribbean region, Trinidad and
Tobago is currently the largest oil and natural gas producer of the Caribbean islands
and territories. The first discovery of oil deposits occurred in 1867 and since then
Trinidad and Tobago has established a good record in offshore commercial oil and

4 GYEITI (2019).
5 ‘ExxonMobil Announces Significant Oil Discovery Offshore Guyana’, press release, 20 May
2015 at https://news.exxonmobil.com/press-release/exxonmobil-announces-significant-oil-discov
ery-offshore-guyana accessed 19 February 2019.
6 See ‘More Oil Found Offshore Guyana’ Guyana Times (26 July 2017) http://guyanatimesgy.com/

more-oil-found-offshore-guyana/ accessed 19 February 2019; Brooks and Schipani (2017).

7 Myers (2018).
8 ‘More Oil Found Offshore Guyana’ Guyana Times, supra n. 6.
The Approach to Corporate Social Responsibility … 529

gas.9 Apart from the petroleum sector Trinidad’s economy includes mineral extrac-
tion, agriculture, tourism and services. However, the petroleum industry remains the
main economic driver of the country.
In this chapter, I will begin by outlining the legal framework of corporate law
and the approach to CSR in Guyana and Trinidad and Tobago. Next, I will critically
discuss ExxonMobil Guyana’s general approach towards CSR. ExxonMobil Guyana
is the main oil company operating in Guyana. This will be followed by what I consider
to be the worst experience with community involvement in the extractive resources
industries in Guyana. I will then discuss one of the best experiences of CSR in the
Caribbean, namely Trinidad and Tobago’s Mayaro Initiative for Private Enterprises
Development (MIPED) programme. Next, an analysis of the main challenges that
the extractive resources industries are facing with respect to CSR practices will be
highlighted. The conclusion will analyse the compatibility of Guyana’s Green State
Development Strategy and sustainable development under the CSR and evaluate
Trinidad and Tobago’s NSCSRP.

2 Development of Corporate Law and the Approach

to CSR in Guyana and Trinidad and Tobago

Up until the 1980s, company law in Guyana and Trinidad and Tobago, as well as
the rest of English-speaking Commonwealth Caribbean10 evolved concomitantly
with the UK company law. The various Companies Acts in the region up until this
time represented a replica of the corresponding UK statute. Momentum for change
began in 1971 when the 8th Meeting of the Council of Ministers of the Caribbean
Free Trade Association (CARIFTA) resolved to initiate a project for the reform and
harmonization of the aging company laws within the Member States. A Working
Party was created to execute the project and was reconstituted under the Caribbean

9 The cumulative production is said to total over 3 billion barrels of oil. Pawan G Patil, John Virdin,

Sylvia Michele Diez, Julian Roberts, Asha Singh, ‘Toward A Blue Economy: A Promise for Sustain-
able Growth in the Caribbean; An Overview’ (Report No: AUS16344 The World Bank 2016) 70. See
also, The Oil & Gas Year Report, ‘Trinidad and Tobago 2019: The Oil & Gas Year: Information is
power,’ at https://www.theoilandgasyear.com/market/trinidad-and-tobago-2/ accessed 19 February
2019; and see Government of the Republic of Trinidad and Tobago Ministry of Energy and Energy
Industries, ‘Historical facts on the Petroleum Industry of Trinidad and Tobago’ http://www.energy.
gov.tt/historical-facts-petroleum/ accessed 19 February 2019.
10 The Commonwealth Caribbean includes the following independent island-nations; Antigua and

Barbuda, The Bahamas, Barbados, Dominica, Grenada, Jamaica, Saint Kitts and Nevis, Saint Lucia,
Saint Vincent and the Grenadines, and Trinidad and Tobago; the following mainland countries:
Belize, once known as British Honduras and Guyana; and the following British Overseas Territories:
Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Montserrat and the Turks and Caicos
Islands.
530 A. Elias-Roberts

Community (CARICOM).11 Out of the Working Party was the CARICOM Report
on the Harmonization of Company Law, which was published in 1979 along with a
model legislation incorporating all the reforms proposed in a report submitted by the
group.
Barbados was the first to use the CARICOM model Companies Act, along with the
Canadian Dickerson Report of 197112 and the (Draft) Canada Business Corporations
Act (CBCA) 1971 to draft and enact the Barbadian Companies Act 1985.13 The
Barbados Act was to be the first of the new generation of Companies Acts in the
Commonwealth Caribbean region which were, for the first time, no longer based on
the UK legislation but instead upon the more progressive Canadian legislation. The
new Act introduced a number of changes and new concepts to Caribbean company
law. Amongst these were: the incorporation of a company by a single person was
now permitted; there was no longer any requirement to file multiple constitutive
documents, such as articles and memoranda of association, instead, incorporation
was effected by simply filing ‘articles of incorporation’; shares could be issued with
no par value; a company now automatically had all the powers and capacity of a
natural person and there was no more need to specifically list the object and powers
of the company; duties and liabilities of directors were expressly stated; and greater
rights and more effective remedies given to minority shareholders.
The reforms created by the Barbados legislation proved popular in the Caribbean
and was followed a few years later by similar pieces of legislation in Guyana14 in
1991 and Trinidad and Tobago in 1995.15 The development of Guyana’s corporate
law adopted the principle that directors have a duty of care and in exercising these
powers and discharging duty he must think about what is in the best interest of the
company, the company’s employees and its shareholders. To be precise, the Act
provides:
(1) Every director and officer of a company in exercising his powers and discharging his
duties must -…
(2) in determining what are the best interest of the company, a director must have regard to the
interests of the company’s employees in general as well as the interests of its shareholders.16

A similar provision is provided for the Trinidad and Tobago’s Companies Act,
1995, Section 99. This statutory position is a little more extensive than the common
law position, which provides that a director owes duties to the company alone. This
company law principle is part of the common law and was enunciated over 100 years

11 See Revised Treaty of Chaguaramas establishing the Caribbean Community including the
CARICOM Single Market and Economy, 2259 UNTS 293 (Nassau, Bahamas 05/07/2001); and
see also, CARICOM Caribbean Community: Who We Are, https://caricom.org/about-caricom/who-
we-are, accessed 14 August 2019.
12 Dickerson et al. (1971).
13 Companies Act, Cap 308 (1985) Law of Barbados.
14 Companies Act (no. 29 of 1991), Cap. 89:01, Laws of Guyana.
15 Companies Act (no. 35 of 1995), Cap. 81:01, Laws of Trinidad and Tobago.
16 Companies Act (Guyana) supra n. 12, s. 96(2).
The Approach to Corporate Social Responsibility … 531

ago in the English case of Percival v Wright.17 The Canadian Supreme Court also
followed this principle in BCE Inc. v 1976 Debentureholders where the court said:
The fiduciary duty of the directors to the corporation originated in the common law. It is a
duty to act in the best interests of the corporation. Often the interests of shareholders and
stakeholders are coextensive with the interests of the corporation. But if they conflict, the
directors’ duty is clear – it is to the corporation [as stated in] People’s Department Stores.18

The impact of this judgment and the common law position established is that
directors do not owe a duty to any individual member or the shareholders or any other
party other than the company alone. However, the wide interpretation given to the
meaning of the ‘interests of the corporation’ in the Canadian case is that stakeholders
and shareholders were included. In contrast to this position, the statutory corporate
law position in Guyana and Trinidad and Tobago is that directors should have regard
to certain listed categories of persons only, namely company employees, shareholders
as well as what is in the best interest of the company, when discharging their duties.
The old common law position emanating from Percival v Wright is akin to the
shareholder primacy theory. This theory underpins US corporate jurisprudence, as
seen in cases such as Dodge v Ford Motor Co.19 The shareholder primacy theory
advances that the corporation’s business decisions should be made with a view to
benefit the shareholders only, to the exclusion of all other stakeholders. This is a
reasonable contention if the company is seen principally as nothing more than a
vehicle to provide a return on the capital invested by its members. Milton Friedman
in Capitalism and Freedom20 supported this view when he opined: ‘There is one and
only one social responsibility of business – to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game…’
According to Van der Weide this theory also has an economic basis. He submits that
the shareholder value theory allows the company to achieve operational efficiencies
and generate greater returns for its equity investors.21 However, this can also have the
negative effect of putting pressure on directors to achieve short-term gains to satisfy
shareholders at the expense of the company’s long-term, wider interests.
In contrast to the shareholder primacy theory, some jurisdictions, including
Canada, have developed a stakeholder approach. In People’s Department Stores Inc.
(Trustees of) v Wise22 the Canadian Supreme Court enumerated a list of categories of
persons for directors to be mindful of while discharging their duties to their company.
As stated by Major and Deschamps JJ:
We accept as an accurate statement of law that in determining whether they are acting with a
view to the best interests of the corporation it may be legitimate, given all the circumstances

17 [1902] 2 Ch 421.
18 [2008] 3 SCR 560 at para 37.
19 170 MW 668 (Mich 1919).
20 Friedman (1962).
21 Van Der Weide (1996).
22 [2004] SCR 461 SCC, para. 42.
532 A. Elias-Roberts

of a given case, for the board of directors to consider, inter alia, the interests of shareholders,
employees, suppliers, creditors, consumers, governments and the environment.23

This list of various categories of persons and things that should be considered when
the director exercises his duty of care was also confirmed by the Supreme Court in
2009 in the case of BCE Inc. v 1976 Debentureholders.24 It is also notable that the
Supreme Court prefaced this list with the words ‘inter alia’. Therefore, this indi-
cates that this is not an exhaustive list and the set of parties mentioned therein is not
intended to be closed but may be further expanded upon in subsequent cases. In this
way, the Canadian courts can be said to embrace the concept of stakeholder primacy.
This is a theory that places equal importance on the interests of other stakeholders
in the company, as is placed on the interests of the shareholders. The theory has its
origins in Professor R. Edward Freeman, a Professor of Business Administration at
the Darden School of Business at University of Virginia, USA. Professor Freeman
wrote a book, Strategic Management: A Stakeholder Approach,25 in which he defines
a stakeholder as ‘any group or individual who can affect or is affected by the achieve-
ment of the firm’s objectives’.26 He lists a variety of constituencies such as owners,
employees, suppliers, government, consumer and other activist groups, trade unions
and associations, political groups and competitors who are stakeholders. According
to Taylor, in so doing, Professor Freeman confirms the status of the corporation as
an essential part of society and the national economy.27
A third approach, which is like a compromise between the stakeholder and share-
holder primacy theories, is the enlightened shareholder theory. This theory was
adopted in the UK Companies Act 200628 on the recommendation of the UK’s
Department of Trade and Industry’s (DTI) Company Law Reform (CLR), instead of
taking a more pluralistic approach such as adopting the stakeholder primacy view,
for instance.29 One reason for this choice was that it was felt that the old common
law position risks leaving directors accountable to no one, since there is no clear
yardstick for judging their performance.30 Section 172 (1) (a) Companies Act 2006
(UK) explicitly requires directors to consider a long-term view of the company, rather
than focusing on achieving the short-term gains to appease shareholders. The section
reads as follows:
A director of a company must act in the way he considers, in good faith, would be most
likely to promote the success of the company for the benefit of its members as a whole, and
in doing so have regard (amongst other matters) to—

23 Major and Deschamps JJ at para 42.

24 [2008] 3 SCR 560, at para 39.
25 Edward Freeman (1984).
26 Ibid., 25.
27 Taylor (2010).
28 Companies Act 2006, Cap. 46 (United Kingdom), http://www.legislation.gov.uk/ukpga/2006/46/

contents, accessed 5 August 2019.

29 See Company Law Reform Bill—White Paper 2005, para. 3.3; CLR, Modern Company Law for

a Competitive Economy: A Strategic Framework, at para 5.

30 UK Committee on Corporate Governance, Final Report, para 1.17; See also: [1903] 2 Ch 506.
The Approach to Corporate Social Responsibility … 533

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,
(c) the need to foster company’s business relationships with suppliers, customers
and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of
business conduct, and
(f) the need to act fairly as between members of the company.31

There are a few key principles that can be distilled about the ‘enlightened share-
holder approach’. In particular, the duty is on the directors to ‘promote the success
of the company for the benefit of its members as a whole’. This phrase was very
carefully and deliberately worded so that the ‘company’ would be the subject of the
sentence, and its ‘members’ would be the object. According to the Company Law
Reform this was done because ‘[w]e believe there is value in inserting a reference
to the success of the company, since what is in view is not the individual interests
of members, but their interests as members of an association with the purposes and
the mutual arrangements embodied in the constitution’.32 According to Sealy and
Worthington, this means that the primacy of the company is paramount. The focus is
first and foremost on the company, and if the interests of the company as a separate
entity are in conflict with the interests of the members as a whole, or at least some of
them, it would appear that the interests of the company should be preferred.33 There-
fore, while the UK law requires the company to have regard to other interests such as
employees, business relationships, community and the environment, amongst others,
unlike the stakeholder theory, in the enlightened shareholder view, these interests are
secondary to the company and its members.
Section 172 (1) of the UK Companies Act 2006 codifies the ‘enlightened share-
holder approach’ as previously explained. This is essentially a compromise between
the shareholder primacy theory and the stakeholder approach. The reference to
director discharging their duties and taking into consideration ‘the impact of the
company’s operations on the community and the environment’ is a welcomed addi-
tion to incorporating sustainable development goals as part of the corporate jurispru-
dence in the UK. There is no similar provision in the Companies Acts in Guyana
and Trinidad and Tobago. It is respectfully suggested that Companies Acts in both
jurisdictions should be amended to incorporate the enlightened shareholder approach
as formulated in the UK statute. This is a preferable position to that which currently
obtains in Guyana and Trinidad and in which the legal framework provides that the
directors are to have regard only to the interests of the shareholders and employers.

31 Section 172 (1) (a) Companies Act 2006 (UK), supra n. 28.
32 White Paper, Company Law Reform (Cm6456, 2005) para 3.3; CLR, Modern Company law for
a Competitive Economy: Developing the Framework (URN 00/656), para 3.51; See also, Monk
(2000).
33 Sealy and Worthington (2008).
534 A. Elias-Roberts

3 ExxonMobil Guyana’s Approach Towards CSR

While the list of major companies operating in Guyana includes several banks,
beverage companies, manufactures, gold and diamond business, etc., ExxonMobil
Guyana, a new entrant in the business scene, is predicated to soon become the largest
company operating in Guyana. It is predicated that ExxonMobil Guyana’s operations
will transform the wealth of the country through revenues to be collected from their
oil and gas exploration and development in Guyana. Hence, this major extractive
company’s approach to CSR is a worthy candidate for review.
According to the ExxonMobil Guyana website,34 the company seeks to contribute
to the social and economic progress of Guyana and the local communities because
they are operating in the country. The company’s CSR statement provides as follows:
We believe that maintaining a fundamental respect for human rights, responsibly managing
our impacts on communities and making valued social investments are integral to the success
and sustainability of our business.
We strive to establish meaningful relationships that benefit communities and the company
for the long-term. Our focus areas include STEM Education; Youth, Women and Community
Empowerment; and Environmental Sustainability.35

During the period 2018–2019, the company reports that over GYD$550 million
in grants were given. This is equivalent to US$2.637 million dollars.36 The contribu-
tions included: GYD$400 million given to Conservation International Guyana for a
programme to advance Guyana’s sustainable economy through education, research,
sustainable management and conservation; GYD$120 million given to Iwokrama
for the Centre’s Science Programme; and GYD$31 million given to Volunteer Youth
Corps for Science, Technology, Engineering and Mathematics (STEM) programmes,
including robotics.
Other activities included: Over GYD$6 million given to the Civil Defence
Commission’s Voluntary Emergency Response Team (VERT) training, supporting
volunteers from Regions 3, 4, 5, 6, 8, 9 and, 10; GYD$5 million given to Youth
Challenge Guyana (YCG) supporting a programme to enhance the agricultural food
production skills of at least 200 Guyanese in Region 4; and GYD$4 million given to
STEM Guyana to support the implementation of a ‘Reading & Robotics’ Program
in libraries in Regions 3, 4, 5, 6 and 9.
The above approach to CSR by ExxonMobil Guyana is in line with the ‘enlight-
ened shareholder approach’ as previously explained. The company’s statement
regarding its contributions towards community and social responsibility makes refer-
ence to environmental sustainability and managing their impact on communities and
making valued social investments. As the figures above demonstrate, the company
has gone beyond what the law requires and what they are contractually obligated to

34 ExxonMobil Guyana, ‘Community and social responsibility in Guyana’, https://corporate.

exxonmobil.com/locations/guyana/community-and-social-responsibility-in-guyana, accessed 23
August 2019.
35 Ibid.
36 For currency conversion see https://www.xe.com/, accessed 23 August 2019.
The Approach to Corporate Social Responsibility … 535

do. This is a move in a positive direction that the investors and director are discharging
their duties and taking into consideration the impact of the company’s operations on
the community and the environment. While it is commendable that the company
has decided to take this approach, there is nothing binding them to continue with
this as there is no legal requirement. Since there is no guarantee to ensure that the
company continues with an enlightened shareholder approach there is the possibility
that the investors can decide to take a different course of action if the price of oil
declines. Hence, it is respectfully recommended that the Guyana Companies Acts
should be amended to incorporate the enlightened shareholder approach as a binding
legal requirement.

4 Trinidad and Tobago’s Mayaro Initiative for Private

Enterprises Development (MIPED) Programme

The Inter-American Development Bank (IDB) has constantly advocated for resource
rich nations, such as Guyana and Trinidad and Tobago, to ensure oil companies
provide ample compensation in every sphere of their operation. In a report released
in 2018, the IDB said that Guyana must move quickly to put a national corporate
social responsibility strategy in place for all companies operating in the oil and gas
industry. In the eyes of the IDB, time is running out for Guyana to get this in order
or else, it runs the risk of being cheated in this area.37
In the 2018 IDB report, it was noted that for CSR to be relevant they must address
the most pertinent pillars of the economy. Generally, most of the money that interna-
tional oil companies in the petroleum sector generates tend to repatriate, and because
of this trend many have argued that they need to follow the Hartwick rule to enhance
their reputation as good corporate citizens. The report referenced the study by Genasci
and Pray who argued that ‘building a town hall or health clinic in a mining community
where the most apparent impact of the mining activity is large-scale environmental
degradation or forced relocation of villages might be viewed as simply an attempt
to buy off the community and create space to go on with business as usual’.38 With
regard to this issue, the IDB stressed that CSR must be relevant to the needs of a
country’s communities.
To further solidify the importance of CSR being relevant, the Bank gave the
example of a successful case study from Trinidad and Tobago called the Mayaro
Initiative for Private Enterprises Development (MIPED) programme. The programme
was set up in 2002 in Mayaro, a small village located in the southeast coast of
Trinidad. The Bank stated that this programme was envisioned by Trinidad’s govern-
ment and has helped to facilitate the growth of small businesses in that area. The
Trinidadian government ensured that MIPED programme was started in 2003 by
British Petroleum of Trinidad and Tobago (bpTT) in the Mayaro community after

37 Wenner et al. (2018) and Wilburg (2018).

38 Genasci and Pray (2008).
536 A. Elias-Roberts

recognizing the challenges of small businesses and their access to finance. The IDB
said that MIPED began operations with a TT$7 million-dollar investment from bpTT
to develop Mayaro and its environs into a model community, creating self-sustaining
employment, improving training and establishing business opportunities to help build
self-esteem and improve the quality of life. According to the report, since its incep-
tion, the MIPED programme has created over 3000 jobs and at the time of reporting
it has an asset base in excess of TT$70m.39
In 2015 the Government of Trinidad and Tobago released the National Strategic
Corporate Social Responsibility Policy (NSCSRP). It is expected that the NSCSRP
will assist in fostering a culture of Strategic CSR activities in Trinidad and Tobago.40
In an earlier report on CSR Mapping in Trinidad and Tobago, which was prepared
by the UNDP in collaboration with the then South Trinidad and Tobago Chamber
of Industry and Commerce (STCIC) it was observed that the domestic landscape in
Trinidad is littered with CSR activities; however the broader and far reaching impacts
of these activities were viewed to be marginal and tended to be philanthropic in nature.
According to figures provided by UNDP and STCIC in the CSR Mapping Report
(2007), for the period 2001–2006, 68 companies disclosed spending a combined
total of TT$ 54 million on external social and environmental programmes. However,
even though a large sum was reportedly spent on CSR initiatives, there were many
issues that were identified, which continues to minimize the impact of CSR activities
in the island. In 2012 UNDP released another report on CSR activities in Trinidad
and Tobago, which found that there was little evidence of a substantial shift towards
more strategic forms of CSR in 2012 since the 2007 report; that there was continuous
strong focus on public relations and reputation management as the main drivers of
CSR; and that unfortunately, there was evidence of poor reporting and disclosure
practices on CSR activities. The issues identified in the UNDP’s 2012 report served
as an impetus for the Ministry of Trade, Industry, Investment and Communications
to develop the NSCSRP to guide companies in Trinidad and Tobago to promote more
Strategic CSR practices.

5 The Hartwick Rule

As stated above the IDB report also contends that CSR must be informed by the
Hartwick rule. The Hartwick rule ensures that while oil companies are allowed to
extract a country’s resource, meaningful investment must be aligned to the devel-
opment of a country’s human and social development. The Hartwick rule is also
intended to help companies to strengthen their legitimacy and, with the right type
of intervention, foster greater genuine savings in host communities. Essentially, the
Hartwick rule argues that the most important assets to which resource rents can be
placed are human capital, produced capital and financial capital. If CSR activities

39 IDB Report, supra n. 37 at 51.

40 NSCSRP Report, supra n. 3 at 3.
The Approach to Corporate Social Responsibility … 537

focused on other areas, there is the possibility that it could impede the long-run
growth potential of the host community.
For CSR to be relevant, it must address the most germane externality.41 In
this regard, the IDB notes that Christmas parties and hampers alongside Carnival
programmes for children would not cut it. It said that CSR that does not seek to
transform the country’s human capital only compromises the growth of the commu-
nities within the country. The IDB said, ‘CSR initiatives have often been conceived
by the “helpers” in the air-conditioned offices of oil companies and consultancies
rather than through ongoing participation with the beneficiaries; again, that approach
follows the logic of CSR serving corporate objectives. Where oil companies have
consulted local communities, the consultation exercises have usually been superficial
and grossly inadequate’.42
While international oil companies in the energy sector will have to provide an
adequate return to their head offices and shareholders, unfortunately, in many devel-
oping countries, this usually takes place while the host communities in which they
operate are experiencing serious and severe environmental degradation and poverty
of various forms including deprivations in human, physical and social capital.
It should be highlighted that the Hartwick rule emphasizes a replacement of the
extracted natural capital with an appropriate intervention by the international oil
companies to provide human, social and infrastructural capital in the host community.
This is recommended because in many regards, as an economy’s stock of physical
capital declines, the only way to maintain the productive capacity is to replace the
depleting natural resource capital (and in the case of hydrocarbons, non-renewable
resources) with human capital and physical capital. Interestingly, one source cites
that for an economy, the ‘transformation of an exhaustible natural resource stock
into a reproducible stock of capital manages to keep the level of production and thus
consumption, constant’43
According to the IDB report, if the government is not skilful in developing a
strong CSR strategy then, oil companies can end up aiming for ‘soft targets’ that
can be seen as a form of hush money and may even help to precipitate a type of
dependency mentality in some host communities of the country. It is said that this
often takes the form of monetary donations to clubs, government entities, etc. In
light of the foregoing, the Bank stressed, ‘Meaningful CSR must be in sync with
the core developmental needs of the country from a Hartwick perspective. In this
regard, Guyana must put in place an appropriate national CSR strategy to promote
the avenues through which large firms, both national and multinational, are guided
to link their CSR strategy with the pertinent Hartwick rule needs of communities’.44
This recommendation is strongly supported. It is critical for Guyana to urgently put
in place an appropriate national CSR strategy. This will help to clarify the govern-
ment’s approach to CSR, and to identify the avenues through which international oil

41 Frynas(2005).
42 IDB Report, supra n. 38 at 52; See also, Frynas (2000), at 580.
43 See Van der Ploeg (2008), at 7.
44 IDB Report, supra n. 38 at 52.
538 A. Elias-Roberts

companies as well as national companies, which are investing in the country, can
operate and will be guided to link their CSR strategy with the pertinent Hartwick
rule needs of the community. According to Article 28 of the 2016 Petroleum Agree-
ment between the Government of Guyana and ExxonMobil, the Government and
the Contractor shall establish a program of financial support for environmental and
social projects to be funded by the Contractor. The CSR from ExxonMobil Guyana
and its partners will amount to US$300,000 per calendar year, and any unspent funds
will be taken over into the ensuing year.45

6 The Worst Experience with Community Involvement

in the Extractive Resources in Guyana: Omai Gold Mine
Environmental Disaster

The Omai gold mine was one of the largest gold mines in Guyana. The mine was
located in the north-west of the country in Cuyuni-Mazaruni area. On 19 August
1995, the mining company had a major failure of its tailings system causing some
4.2 billion liters of cyanide-laced waste to flow into a tributary of the Essequibo
River, the main water source in the country. The incident lasted over a period of
five days and marine life in the river was essentially killed off. Eighty kilometres
of the Essequibo River were declared an environmental disaster zone.46 Operation
at the mine was halted for several months while the spill was investigated, and the
mine was subsequently forced to close. The principal mine owners were Cambior
Inc., a Canadian based company; Golden Star Resources Inc., a company based in
Colorado, USA; and the government of Guyana. Cambior owned 65%, Golden Star
30%, and the Government of Guyana 5% of the mine.
Attempts were made in Guyana and in Canada to sue the principal company.
Some 23,000 victims of the spill filed suit in Quebec against Cambior. The Guyana
case sought $2 billion in damages. These cases were dismissed in Canada in 1998,
and in Guyana in 2002 and 2006.47 In 1998, the Quebec Superior Court refused to
take jurisdiction over the legal action in which it was alleged that Cambior was
negligent with respect to the tailings dam collapse at its mine in Guyana. The
Guyanese plaintiffs sought to have the Canadian courts exercise jurisdiction over
alleged human rights abuses and environmental damages committed in Guyana.
The tailings dam collapse allegedly contaminated the water supply of thousands of

45 Petroleum Agreement between the Government of Guyana and Esso Exploration and Production

Guyana Limited, CNOOC Nexen Petroleum Guyana Limited and Hess Guyana Exploration Limited
(2016), Article 28.7.
46 See Mineral Policy Institute (2014); see also Davidson (1995).
47 Recherches Internationales Quebec v. Cambior Inc. [1998] Q.J. No. 2554 (S.C.J.); See also

Business and Human Rights Resource Centre, Cambior Lawsuit (re Guyana), https://www.bus
iness-humanrights.org/fr/node/86220?page=1, accessed 27 August 2019.
The Approach to Corporate Social Responsibility … 539

Guyanese. While the Quebec Court determined that there were some connections to
Quebec, it ultimately determined that Guyana was the appropriate forum.48
The cyanide spill affected loggers, indigenous villagers/native Indians, wildlife
and fish along the Essequibo river. Those who live along the banks of the river
rely on it for their drinking water and the river is renowned for its fishing. It was
reported that the remedial action undertaken by Cambior included sending Canadian
mining engineers who tried to build a new dam on the Essequibo river within a week
after the accident to stem the flow. The company also sent out helicopters and foot
patrols to distribute drinking water and warn indigenous villagers and others along
the banks not to drink, fish or bathe in the affected rivers. While the government
lifted the environmental alert on the river after one-week, indigenous villagers on the
river were still using alternative water sources, at considerable inconvenience, seven
years after the spill.49
This incident is one of the worst cases of CSR in Guyana’s extractive industry
experience. The remedial action taken by the company was woefully inadequate.
Sadly, there was no CSR activities by Omai to align the companies’ objectives and
investment with broader goals towards sustainable development and development of
the country’s human and social development. Apart from the Omai environmental
disaster incident, the Bai Shan Lin controversy is another case of poor CSR within the
extractive industries in Guyana. It was reported in the local newspapers in Guyana that
Bai Shan Lin, a large logging company operating in Guyana, was doing nothing more
than capitalizing on an opportunity for its own corporate gain.50 It was alleged that the
company’s operations were not ‘socially, ethically, and environmentally’ responsible
or accountable to the people of Guyana. There were many articles published about
the company, which alleged their absolute disregard for Guyana law and process. A
Stabroek News article published in 2013 stated: ‘The Chinese logging company Bai
Shan Lin Forest Development Inc. has been accused of carrying out unlawful works
at Moblissa, Linden, and refusing to sign a Cease Work Order (CWO) served on it
by the Guyana Geology and Mines Commission (GGMC)’.51
The Omai environmental disaster and the Bai Shan Lin controversy demonstrate
an important element for companies in their approach to CSR. Mining, logging or
any company operating in the extractive industries need to realize that it is no longer
just about having individuals with good finance or the other relevant expertise, but
good social conscience is now a necessary ingredient in conducting meaningful
investments. Companies operating in the extractive industries need to be socially
responsible. Governments who regulate the industries ought to ensure that along
with granting an operating license, CSR activities become an integral part of the
daily operations of companies operating within their jurisdictions.

48 Ibid.
49 Reuters (1995).
50 Henry-Williams (2013).
51 Thomas (2013).
540 A. Elias-Roberts

7 The Main Challenges that the Extractive Resources

Industries Are Facing with Regards to CSR Practices

As highlighted above, the main challenges that the extractive resources industries
are facing with regard to CSR practices is the need to incorporate sustainable devel-
opment. Incorporating sustainable development in CSR practices will help to ensure
that companies conduct meaningful investment that is aligned to the development
of the country’s human and social development goals. Another challenge is that the
Companies Acts in both Guyana and Trinidad and Tobago should be amended to
include an enlightened shareholder approach towards directors and investors’ duties.
The current legal framework in Trinidad and Tobago and Guyana provides that the
directors are to have regard only to the interests of the shareholders and employers.
However, various other laws and policy documents released by the Governments
in both states mention sustainable development as an important goal, which should
guide investors. It is important for the legal and regulatory framework to be compat-
ible with other strategies, such as the Green State Development Strategy and the
NSCSRP released by the governments.
Turning to the Green State Development Strategy: Vision 2040 and community
involvement in Guyana, this strategy is Guyana’s twenty-year, national development
policy that reflects the guiding vision and principles of the ‘green agenda’. According
to the information about this strategy shared by the government, the aim is for ‘an
inclusive and prosperous Guyana that provides a good quality of life for all its citizens
based on sound education and social protection, low-carbon and resilient develop-
ment, providing new economic opportunities, justice and political empowerment’.52
The central objective of the Green State Development Strategy is stated to be develop-
ment that provides a better quality of life for all Guyanese derived from the country’s
natural wealth—its diversity of people and abundant natural resources (land, water,
forests, mineral and aggregates, biodiversity). The vision of the ‘green agenda’ is
centred on principles of a green economy defined by sustainable, low-carbon and
resilient development that uses its resources efficiently and sustained over genera-
tions. According to the Strategy document, the development philosophy emphasizes
the importance of a more cohesive society based on principles of equity and toler-
ance between ethnic groups—recognizing that diversity of culture and heritage is the
underlying strength of the country’s human capital. So the overall picture generated
by the strategy is to promote development objectives that seek to improve the health,
education and overall well-being of Guyanese citizens, to lift people out of poverty
through an economy that generates decent jobs and that provides opportunities for
sustaining livelihoods over the long term.
While the principle of ‘sustainable development’ is often repeated in the Strategy
document it is not defined in the document. According to the Brundtland Commis-
sion on Environment and Development,53 sustainable development is: ‘development

52 Green State Development Strategy, Vision 2040, supra n. 2 at 1.

53 Brundtland Commission on Environment and Development (1987).
The Approach to Corporate Social Responsibility … 541

that meets the needs of the present without compromising the ability of future gener-
ations to meet their own needs’. This definition will be adopted here. Note that the
principle sustainable development has the status of a legal norm and is evident in the
Rio Principles 4 and 25, which provides the concepts of integration and interdepen-
dence are an integral part of achieving peace and development.54 Also, one of the
Millennium Development Goals, number 7, to ‘Ensure environmental sustainability’,
provides that governments must ‘integrate the principles of sustainable development
into country policies and programmes…’55 Guyana has incorporated sustainable
development into several Acts related to the environment. However, it is time for the
government to consider incorporating sustainable development into corporate laws,
such as the Companies Act.
Regarding Trinidad and Tobago, as mentioned above, notwithstanding the fact
that a large sum of money was reportedly spent on CSR initiatives, there were many
issues that were identified, which continues to minimize the impact of CSR activities
in the country. A major challenge is to shift CSR activities towards more strategic
forms of CSR. The Government of Trinidad and Tobago indicated that it will lead
by example and actively participate in and promote the NSCSRP. The overall aim of
the NSCSRP is to shift the focus from mainly charitable activities by companies to
more strategic forms of CSR. One of the benefits of the Government’s participation
in Strategic CSR, and as a leader in the practice of Strategic CSR, is that it will
encourage Foreign Direct Investments (FDIs). Foreign investors are usually attracted
to nations that operate responsibly, support good governance, anti-corruption and a
robust, responsible business sector.56
The Government of Trinidad and Tobago intends to lead by example in adhering
to CSR principles and practices through the following four main channels:
(i) Promoting policies that provide support to CSR efforts (e.g. endorsement of
CSR labels, publication of best practices, support to civil society transparency
initiatives).
(ii) Partnering of public and private CSR efforts (e.g. public–private partnerships,
ensuring stakeholder consultation in the development of public policy and
laws).
(iii) Facilitating measures to enable CSR efforts (e.g. awareness raising campaigns,
incentives, tax rebates, procurement policies, capacity building, supporting the
development of sustainable and green businesses); and
(iv) Mandating frameworks to enforce and guide CSR activities in its departments
and state enterprises (e.g. developing standards and codes of conduct, reporting
guidelines, corporate governance codes).57

54 United Nations Conference on Environment and Development. Agenda 21, Rio Declaration,
Forest Principles (New York: United Nations, 1992).
55 UN Office of the High Commissioner for Human Rights (OHCHR) 2008.
56 NSCSRP Report, supra n. 3 at 15.
57 Ibid., 16.
542 A. Elias-Roberts

The Government of Trinidad and Tobago also reported that it will make it manda-
tory for all Government departments and State Enterprises to publicly report on
an annual basis all activities and expenditures relating to CSR. This bold initiative
should strengthen reporting and disclosure practices on CSR activities and help to
promote more Strategic CSR practices in Trinidad and Tobago.

8 Conclusion

Since late 2001, many corporate failures, scandals and wrongdoing that have come
to light have increased the global drive for CSR. The abuses at Enron, Tyco, Global
Crossing, Adelphia and WorldCom in the USA, and Shell in Europe, have severely
impacted investor and other stakeholder confidence in the integrity of those charged
with the supervision and management of large companies. The incidents in North
America and Europe have severely impacted the Caribbean. In Trinidad and Tobago
and Guyana there is the view that corporate corruption is widespread and there is a
general lack of transparency and accountability.
Companies operating in the extractive industries in Trinidad and Tobago and
Guyana should develop clear CSR. While the primary role of corporate businesses
is to maximize shareholder value, the global marketplace, where reputations matter
deeply, dictates that shareholder value increasingly depends on corporate values.
Corporate leaders understand that practising corporate responsibility affects their
corporate reputation and brand image. Business managers are becoming more aware
that socially responsible investors and activist shareholders can impact the bottom
line. It is recommended that companies operating in the extractive industries should
develop clear CSR policies to strengthen their ties with local communities through
sustainable development programmes and corporate codes of conduct. By conveying
clear values and principles, and accepting responsibility for workplaces and work-
place conduct, companies can not only build trust and mutual understanding with
stakeholders, they can also support the role of governments and the communities in
which they operate. Also, corporate responsibility can provide a competitive advan-
tage to companies and company executives can motivate employees by their labour
practices.
It is recommended that Guyana develop a National CSR policy like Trinidad
and Tobago’s NSCSRP, to encourage foreign companies operating in the extractive
industries and large domestic companies to strategically give back to the economy,
and specifically to host communities. Also, in line with the Green State Development
Strategy, the Government of Guyana must aggressively promote sustainable devel-
opment as part of investment. Additionally, it is recommended that the Government
of Trinidad and Tobago continue to map CSR activities to assess whether the initia-
tives under the NSCSRP to maximize the impact of CSR activities in the country, and
shift CSR activities towards more strategic forms of CSR. Finally, it is recommended
that the Companies Acts in both Guyana and Trinidad and Tobago be amended to
incorporate the enlightened shareholder approach as formulated in the UK statute.
The Approach to Corporate Social Responsibility … 543

Of the various approaches discussed above, this approach provides the best situation
to investors while still accommodating elements of Corporate Social Responsibility.

References

Brooks, E., & Schipani, A. (2017, March 19). Guyana oil prospects stir friction between Venezuela
and ExxonMobil. Financial Times. https://www.ft.com/content/013bfd26-0a8e-11e7-ac5a-903
b21361b43?mhq5j=e1. Accessed July 19, 2019.
Brundtland Commission on Environment and Development. (1987). Our common future. New York:
Oxford University Press.
Davidson, P. (1995, August 23). Cyanide from mine threatens Guyana river. The
Independent. https://www.independent.co.uk/news/world/cyanide-from-mine-threatens-guyana-
river-1597531.html. Accessed August 27, 2019.
Dickerson, R. W. V., et al. (1971). Proposal for a new business corporations law for Canada.
Ottawa: Information Canada.
Edward Freeman, R. (1984). Strategic management: A stakeholder approach. Pitman Publishing.
Friedman, M. (1962). Capitalism and freedom: Fortieth anniversary edition (p. 133). University of
Chicago Press.
Frynas, G. (2000). Oil in Nigeria: Conflict and litigation between oil companies and village
communities. Hamburg, Germany and New Brunswick, NJ: LIT Verlag and Transaction
Publishers.
Frynas, G. (2005). The false developmental promise of corporate social responsibility: Evidence
from multinational oil companies. International Affairs, 81(3), 581–598.
Genasci, M., & Pray, S. (2008). Extracting accountability: The implications of the resource curse
for CSR theory and practice. Yale Human Rights and Development Journal, 11(1), Article 4.
Government of the Cooperative Republic of Guyana. (2019, May). Green state develop-
ment strategy, vision 2040. https://www.doe.gov.gy/published/document/5cd1d69fe5569929a6
9b35b0. Accessed August 23, 2019.
GYEITI. (2019, April). Guyana Extractive Industries Transparency Initiative (GYEITI) report for
2017 fiscal year.
Henry-Williams, T. (2013, November 2). Customer service must not be at the cost of insulting
public intelligence. Kaieteur News. https://www.kaieteurnewsonline.com/2013/11/02/customer-
service-must-not-be-at-the-cost-of-insulting-public-intelligence/. Accessed August 25, 2019.
Mineral Policy Institute. (2014, August 7). Chronology of major tailings dam failures. http://www.
mpi.org.au/2014/08/chronology-of-major-tailings-dam-failures/. Accessed June 23, 2019.
Monk, R. (2000). Modern company law for a competitive economy: The strategic framework.
Corporate Governance: An International Review, 8(1), 16–24.
Myers, K. (2018, September 5). Latest Guyana discovery opens the way to a new 10 billion barrel
oil province and transformation for one of South America’s smallest countries. Westwood Global
Energy Group. Westwood Insight. https://www.westwoodenergy.com/news/westwood-insight/lat
est-guyana-discovery-opens-the-way/. Accessed August 14, 2019.
Republic of Trinidad and Tobago, Ministry of Trade, Industry, Investment and Communications.
(2015, August). National strategic corporate social responsibility policy of Trinidad and Tobago.
Reuters. (1995, August 25). World news briefs: cyanide spill is plugged along river in Guyana. The
New York Times. https://www.nytimes.com/1995/08/25/world/world-news-briefs-cyanide-spill-
is-plugged-along-river-in-guyana.html. Accessed August 27, 2019.
Sealy, L., & Worthington, S. (2008). Cases and materials in company law (p. 293). Oxford University
Press.
544 A. Elias-Roberts

Shah, K. U., Arjoon, S., & Rambocas, M. (2016). Aligning corporate social responsibility with
green economy development pathways in developing countries. Sustainable Development, 24,
237–253.
Taylor, P. N. (2010). Enlightened shareholder value and the companies act 2006 (Ph.D. thesis).
Birkbeck College.
Thomas, M. (2013, April 18). Chinese logging co accused of illegal Moblissa excavation—Oper-
ations continuing despite GGMC cease orders. Stabroek News. https://www.stabroeknews.
com/2013/news/guyana/04/18/chinese-logging-co-accused-of-illegal-moblissa-excavation/.
Accessed August 29, 2019.
UN Office of the High Commissioner for Human Rights (OHCHR). (2008). Claiming the millennium
development goals: A human rights approach. HR/PUB/08/3. https://www.refworld.org/docid/
49fac1162.html. Accessed September 7, 2019.
Van der Ploeg, F. (2008). Voracious transformation of a common natural resource in productive
capital (OxCarre Research Paper No. 2008-02). Oxford, UK: Oxford Centre for the Analysis of
Resource-Rich Economies, Oxford University.
Van Der Weide, M. (1996). Against fiduciary duties to corporate stakeholders. Delaware Journal
of Corporate Law, 21(27), 56.
Wenner, M., Bollers, E., & Hosein, R. (2018, July). The Dutch disease phenomenon and lessons for
Guyana: Trinidad and Tobago’s experience. IDB report. Country Department Caribbean Group,
Technical Note No. IDB-TN-1470.
Wilburg, K. (2018, October 3). Time is running out; get appropriate CSR strategy for oil compa-
nies—IDB urges. Kaieteur News. https://www.kaieteurnewsonline.com/2018/10/03/time-is-run
ning-out-get-appropriate-csr-strategy-for-oil-companies-idb-urges/. Accessed August 23, 2019.
Corporate and Environmental
Responsibility Among Russian Oil
Companies

Nina Poussenkova and Indra Overland

Abstract Corporate social responsibility (CSR) and commitment to sustainable

development have become integral elements of long-term corporate strategies across
sectors and countries. The CSR policies of Russian vertically integrated oil compa-
nies (VIOCs) are of particular interest because these companies share some charac-
teristics of international oil companies (IOCs) and the national oil companies (NOCs)
of other petroleum-producing countries.

1 Between IOCs and NOCs

Corporate social responsibility (CSR) and commitment to sustainable development

have become integral elements of long-term corporate strategies across sectors
and countries. The CSR policies of Russian vertically integrated oil companies
(VIOCs) are of particular interest because these companies share some characteris-
tics of international oil companies (IOCs) and the national oil companies (NOCs) of
other petroleum-producing countries.
In general, NOCs bear a heavier social burden than Russian VIOCs since the
former usually have a “national mission” and perform political and social tasks that
distract them from the task of profit maximisation.1 In return, they receive additional

1 National Oil Companies and Value Creation. Silvana Tordo with Brandon S. Tracy and Noora

Arfaa.
2 Poussenkova (2012).

N. Poussenkova (B)
Institute of World Economy and International Relations, Russian Academy of Sciences; ENERPO
Centre of the European University at St. Petersburg, Moscow and St. Petersburg, Russia
e-mail: [email protected]
I. Overland
Centre for Energy Research, Norwegian Institute of International Affairs (NUPI), Oslo, Norway
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 545
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_31
546 N. Poussenkova and I. Overland

benefits from the state. In practice, one of the heaviest social burdens for NOCs is
their obligation to provide petroleum products to the population and other sectors
of the economy at subsidised prices.2 Russian oil companies do not have such an
obligation, although the Russian government does occasionally ask them to freeze
gasoline prices. Thus, in February 2011, Prime Minister Vladimir Putin ordered the
VIOCs to change price tags at fuel stations: “The end consumer should sense that the
decrease of fuel prices benefits his pocket, and it should be visible at fuel stations”; the
oilmen rushed to obey. In early 2012, before the presidential elections, the Ministry of
Energy reached an agreement with the VIOCs not to raise retail prices until March.3
This is an unusual combination of political and social objectives achieved at the
expense of the Russian oil companies, and definitely transcends traditional Western
CSR—but is quite similar to non-commercial obligations of NOCs.
There are also certain specifics deriving from the Russian context, particularly
the complicated relations between the State and the oil sector that makes CSR in the
Russian petroleum sector comparable to the non-commercial obligations of NOCs.
NOCs often have to help improve living standards in the poorer areas of their home
country. In Russia, sometimes the state “offers” the oil oligarchs a chance to resolve
social issues in Russia’s backward regions by spending some of the fortunes they
amassed during the 1990s—an offer they can hardly refuse.4 For example, in 2000,
the oligarch Roman Abramovich was tasked by the Kremlin with taking over the
governorship of Chukotka, an impoverished and remote region in the East of Russia.
He saved the region’s finances by registering his companies in Chukotka, where they
supplied around 60% of Chukotka’s revenues as long as Abramovich was Governor.
His personal income tax also went to the province.5 Besides, Abramovich channelled
money to Chukotka through two charitable organisations. As a result, during the
period 2000–2004, salaries grew by 350%, and quality of life radically improved in
the region.
Despite their shared characteristics with national oil companies, Russian vertically
integrated oil companies now seek to emulate international oil companies in terms
of CSR. The transformation is particularly striking in the case of Rosneft, Russia’s
largest oil company. During the 1990s, the then fully state-owned Rosneft was in a
weak position, particularly vis-a-vis private VIOCs. During that period, it appeared
to welcome non-commercial responsibilities, perhaps because it wanted to show that
it was useful to the Russian state. However, as the company returned to strength
during the rule of Vladimir Putin, it changed its stance and started behaving more
like an IOC than an NOC and increasingly came to see its social engagements as an
onus that stood in the way of profitability. Meanwhile, it continued to see the perks
of being a national oil company as its birth right.
Rosneft’s activities in the Republic of Chechnya exemplify its changing role.
After the two wars in Chechnya, Rosneft was tasked with rebuilding the Chechen oil

3 Predvybornoye sderzhivaniye tsen na benzin mozhet byt oplacheno iz byudzheta, Vedomosti,

30.01.12.
4 Neft I Capital, 2004, Roman Abramovich.
5 Anna Nikolayeva. Odin za Vsekh Oligarkhov. Vedomosti, 13.09.05.
Corporate and Environmental Responsibility … 547

sector in the early 2000s—in the national interest. Thus, in cooperation with the
regional government of Chechnya, Rosneft created the subsidiary Grozneftegaz. It
rebuilt 256 pieces of infrastructure and raised oil production in the Republic from
0.7 million tonnes in 2001 to 2 million tonnes in 2004.6 But this surge in oil output
was unsustainable: By 2011, oil production had declined again to 0.8 million tonnes,
and by 2018, it had fallen all the way to 0.3 million tonnes. A refinery that Rosneft
was to build in Grozny experienced severe delays. In 2013, work on the refinery
appeared to accelerate when Vladimir Putin intervened to push it forward. However,
in 2016, it was put on hold until an unspecified date. In 2017, Rosneft decided
that the refinery was not commercially viable and suggested building a cheaper
bitumen facility instead.7 Also this was shelved later on.8 Rosneft’s reluctance to
invest in Chechnya, and especially in the refinery, was driven by entirely financial
considerations related to the oil price and market conditions for refined petroleum
products in and near Chechnya.9
Ramzan Kadyrov, leader of the Republic of Chechnya, made a public statement
that the Chief Executive Officer of Rosneft, Igor Sechin, as a “big politician” who
came to the oil sector from a “top-level position”, should take into account the
Chechen Republic’s status as a former war zone in need of support and rebuilding.10
Rosneft’s response says a lot about its new self-image. “We have a profound sympathy
with the fact that Ramzan Akhmatovich [Kadyrov] refers to the social problems of
Chechnya, but we do not have the right to discount the value of assets to the detriment
of the interests of our shareholders”.11 This statement is clearly far removed from
the perception of Rosneft as the faithful vassal of the state, ready to undertake any
strategic business that the Kremlin entrusted it with—and there is hardly a more
strategic business in Russia than Chechnya.

2 “Good Old Days” of Soviet Petroleum Social

Responsibility?

Partly, this similarity of Russian oil companies to NOCs in the social sphere originated
in the socialist past. Many older generation oilmen nostalgically recall the good old
days of the “Soviet social responsibility”. This psychological phenomenon stems
from the evolution of the Soviet oil industry. It was born before the 1917 revolution,
in Azerbaijan and the North Caucasus. These territories have a fairly mild climate
and relatively well-developed social infrastructure. After WWII, petroleum activities

6 Neft i Kapital 2004: 37.

7 http://www.rbc.ru/business/30/03/2017/58dd00469a794728782e107c.
8 https://ria.ru/economy/20170817/1500541945.html.
9 https://oilcapital.ru/news/companies/04-05-2017/chechnya-i-rosneft-avantyurnyy-roman-s-otk

rytym-finalom.
10 http://www.rbc.ru/business/30/03/2017/58dd00469a794728782e107c.
11 https://www.rbc.ru/business/25/04/2017/58fdccad9a79478ad5714d5a.
548 N. Poussenkova and I. Overland

shifted to Bashkiria and Tatarstan, two densely populated regions in the Volga-Urals
area. Their economy was reasonably diversified, so there was no need for a special
“petroleum” social responsibility.
However, in the early 1960s, the oilmen moved to West Siberia where giant oil
fields were discovered in the Ob river basin. It is a swampy, sparsely populated
region with a harsh climate. Overnight, tens of thousands of workers from all over
the USSR arrived to explore and extract ¨“black gold” in an area with practically
no roads and very few houses; in a case of typical Soviet mismanagement on a
grand scale and with blatant disregard for the people whose welfare was sacrificed
to political and ideological considerations. Soviet energy policy was driven by the
desire to produce as much oil as quickly as possible mainly to provide financing for
Soviet geopolitical goals.12 The Central Committee of the Communist Party of the
Soviet Union (CPSU) and the government relentlessly raised oil production targets,
and they did not much care how the West Siberian oilmen achieved them. Thus, given
the low productivity of labour in the USSR, production associations (PAs) had to
hire numbers of personnel that were hugely excessive by Western standards.
Thus, in 1964, only seven enterprises operated in Surgut, a tiny West Siberian town
where just 5 thousand people lived. A year later, over 60 new petroleum enterprises
were established, and their personnel had to be somehow housed and fed.13 The
regional Communist Party committee tried to cope with these challenges, but failed.
So, oil PAs came to rescue—they needed able-bodied workers to fulfil tough five-year
plans.
Many new arrivals were lured to West Siberia by higher “Northern” salaries and/or
the chance for rapid promotion. But money alone was not enough to retain workers in
the mid-Ob area. Harsh living conditions were, probably, the main reasons for high-
personnel turnover (which was detrimental for efficiency of operations): initially,
many oilmen had to live in tents with winter temperature falling to −35–40°. So,
PAs rapidly erected wooden barracks or converted storage facilities to house the
newcomers… They also had to build cinemas and recreation centres to prevent
potential conflicts among the young workers who had nothing to do in their free
time.
Lev Tchourilov, the last USSR Minister of the Petroleum Industry, recalls that
when he was appointed Director of the Nefteyugansk Oil Production Unit, there was
only one small bakery (built by geologists) in the town of Nefteyugansk. However, its
capacity was insufficient for the rapidly growing oil-producing personnel. Tchourilov
ordered two mobile military ovens, but they kept breaking down. One unlucky day
both of them broke and the population of Nefteyugansk was left without bread.
Oilmen rushed to build a new powerful bakery for their own needs—and meanwhile
bread was delivered by airplanes to Nefteyugansk from Surgut, Nizhnevartovsk and

12 See in detail Elena Nikitina, Nina Poussenkova, Petroleum CSR in Russia: Affordable Luxury or

Basic Necessity, Russian Analytical Digest, # 181, 2016.

13 Krol (1995).
Corporate and Environmental Responsibility … 549

Khanty-Mansiisk.14 It was a typical example of oil enterprises being more efficient

and socially oriented (by dire necessity) than the government.
Yet, with application of the state-of-the-art technologies and higher labour produc-
tivity, the West Siberian oil industry would not have needed the excessive number of
personnel, and the social burden of the oil PAs could have been reduced. As Thane
Gustafson remarked in his “Crisis Amidst Plenty”, “much of the housing problem,
therefore, was a symptom rather than a cause.”15
Consequently, oil PAs had to keep on their balance sheets non-core social assets
(schools, cinemas, hospitals, agricultural farms, etc.) necessary to ensure reasonable
living standards for their employees. Thus, Vagit Alekperov, who was appointed head
of Kogalymneftegas PA in 1986, had not only to deal with oil production issues, but
also to organise adequate life for his workers; because at that time the town of
Kogalym was just being established (it is noteworthy that Alekperov insisted from
the start on building high-quality houses for the oilmen rather than the traditional
temporary barracks).16 These non-core social activities consumed much of the time
and energy of the Soviet oil “generals”, sometimes interfering with their key job, as
was often the case with NOCs from other petrostates.
Thus, the 1985 oil production plan in the Soviet Union was fulfilled only by 94%
and West Siberia accounted for the lion’s share of the shortfall. As Vagit Alekperov
wrote in his book “Oil of Russia”, the CPSU Central Committee and the government
admitted the following main reasons of this failure: insufficient focus on providing
housing and social and cultural infrastructure to the workers, low rates of new field
development, shortage of state-of-the-art equipment, etc.17
Therefore, this much-admired “petroleum” Soviet social responsibility resulted
from several objective and subjective factors: the harsh West Siberian climate; an
unbalanced and controversial State energy policy; and low labour productivity. And
directors of oil PAs had to cope with adverse nature, challenging crude output plans,
relentless pressure from Moscow, and, in addition had to be “founding fathers” of
oil towns. The USSR used petrodollars earned by exporting hydrocarbons that were
produced with such hardships to import basic food and low-quality consumer goods,
as well as to pursue the geopolitical ambitions of the establishment, rather than to
modernise the economy and the oil industry itself.
Besides, though the circumstances forced Siberian oil PAs to strongly focus
on providing social services to their workers, they were unable (or unwilling) to
spend time and efforts on minimising environmental impact of their activities. Lev
Tchourilov recalled with bitterness what he termed “environmental barbarism” prac-
ticed by the oilmen in West Siberia since they had to fulfil extremely demanding
five-year oil production plans regardless of the inevitable damage to nature.18 A
similar cavalier attitude prevailed in mature oil regions of Russia. Representatives of

14 Tchourilov et al. (1996).

15 Thane Gustafson, Crisis amidst Plenty, p. 116.
16 Slavkina M. Rossiiskaya Dobycha, Moscow, 2014, p. 328.
17 Alekperov (2011).
18 See in detail Lifeblood of the Empire.
550 N. Poussenkova and I. Overland

Tatneft say: “… unprecedented rates of drilling, development, and production under

the tough dictate of the centre—“Oil at any cost”, and continuously rising output
targets of “His Majesty the Plan” had a negative impact on the environmental situa-
tion in the region.”19 And currently the Russian oil companies have to cope with this
legacy environmental damage.
When oil PAs were privatised in the early 1990s, many of them transferred their
social assets to the local municipalities in order to raise corporate efficiency. Still, it
is unclear whether their efficiency improved due to this divestment, and whether the
quality of social services provided by the municipalities to the residents remained
adequate.
The 1990s were characterised by economic, social and political crises, low oil
prices, declining crude production, galloping inflation and rampant non-payments in
Russia. Oil companies were forced to reduce investments, shut down wells, and delay
payment of salaries. Clearly, CSR and sustainability were not their top priority. At the
same time, the oil companies were globalising, hiring foreign advisors, establishing
international alliances, entering world capital markets, and learning the rules of the
(international) game, including in the CSR sphere.
In the 2000s, the economic and political situation in Russia was stabilising, oil
prices were rising, and crude production was increasing. The Timan-Pechora and
East Siberia petroleum provinces were launched, but they are much smaller than West
Siberia and require considerably less “imported” manpower. Oil companies now do
not have to provide comprehensive “Soviet” social packages to their employees, but
their social policy began to embrace new stakeholders, e.g. indigenous peoples.20 So
their “sotsialnaya otvetstvennost” (social responsibility) became closer to Western
notions of CSR, particularly in companies with a strong foreign influence such as
Rosneft (Table 1).
The five biggest oil companies in Russia—Gazprom neft, LUKOIL, Rosneft,
Surgutneftegas and Tatneft—perform fairly similar CSR activities, though each one
has different priorities. Compared to its West Siberian peers, Tatneft, which mainly
operates in the Central part of Russia, has not had to build oil towns from scratch,
nor does it interact with northern indigenous peoples. Still, it has a greater visibility
because it functions in densely populated areas, and any environmental accident is
likely to draw immediate large-scale attention.
In the CSR sphere, Russian VIOCs are basically guided by the provisions of
the relevant Russian legislation and of the E&P licences that they receive and
which contain certain social obligations—and by their own social and environmental
policies.

19 https://www.tatneft.ru/ekologiya/ohrana-okruzhayushchey-sredi-i-obespechenie-ekologich

eskoy-bezopasnosti/?lang=ru.
20 See in detail Nikitina, Poussenkova.
Corporate and Environmental Responsibility … 551

Table 1 Five Largest Oil Companies in Russia

Gazprom LUKOIL Rosneft Surgutneftegas Tatneft
neft
Oil production 62.9 82.0 230.2 61.0 29.5
in Russia in
2018 (mt)
President Alexander Vagit Igor Sechin Vladimir Nayl
Dyukov Alekperov Bogdanov Maganov
HQ St. Moscow Moscow Surgut Almetievsk
Petersburg
Main regions West West Siberia, West Siberia, West Siberia, Tatarstan,
of E&P Siberia, Timan-Pechora, East Siberia, East Siberia Samara and
operations in Tomsk, Perm Region, Volga-Urals Orenburg
Russia Omsk and Volga-Urals Region, Far regions,
Orenburg Region, East, Nenetsk
regions Caspian and Timan-Pechora, Autonomous
Baltic Seas Krasnodar Krai, District
continental
shelf
State stake Yes No Yes No Yes
Foreign No No Yes No No
shareholders
Overseas Yes Yes Yes No Yes
operations
Foreigners in No/no Yes/no Yes/yes No/no Yes/no
BoD/Managing
Board
Listing at Yes Yes Yes Yes Yes
international
stock
exchanges
Sources Company data

3 Social and Environmental Policies of Russian Oil

Companies

All petroleum companies in Russia proclaim their firm commitment to CSR. Many of
them incorporate these issues into their long-term strategies. Thus, in 2018, Rosneft
included three new social initiatives in its strategy up to 2022: Social Medicine
(expansion of the network of industrial health centres, development of tele-medical
technologies and introduction of a new system of regular checkups), Active Longevity
(indexation of corporate pensions on the basis of investment income of Rosneft’s
pension fund) and Accessible Housing (opportunities for employees to improve
552 N. Poussenkova and I. Overland

their living conditions through dedicated interest-free loans of Rosneft and cheaper
mortgage provided by partner banks).21
Most VIOCs publish regular sustainability reports; the more internationalised
companies, such as Rosneft or LUKOIL, produce them in accordance with the
requirements of the Global Reporting Initiative, the UN Global Compact and
other national and international sustainability reporting guidelines. Thus, LUKOIL’s
reports comply with Business Reporting on SDGs, GRI, the UN Global Compact
and the Social Chart of the Russian business.22 In contrast, Surgutneftegas, which is
resolutely Russian-based, has been producing since 2004 an annual environmental
report that resembles Soviet style documents.
Over time, the proclaimed perceptions of CSR by most Russian oil companies are
evolving: They increasingly take into account internationally recognised principles,
such as the UN Sustainable Development Goals-2030, probably prompted by their
investors and shareholders. For example, the contents of LUKOIL’s sustainability
reports exemplify the changes in LUKOIL’s approach to corporate responsibility.
Vagit Alekperov’s introductory words to the 2012 issue are about LUKOIL’s finan-
cial successes and technological innovations.23 Subsequent prefaces are increasingly
about the environment and local communities. Thus, in his preface to the 2017 issue
of the report, Alekperov write that “The Company has always sought to work not
only to benefit its shareholders and employees, but also society as a whole. We are
convinced that our successful development is only possible if we take into account
the interests of the communities of the countries where we operate’.24 This evolution
shows that there has been a changed understanding—at least in LUKOIL’s commu-
nications department—to see that a company’s social responsibility goes beyond
simply paying taxes.
By now, most Russian VIOCs admit the importance of non-financial indicators.
In his introductory message to Gazprom neft’s 2018 sustainability report, Alexander
Dyukov states: “Gazprom neft is consistently based on the principles of sustainable
development in its activities. We measure success of the company not only by finan-
cial and production indicators. Our key priorities are care about the environment
and prudent use of natural resources, safety, high technological level and systemic
improvement of living standards in the regions where the company operates.”25
Currently, the UN Sustainable Development Goals (SDGs) are recognised by
many Russian oil companies as viable guidelines. Thus, Rosneft says that an integral
element of its Rosneft-2022 strategy is the commitment to the UN SDGs. In line with
the practice of international majors, it identified five main goals to pursue in its core
activities: (1) good health and wellbeing, (2) affordable and clean energy, (3) worthy

21 https://www.rosneft.ru/Development/social/m-0.
22 http://www.lukoil.ru/InvestorAndShareholderCenter/ReportsAndPresentations/SustainabilityR

eport.
23 LUKOIL 2012 Sustainability Report.
24 LUKOIL 2017 Sustainability Report.
25 Gazprom neft 2018 Sustainability Report, p. 7.
Corporate and Environmental Responsibility … 553

work and economic growth, (4) climate change mitigation and (5) partnership in the
interests of sustainable development.26
Most companies now realise that adherence to sustainability principles results in
their greater attractiveness for investors. Thus, Nayl Maganov said in Tatneft’s BoD
report to the AGM held in June 2019: “We implement target corporate programmes
aimed at support of health protection, science, education, preservation of spiri-
tual heritage, culture and sport in the form of social partnership and social invest-
ments. This contributes to social stability in the regions of our operations, which
simultaneously enhances investment attractiveness of the company”.27
It is noteworthy that one of the most environmentally and socially responsible
Russian oil companies, Surgutneftegas, firmly believes that actions speak louder
than words. In the 2018 Environmental Report of Surgutneftegas, the introduc-
tory message of the first deputy director Anatoliy Nuryaev simply says that “the
JSC understand how important it is to maintain the balance ensuring not only
high economic indicators of Surgutneftegas’ activities, but also reliability and envi-
ronmental aspects of all production processes, as well as social responsibility of
business”.28

3.1 Environmental Protection

All Russian VIOCs proclaim their commitment to environmental protection. Thus,

Gazprom Neft states in its 2018 Sustainability Report “Goal—zero: no harm to
people, environment and assets in the process of activities”.29
Many of them had to deal with the Soviet “legacy pollution.” Thus, LUKOIL
that bought KomiTEK in the late 1990s had to eliminate the consequences of the
major oil spill from Komineft’s feeder pipelines that happened in the mid-1990s. In
a similar vein, Gazprom neft recycles waste generated over several decades. After
five years of such clean-up activities, dumps that were accumulated before 1991
at its Moscow refinery were completely liquidated. More than 180,000 tonnes of
oil-containing waste was handled, and 15 hectares of the territory re-cultivated.
However, given the specifics of the contemporary Russia, several controversial
factors affect environmental activities of VIOCs, particularly given their considerable
lobbying potential. On the one hand, a popular Russian saying, “the strictness of our
laws is offset by the fact that it is not necessary to observe them” is fully applicable
to the petroleum sector. Sometimes, oil companies find it easier to pay environ-
mental fines and penalties than to install expensive purification equipment—or they
successfully lobby delays in introduction of stricter environmental regulations.

26 https://www.rosneft.ru/Development/.
27 https://www.tatneft.ru/press-tsentr/press-relizi/more/6483?lang=ru.
28 Surgutneftegas Environmental Report for 2018, p. 3.
29 https://www.gazprom-neft.ru/social/ecology/.
554 N. Poussenkova and I. Overland

Table 2 Dynamics of LUKOIL’s environmental expenditures, 2012–2018, bln rubles

2012 2013 2014 2015 2016 2017 2018
Environmental expenditures 23.4 42.1 59.2 48.4 53.3 42.4 35.5
Source http://www.lukoil.ru/Responsibility/SafetyAndEnvironment/Ecology/Results

Also, a serious controversy stems from the dual nature of the Russian Ministry of
Natural Resources and Environment that plays a role simultaneously of a gamekeeper
and poacher, and there were numerous cases when the poacher defeated the game-
keeper in the process of issuing E&P licences in environmentally vulnerable areas.
The much-publicised conflicts around Surgutneftegas’ operations in Numto Nature
Reserve and the sacred Imlor Lake areas are a good example of this dual role of the
Ministry. Despite protests by local inhabitants from 2010 onwards against petroleum
activity in the area, in 2012 Surgutneftegas reached an agreement with the Governor
of Khanty-Mansi Autonomous District. In the ensuing years, almost all indigenous
people moved out of the area. Regarding the Numto Nature Reserve, 36,000 letters
were written to officials requesting them to stop oil drilling in the area. Nonetheless,
in 2016, the federal government decided to allow drilling to move forwards.30
On the other hand, the oil companies realise that environmental offences are a
convenient lever for the authorities to put pressure on business in certain cases,
as the conflict around Sakhalin Energy demonstrated. Then, Gazprom and federal
agencies pressured shareholders of Sakhalin-2 consortium accusing them, among
other things, of environmental violations, and as a result Gazprom managed to
join Sakhalin Energy as a majority shareholder on very attractive terms in 2006.31
Also, Russian oil companies are now increasingly influenced by their shareholders,
investors and consumers of petroleum products, all demanding greater environmental
responsibility.
The Russian VIOCs report considerable outlays on environment protection. Thus,
in 2018, Gazprom Neft’s investments in environment protection rose to 19.0 bln
rubles32 ; Surgutneftegas spent 17.4 bln rubles on environmental protection; payments
for negative impact on the environment amounted to 75.4 mln rubles, including 173
thousand rubles for impact above the established limits.33 LUKOIL allocated 35.5
bln rubles for capital and operating environmental expenditures in 2018, i.e. less
than in 2017, mainly because it completed construction of several APG (associ-
ated petroleum gas) utilisation facilities. Key directions of its expenditures were as
follows: 41% for prevention and elimination of accidents, 31% for protection of
atmospheric air, 10% for waste utilisation, 9% for protection and rational use of
water resources and 9% for other directions (Table 2).34

30 https://regnum.ru/news/2197112.html.
31 Sakhalin perestal byt goryachei tochkoi. Kommersant, 22.12.2006.
32 https://www.gazprom-neft.ru/social/ecology/.
33 https://www.surgutneftegas.ru/responsibility/ecology/prirodookhrannye-aspekty-khozyaystven

noy-deyatelnosti/osnovnye-napravleniya-prirodookhrannoy-deyatelnosti/.
34 LUKOIL 2018 Annual Report, p. 71.
Corporate and Environmental Responsibility … 555

In general, all five companies focus on traditional directions of environmental

protection: air, water, land, biodiversity, waste utilisation, environmental monitoring,
prevention of accidents, R&D, education and training of personnel.35 Here are
some specific examples of these activities. In 2006, Rosneft introduced the inte-
grated system of HSE management (which complies with ISO 14001 and OHSAS
18001), and target HSE indicators are incorporated in Rosneft-2022 Strategy. Its
main HSE goal is to be included in the first quartile of the relevant rating of the
global energy companies by end of 2022.36 In January 2018, TANECO, Tatneft’s
refinery, became the first enterprise in Russia to introduce automatic monitoring of
pollutant emissions to the atmosphere.37 In 2017, Gazprom neft commissioned the
9 bln rubles Biosphera treatment facilities at the Moscow Oil Refinery that purify
99.9% of the refinery’s wastewater. A similar installation is also being introduced at
its Omsknefteorgsyntez.38
Gazprom neft implements a Clean Territory project which envisages, among other
things, re-cultivation of land; it also takes preventive measures to reduce the number
of accidents at pipelines; in 2018, 37 thousand km of pipelines were protected by
inhibitors of corrosion. Surgutneftegas places a special focus on maintaining biodi-
versity, particularly in environmentally sensitive areas. In Numto, Surgutneftegas
implements measures aimed at minimising environmental risks of oil production
in swamps, as well as at preventing death of birds at electricity facilities.39 Rosneft
launched a programme of protecting polar bears: since 2013 it has been a guardian of
34 polar bears that are exhibited in 16 Russian zoos, and it implements a programme
of protection of polar bears in their natural environment, for example, saves orphaned
bear cubs. Since 2014, Rosneft has been studying polar bears in the regions of future
oil developments.40
Breaking with the Soviet traditions of environmental secrecy, Russian oilmen
provide fairly detailed information about their environmental challenges. Thus,
Surgutneftegas, normally the least transparent company among its peers, posts a
surprising amount of environmental data on its website, even a detailed analysis of
environmental incidents in a given year. Thus, in 2019, it reported three serious acci-
dents: one was fire at a well in Rogozhnikovskiy licensing plot (the reasons are being
investigated); another was an oil spill from a pipeline caused by an attempt at oil
theft by an unknown person; and the third was an unauthorized spill of oil-containing
liquid by an unknown person in the area of Zapadno-Surgutskoye field.41

35 https://www.surgutneftegas.ru/responsibility/ecology/prirodookhrannye-aspekty-khozyaystven

noy-deyatelnosti/osnovnye-napravleniya-prirodookhrannoy-deyatelnosti/.
36 https://www.rosneft.ru/Development/HealthSafetyandEnvironment/.
37 https://www.comnews.ru/digital-economy/content/111407/2018-01-24/taneko-avtomatiziruet-

kontrol-promyshlennyh-vybrosov.
38 Gazprom Neft 2017 Sustainability Report, p. 7.
39 https://www.surgutneftegas.ru/responsibility/ecology/osobo-okhranyaemye-prirodnye-territorii/

prirodnyy-park-numto/.
40 https://www.rosneft.ru/press/news/item/197505/.
41 https://www.surgutneftegas.ru/upload/iblock/009/Svedeni%20ob%20incidentah%20n

a%20neftepromyslah%20po%20PAO%20Surgutneftegaz%202019.pdf.
556 N. Poussenkova and I. Overland

Table 3 Surgutneftegas environmental indicators

Indicator Unit 2016 2017 2018
Gross emissions of pollutants into Thous. tons 185,120 176,707 139,485
atmosphere
Level of APG utilisation % 99.34 99.32 99.56
Water consumption Thous. cub. m 10,155,104 10,110,556 9,996,563
Generation of waste Thous. tons 714.0 797.3 798.6
Utilisation of waste in own Thous. tons 417.1 462.3 480.5
production
Source https://www.surgutneftegas.ru/upload/iblock/009/Pokazateli%20vozdectvi%201
1102019.pdf

In general, their environmental policies bring desirable results. Thus, Surgut-

neftegas was rated number 1 in terms of environmental management, and number 5
in the total 2018 rating of WWF and Kreon42 reported the following improvements
of its environmental indicators (Table 3):
Oil companies increasingly apply state-of-the-art environment protection tech-
nologies and approaches in their activities. Thus, in 2018, Gazprom neft launched a
Green Seismic 2.0 project that introduces environmentally friendly seismic technolo-
gies (while traditional seismic requires clearing wide paths in forests so that heavy
vehicles could pass, Green Seismic uses registering equipment that can be installed
with light vehicles. Therefore, it reduces cutting of trees, consumption of fuel and
atmospheric emissions).
All these are traditional directions that were implemented even in the USSR.
However, recently, a new area of environmental protection emerged connected with
the commencement of offshore crude exploration and production by Gazprom neft,
LUKOIL and Rosneft, including in the Arctic, and it is particularly important for
them to demonstrate to the global community their environmental reliability and
responsibility.
Thus, after Greenpeace’s activists protested in 2012–2013 against environmen-
tally unsafe and economically unfeasible oil production in the Arctic and boarded
twice the Prirazlomnaya oil platform of Gazprom neft in the Pechora Sea, the
company places a special focus on environmental aspects of the Prirazlomnoye field
development. It stresses that specialised ice-class vessels equipped with the state-
of-the-art complexes for gathering spilt oil are on constant duty in the vicinity of
the platform. According to the company, Prirazlomnaya platform operates under a
“zero-discharge” principle: the drilling muds, sludge and other technological wastes
are pumped into a special absorption well.43

42 https://wwf.ru/what-we-do/green-economy/ekologicheskiy-reyting-neftegazovykh-kompaniy-

rf-sovmestnyy-proekt-wwf-i-kreon/.
43 https://shelf.gazprom-neft.com/upload/iblock/109/spravka_o_proekte_prirazlomnoe.pdf.
Corporate and Environmental Responsibility … 557

LUKOIL that produces oil in the Caspian Sea and the Baltic Sea also emphasises
environmental aspects of its offshore activities. Vagit Alekperov says in 2018 Sustain-
ability Report that environmental protection and occupational safety technologies
and standards that the company uses often exceed the current international prac-
tice. “For example, LUKOIL applies “zero-discharge” principles at all its offshore
projects, and this approach was recognised as exemplary by the Helsinki Commis-
sion on the Protection of the Marine Environment in the Baltic Sea (HELCOM)”.44
It is noteworthy that in 2017, the Year of Ecology in Russia, LUKOIL and Gazprom
neft conducted joint trainings to clean up oil spills in the Arkhangelsk region in the
vicinity of Varandei terminal of LUKOIL and Prirazlomnaya platform of Gazprom
neft.45
In 2012 and 2013, Rosneft published joint declarations on environmental protec-
tion in the Arctic with its international partner companies ExxonMobil, Equinor
and Eni. In these declarations, they committed to protection of the Arctic environ-
ment, including keeping their impact on indigenous peoples and climate change to
a minimum.

3.2 Climate Change

The most important challenge faced by oil companies—Russian or international—

during the coming decades will be that of climate policy. Russian vertically integrated
oil companies have a nonchalant approach to climate change; however, there are
differences among them.
Although Rosneft has made climate change, one of its five main goals, Igor
Sechin’s attitude indicates that the company’s climate engagement is at best shallow.
I can tell you I am not a big expert in that area, but I know a few things. First of all, we
are subject to global climate change cycles… those cycles repeat every 30 million years,
so everything is normal. The human effect on the environment is less than any volcano. A
volcanic eruption produces more CO2 than any human activity. The rotting of algae in the
ocean significantly exceeds any human-made effect.46
LUKOIL appears to take climate policy a bit more seriously and has been part of
the International Carbon Disclosure Project since 2013. In 2016, LUKOIL achieved
a climate score of D on a scale from A (best) to F (worst). By contrast, BP, Eni,
Statoil (Equinor) and Total all achieved A-.47
Russian VIOCs’ main contribution to climate change mitigation is the introduction
of energy efficiency programmes (thus, Surgutneftegas has been implementing the
Programme of Energy Saving and Enhancing Energy Efficiency of Facilities since

44 LUKOIL 2018 Sustainability Report, p. 2.

45 http://www.lukoil.ru/Responsibility/SafetyAndEnvironment/Ecology/AccidentElimination.
46 https://www.independent.co.uk/news/business/analysis-and-features/igor-sechin-the-oil-man-at-

the-heart-of-putins-kremlin-10043230.html.
47 LUKOIL 2016 Sustainability Report, p. 67.
558 N. Poussenkova and I. Overland

Table 4 Rational utilisation

Company Level (%)
of APG by companies in 2018
Surgutneftegas 99.5
LUKOIL 97.4
Tatneft 96.2
Rosneft 84.4
Gazprom neft 78.4
Source Company data

1997)48 and limiting flaring of associated petroleum gas (APG), which is required
by the Russian authorities—95% rational utilisation of APG is the declared official
target (Table 4).
It is noteworthy that the two Russian privately owned companies, Surgut and
LUKOIL, achieved a higher level of APG utilisation than companies that are partly
owned by the State. Thus, while Surgutneftegas has avoided making statements about
climate change and climate policy, the company has taken the lead on reducing the
flaring of associated petroleum gas. It has advanced facilities for associated petroleum
gas utilisation.49
Gazprom neft has reported the lowest utilisation of associated petroleum gas of
the Russian oil companies, but the company has been taking consistent and inno-
vative measures to limit gas flaring. In 2012, the company agreed with SIBUR to
create the Noyabrsk Integrated Project for the Vynagapurovskaya group of fields
in the Yamal-Nenets Autonomous District. Associated petroleum gas from these
fields is supplied to SIBUR’s Vynagapurovskiy plant.50 Extending this trend, in 2018
Gazprom neft started injecting associated petroleum gas from the East Messoyakha
field into the West Messoyakha field, thus avoiding having to flare the gas and saving
it for the future at the same time.51 In June 2017, LUKOIL became the first Russian
oil company to support the World Bank initiative “Full Elimination of Regular Gas
Flaring by 2030”, and intends to take all necessary measures to implement this initia-
tive both in Russia and in its overseas operations.52 Tatneft’s situation with APG util-
isation is somewhat different because it mainly produces oil in mature regions with
well-developed gas gathering infrastructure. Its interest in climate issues is growing:
it plans to apply the latest international standards of the ISO 14064 “Greenhouse
Gases”.53

48 https://www.surgutneftegas.ru/responsibility/ecology/prirodookhrannye-aspekty-khozyaystven

noy-deyatelnosti/energoeffektivnost-i-resursosberezhenie/.
49 https://www.surgutneftegas.ru/responsibility/ecology/prirodookhrannye-meropriyatiya/meropr

iyatiya-po-okhrane-atmosfernogo-vozdukha/.
50 https://www.gazprom-neft.ru/press-center/sibneft-online/archive/2012-october/1103828/.
51 https://www.gazprom-neft.ru/press-center/news/messoyakhaneftegaz-realizuet-unikalnyy-pro

ekt-po-utilizatsii-poputnogo-neftyanogo-gaza/.
52 http://www.lukoil.ru/Responsibility/SafetyAndEnvironment/Ecology/Results.
53 http://2018.tatneft.ru/climate/company-position/.
Corporate and Environmental Responsibility … 559

Reforestation is another climate change mitigation measure taken by VIOCs.

Thus, since 2008, Tatneft planted over 9 million trees, i.e. some 5000 hectares of
forests, trying to compensate GHG emissions through sinking capacity of woods.
Tatneft plants trees along highways, creates “green fuel stations”, establishes “green
belts” around industrial facilities, develops parks in cities and towns, as well as
improves “green infrastructure” of social facilities.54
The relative indifference of Russian oilmen to climate change goes hand in hand
with their scepticism about renewables. Among the Russian oil companies, LUKOIL
has shown the greatest interest in renewable energy, with an electricity generation
capacity 390 MW in 2016 (including hydropower). In 2009, LUKOIL installed solar
panels at three petrol stations in Serbia and Russia. The company has also commis-
sioned solar panels at its refineries in Romania and Bulgaria. LUKOIL’s joint venture
with the Italian ERG SpA acquired four Bulgarian wind power firms.55
According to Gazprom Neft, oil and gas will continue to be important and supply
some 90% of the world’s primary energy supply for the foreseeable future. Sergei
Vakulenko, Head of the Department of Strategy and Innovations stated in a recent
interview: “If we speak about alternative energy: solar, air and water, electric vehicles
and so on, we certainly take them into account in our strategy but in a much longer-
term perspective”.56
Nonetheless, Gazprom Neft started dabbling in renewables through its Serbian
subsidiary NIS. Geothermal units have been installed near 11 oil wells owned by
NIS, with another 20 wells under construction. In 2013, NIS started building a wind
farm in Plandishte with a capacity of 100 MW, consisting of 40 wind generators.57
Gazprom Neft is also involved in some minor wind and solar power projects on the
Yamal Peninsula, where electricity in remote locations is generated by a combination
of wind, solar and diesel.
Tatneft is taking its first tentative steps towards renewables. In 2018, 0.24% of the
total power generated by Tatneft was produced on their basis: 99.9% by generating
heat by pellet-fired boilers, and 0.01% by solar panels.58
There are also leaders and laggards among the five companies with respect to the
use of electric vehicles. At the 2017 Saint Petersburg Forum, Igor Sechin discussed
the outlook for electric cars, stating that they would have a niche in the market but
not on the scale anticipated by some actors. He repeated this forecast in even stronger
negative terms at the 2019 Forum.59 By contrast, Tatneft has involved itself actively
in electric vehicle developments by installing charging points for them. In 2016, the
company set up its first charging point in Khimgrad Industrial Park in Kazan. Tatar
President Minnikhanov took part in the opening and stated that electric vehicles were

54 http://2018.tatneft.ru/climate/measures/.
55 http://www.lukoil.ru/Responsibility/SafetyAndEnvironment/Ecology/RenewableEnergy.
56 https://www.gazprom-neft.ru/press-center/lib/1642212/.
57 https://www.nis.eu/en/presscenter/news/nis-started-construction-first-wind-farm-serbia-pla

ndiste.
58 http://2018.tatneft.ru/climate/measures/.
59 https://www.kommersant.ru/doc/3992564.
560 N. Poussenkova and I. Overland

environmentally safe and reliable, and that Tatneft should do more work in this area.
In June 2017, a second charging point was unveiled at a Tatneft petrol station in the
city of Almetievsk.60
Thus, Gazprom Neft and LUKOIL are most transparent in reporting their green-
house gas emissions and have taken some first steps into the renewable energy sector,
mostly outside Russia. In sum, the Russian vertically integrated oil companies are
similar to their international peers, with a delay of some years.61

3.3 Agreements on Socio-economic Cooperation

with the Regions

Russian oil companies normally sign agreements on socio-economic cooperation

with the heads of the regions where they operate. Such agreements are particularly
important in the Russian high North and Siberia, where CSR programmes of the oil
companies are still essential for ensuring higher living standards of the population—
and, subsequently, social and economic stability. Thus, in September 2019, Rosneft
and Yamal-Nenetsk Autonomous District signed additional agreements on cooper-
ation in the social and environmental spheres, the basic agreement being effective
since 2015. Under them, a number of infrastructural projects will be implemented
in the region with Rosneft’s support. The company will assist in medical treatment
and rehabilitation of handicapped children, will provide support to organizations of
veterans of wars and armed forces, as well as indigenous people of the North. Rosneft
will also take measures to restore biodiversity in water bodies of the district.62
Also, during the 2019 Saint Petersburg International Economic Forum, Rosneft
and the Samara region signed an additional agreement on cooperation in social devel-
opment. Under it, Rosneft will finance construction of a swimming pool in Samara,
repair of a school building in Syzran, reconstruction of Children’s School of Art
building in the town of Otradniy and of the kindergarten in Novokuibyshevsk.63

3.4 Stakeholder Engagement

Stakeholder engagement is a fairly recent phenomenon in the Russian oil business.

Russian oilmen usually stress that they strive to involve stakeholders in their decision-
making, particularly on environmental issues. However, it is difficult to say whether
the general public in Russia can make a real impact on operating decisions of the

60 https://tender.tatneft.ru/news/2017/na-azs-tatnefti-otkrylas-eshche-odna-stantsiya-dlya-zar

yadki-elektromobiley/.
61 See in detail: Challenge of Change, Indra Overland, Nina Poussenkova.
62 https://www.rosneft.ru/press/releases/item/196909/.
63 https://www.rosneft.ru/press/releases/item/195559/.
Corporate and Environmental Responsibility … 561

powerful oil companies. Thus, in late 2015, a series of public hearings were organised
by LUKOIL-Komi in the town of Ukhta concerning the Yareg field development.
Usually, from 11 to 26 people registered for such hearings, and it is unclear whether
these were merely formalities or real discussions that could have made a difference.64
Rosneft’s sustainability reports explain its involvement of stakeholders, with the
main types of stakeholder engagement being public consultations about environ-
mental impact, and roundtables the company has held regularly since 2007 in the
regions where it operates. Rosneft reported 127 public awareness measures in 2017;
over 50 of these were consultations about offshore exploration; and 15 were roundta-
bles.65 Rosneft diligently publishes the results of such hearings on its website, usually
stating that the participants of the hearings wholeheartedly support its projects. Thus,
in February 2016 RN-Shelf-Arctic, subsidiary of Rosneft, held public hearings in
Arkhangelsk where it presented a programme of maritime geochemical studies to be
held in 2016-2020 in the Barents Sea, detailing the schedule of activities and environ-
ment protection measures. Rosneft’s press release said that the participants approved
the programme, including the environmental impact assessment.66 Given the power
of Rosneft, it might have been difficult for the participants to take a negative stance
during the hearing.

3.5 Relations with Indigenous Peoples

Interaction with northern indigenous peoples became an important new direction of

CSR activities of Russian oil companies, with four out of five companies introducing
this element in their strategy (Tatneft is less involved because of the geography of
its operations). Most of Russia’s vertically integrated oil companies have formalised
policies with the northern indigenous peoples. Gazprom neft approved its Policy
for Interaction with Indigenous Minorities of the North, Siberia and the Far East
in 2017.67 LUKOIL’s approach to indigenous peoples is set out in its Social Code
(Section 2.4, Preserving National and Cultural Identity). The company also seeks to
regulate the behaviour of its subsidiaries in this area. LUKOIL-Western Siberia, for
example, is subject to Order 262, “On Measures to Limit Access to Territories of
Communal Lands”. Subsidiaries have Departments on Interaction with Indigenous
peoples to handle complaints and proposals.68 Surgutneftegas has departments on
relations with indigenous people at management level as well as further down in the

64 Indra Overland, Nina Poussenkova. “Russia: Public Debate and the Petroleum Sector”, in Public
Brainpower.
65 Rosneft, 2017a, p. 48–9.
66 https://www.rosneft.ru/press/news/item/180545/.
67 Gazprom Neft, 2017n, p. 124.
68 LUKOIL 2015-16: 92–93.
562 N. Poussenkova and I. Overland

company hierarchy.69 Rosneft applies Convention 169 of the International Labour

Organisation, as well as the UN Declaration on Rights of Indigenous Peoples.70
One of LUKOIL’s initiatives to deliver medical assistance to the Northern indige-
nous people is particularly noteworthy. The Red Tent (Krasniy Chum) project was
launched in 2002 in the Nenetsk Autonomous District by LUKOIL-Komi, the district
administration, Yasavei public movement and Total E&P Russia. Red Tent ensures
accessible medical aid to the nomad tribes in the remote Northern regions. The
project also supplies deer-breeding crews with necessary medicine and teaches them
principles of providing first medical aid.71
Surgutneftegas signs and implements cooperation agreements with the admin-
istrations of the regions where it operates and enters into direct agreements with
indigenous families. The company pays the families’ transportation expenses, reim-
burses expenditure for medical treatment and care, and supports children’s education.
Surgutneftegas organises seminars for its own and contractors’ personnel to discuss
norms of behaviour towards indigenous people, as well as briefings before employees
are allowed to work within the habitation areas of indigenous people.72 Rosneft’s
approach to interaction with indigenous people is an element of its Sustainable Devel-
opment Policy. Rosneft helps them to buy vehicles to drive children to school, trucks,
fuel and lubricants, communication equipment, finances repair and procurement of
medical equipment for district hospitals, and assists in creating jobs for indigenous
people.73 Gazprom neft also grants financial assistance to families who suffered in
emergency situations. To preserve national identity of Northern people, Gazprom
neft supports celebration of Days of Deer-herder in Polar towns and settlements.74
All of the Russian companies claim to involve indigenous peoples in decision-
making on future activities. LUKOIL coordinates its exploration schedule with
indigenous people and states that it takes into consideration their interests already
at the planning stage. But despite the official policies on indigenous peoples,
conflicts do occur. In 2014, there was a high-profile scandal in the Izhma District
of the Komi Republic when the local inhabitants voted unanimously to terminate
LUKOIL-Komi’s activities in the region.75

69 https://www.surgutneftegas.ru/responsibility/ecology/vzaimootnoshenie-s-kmns/politika-v-obl

asti-vzaimootnosheniy-s-kmns/.
70 https://www.rosneft.ru/Development/cooperation/Podderzhka_korennih_malochislennih_naro

dov_Severa/.
71 http://www.lukoil.ru/Responsibility/SocialInvestment/SocialInitiatives/Theredtent.
72 https://www.surgutneftegas.ru/responsibility/ecology/vzaimootnoshenie-s-kmns/politika-v-obl

asti-vzaimootnosheniy-s-kmns/.
73 https://www.rosneft.ru/Development/cooperation/Podderzhka_korennih_malochislennih_naro

dov_Severa/.
74 https://www.gazprom-neft.ru/social/indigenous-people/.
75 https://www.greenpeace.org/russia/ru/news/blogs/green-planet/-/blog/49459/.
Corporate and Environmental Responsibility … 563

3.6 Charity

Charity is a traditional element of oil companies’ social policy. Thus, LUKOIL

established a charity fund in 1993, one of the first of its kind in contemporary Russia.
LUKOIL’s position in this respect is quite clear: charity should not generate social
parasitism. Therefore, LUKOIL, alongside with the traditional forms of charity, uses
programmes of strategic charity and social investments. LUKOIL and its charity fund
have been organising contests of social and cultural projects in host regions since
2002. Project applications are submitted in three main nominations: Environment;
Spirituality and Culture; and Sport. Additional nomination is approved every year:
in 2016, in honour of the 25th anniversary of LUKOIL, a nomination Energy for
the Benefit of People was approved; in 2018, the Year of Volunteer in Russia, a
nomination Youth Initiatives.76
To raise efficiency of social investments, in 2018 Tatneft united its various char-
itable funds in a single Charitable Fund while retaining all its main long-term
programmes such as Mercy, Talented Children, Ruhiyat and Tazalyk. The annual
charitable programme of Tatneft is approved by the Board of the Fund, which is
chaired by the General Director of the company. In 2018, the Fund approved grants
to 44 projects. The initiative Talented Children, for example, provides grants for
gifted children. As a new trend, in 2018, financial support was allocated for the
“green fitness” activities.77 In a first for a Russian oil company, Tatneft started leasing
bicycles to the residents of Almetievsk at subsidised rates in 2017.78
Gazprom neft’s social programme is called ‘Native Towns’. Projects are selected
every year, taking into account the views of stakeholders. The programme included
over 2000 projects in 35 regions in 2017.79 Kustendorf CLASSIC is one of the key
projects of the Native Cities aiming at helping young musicians and developing
cultural ties between Russia and Serbia.80

3.7 Sponsorship of Education and Health Protection

These spheres have traditionally been important CSR foci for all Russian oil compa-
nies. Rosneft supports education, focusing on nine institutions of higher education.
The company helped set up a school connected with Moscow State University and
finances the naval higher education establishments, for example, at the Saint Peters-
burg State Naval Technical University and Makarov State University of Sea and River

76 http://www.lukoil.ru/Responsibility/SocialInvestment/SocialProjectsCompetition.
77 http://2018.tatneft.ru/socialpartnership/charity/.
78 http://almetievsk-ru.ru/news/goryachie-novosti/v-almetevske-zapustyat-sotsialnyiy-proekt-po-

proka.
79 https://www.gazprom-neft.ru/social/regions/.
80 https://www.gazprom-neft.ru/social/fest/about/.
564 N. Poussenkova and I. Overland

Fleet. At Tatneft, Nayl Maganov emphasises support for medical services. Projects
have included support for an oncology centre and a children’s clinic and various
other medical facilities.81

3.8 Support of Entrepreneurship

Support of entrepreneurship is a relatively new direction of CSR activities for

Russian oilmen, which resembles traditional activities of IOCs. LUKOIL’s CEO
Vagit Alekperov created the foundation “Our Future”, which promotes entrepreneur-
ship. “Our Future” helps people to set up new businesses, with all-Russian contests
for project proposals held twice a year. In 2014, LUKOIL and “Our Future” estab-
lished the initiative “More than a Purchase”. It involves the selling of goods produced
by social entrepreneurs at 106 LUKOIL petrol stations across the country.82 Gazprom
neft focuses on supporting local industry to serve the petroleum sector. In 2017, the
company entered into agreements with seven Russian regions to replace the imported
lubricants and fluids.83
Tatneft launched an initiative of cooperation with stakeholders in support of small
and mid-size business. Tatneft is ready to give SMEs an opportunity to produce new
goods or provide services by leasing or selling them its redundant production facili-
ties. In 2004, Tatneft approved a Special Corporate Project to Support Development
of SMEs in order to enhance business activity in the South-East of Tatarstan, create
new jobs and ensure social stability in the host regions.84
In June 2019, Rosneft and the Kurgan region signed an agreement on cooperation
in promoting import substitution. According to Rosneft, it is aimed at maximising
use of Kurgan’s industrial potential by the company. The parties plan to develop
proposals on cooperation with regional industrial and R&D organisations, as well as
to compile a list of equipment and technologies to be used at Rosneft’s facilities.85
On the part of Rosneft, this move was, probably, prompted by sectoral sanctions
against Russian VIOCs, as they began to focus on import substitution in response.86
From a social perspective, this initiative will help to create jobs in the Kurgan region
and will contribute to improvement of living standards.

81 http://zt116.ru/news/1/nail-maganov-my-zdes-zhivem-dyshim-odnim-vozdukhom-so-vsemi.
82 http://www.lukoil.ru/Responsibility/SocialInvestment/SocialInitiatives/JointprogramswiththeF

undOurFuture.
83 Gazprom Neft 2017 Annual Report, p. 124.
84 https://www.tatneft.ru/sotsialnaya-politika/podderzhka-malogo-i-srednego-biznesa?lang=ru.
85 https://www.rosneft.ru/press/releases/item/195551/.
86 Fjaertoft and Overland (2015).
Corporate and Environmental Responsibility … 565

4 Conclusion

Some of the CSR activities of the five oil companies reflect the traditional Soviet
approach (support for health facilities and cultural festivals) while others resemble
more Western notions of CSR (investment in the supply chain capacities of local
enterprises). Agreements with local indigenous communities combine elements of
the Soviet, Russian and international standards and values. In general, Russian VIOCs
initially used to closely resemble NOCs in the social sphere, since they inherited
the traits of the “Soviet social responsibility” from their Socialist predecessors. As
it usually happens with NOCs, this dual role of being both a commercial entity
and an instrument of the “national mission” often resulted in the lower business
efficiency of oil companies and undermined their investment potential. Currently,
VIOCs try to evade non-commercial obligations and purely social projects, consid-
ering them unprofitable, and tend to evolve towards the CSR models of IOCs, largely
driven by the demands of their investors, shareholders and consumers. In contrast to
the non-commercial functions of NOCs, corporate social responsibility policies and
commitment to sustainable development help to enhance investment attractiveness
of Russian oil companies.87

Acknowledgement This chapter was funded by the Research Council of Norway, grant
number 287937.

References

Alekperov, V. (2011). Oil of Russia: Past, present and future (pp. 333–334). Moscow: Creative
Economy.
Fjaertoft, D., & Overland, I. (2015). Financial sanctions impact Russian Oil, Equipment Export
Ban’s Effects Limited. Oil and Gas Journal, 113(8), 66–72. https://www.researchgate.net/public
ation/281776234.
Krol, M. (Ed.). (1995). Oil epopee of West Siberia (p. 33). Moscow: Publishing House Neftyannik.
Poussenkova, N. (2012). Noviye Zvezdy Mirovoi Neftyanki. Moscow.
Tchourilov, L., Gorst, I., & Poussenkova, N. (1996). Lifeblood of empire. A personal history of the
rise and fall of the Soviet oil industry. PIW Publications.

87 Thischapter is a product of the project “Is this Russia’s Kodak Moment”, which is financed by
the Research Council of Norway, grant number 287937.
Alaska’s Corporate Social
Responsibility: The Economics
of the Corruption Case of VECO

Douglas B. Reynolds

Abstract During the early 2000s, Alaska tried to develop its natural gas industry
just as natural gas prices in the US market were high, highlighting an interesting case
of Corporate Social Responsibility (CSR). In order to develop an Alaskan natural gas
industry, then, a two thousand mile, multi-billion dollar pipeline would be needed,
and such a pipeline would require a tax contract between the state of Alaska and
the Alaskan North Slope oil producers, which would create tough negotiations and a
strenuous relationship between Alaska and the international oil companies (IOCs).
Usually, governments choose petroleum taxes, regulations, and government support
within the petroleum industry based on maximizing social welfare, but not based
on maximizing corporate profits. The corporations though needed a certain level
of profits in order to be able to invest in a new petroleum development. Therefore,
there is a natural incentive for corporations to try to change government policy in
order to reduce their risk and assure profitability. However, there is one other factor
to consider when trying to get such a gigantic pipeline built and a new natural gas
industry started, which are the risks involved. Since investors are taking huge risks to
build natural gas infrastructure, then they need favorable taxes to get the job done or
they cannot make the investment pay off, and sometimes, they use corrupt means to
get a good deal, in which case their Corporate Social Responsibility can be lost. Still,
it is not always possible to know the absolute best tax rates or the perfect government
terms and conditions that will maximize social value. Therefore, if social welfare
includes not just the best terms possible of a tax contract but also whether a project
is completed or not, then even if taxes are low, the state could still receive jobs and
maximize social welfare compared to not having a new industry at all. Thus, the
Alaska VECO corruption case analysis also shows an intricate economic calculation
of the expected costs and benefits of the project, after the fact, of how things could
have turned out.

D. B. Reynolds (B)
Department of Economics, School of Management, University of Alaska Fairbanks, Fairbanks,
USA
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 567
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_32
568 D. B. Reynolds

Keywords Resource development · Corruption · Negotiating terms

1 Introduction

Almost inevitably the idea of corporate social responsibility (CSR) is about how
corporations are going to help various social causes or reduce pollution or in some
way help the citizens of the countries where they work. What can be more interesting,
though, is the interaction of the International Oil Companies (IOCs) with the govern-
ments they deal with over terms and condition of their business relationship with the
government. Thus, we have (1) the government that represents society, (2) the IOCs
that represent investor interests in developing the petroleum resources for a profit,
and (3) the interaction between the IOCs and the government. It is this interaction
then that can be the most interesting thing about CSR since within this relationship
cases of corruption can emerge, and where CSR can be lost. For example, in Alaska,
it is relatively cheap to give money to specific community projects and causes within
the state since the population is so small. The more pertinent issue then is not so
much local giving or local environmental protection, but rather the oil taxes and the
government take themselves which allow the state to gain value from the petroleum
industry. Indeed, more often than not the workers in the industry do not live in Alaska
but come into the state for two weeks of work every month and then live the other two
weeks outside of the state. This makes the most pertinent issue in CSR not so much
corporate giving to help local causes, but rather the state’s oil taxes on those corpora-
tions where the amount of revenues to the state determines how much the state itself
can pursue social welfare programs. However, there is more to gaining social welfare
than mere government take because the real tension is between society’s desire to
get the most benefit out of its petroleum resources and the corporate investor’s desire
to make a fair return on the money that petroleum companies invest in Alaska, espe-
cially since if a given project has a risk of losing money, then the investors could see
a sizable loss.
I was seldom able to see an opportunity until it has ceased to be one.
A man cannot be comfortable without his own approval.
Let us live so that when we come to die even the undertaker will be sorry.
Mark Twain.

In Alaska, one of the most controversial petroleum projects in terms of creating

social welfare and also in terms of CSR is a long sought after natural gas pipeline,
which in the years before the new millennium was supposed to encompass a pipeline
all the way from the North Slope of Alaska down to Alberta, Canada, a roughly 2000
mile (3000 km) distance depending on which route was to be used. The idea of this
pipeline project was that it would develop Alaska’s stranded, but massive, natural
gas reserves that exist on the Alaskan North Slope and sell them to Alberta, Canada,
which is connected by pipeline to Chicago and the Lower-48 natural gas markets.
Alaska’s Corporate Social Responsibility: The Economics … 569

Considering such a massive multi-billion dollar project, if, on the one hand, the
project came in under cost and the natural gas prices held up, then the project could
have made a healthy return such that investors would have been compensated and
the state government would have obtained healthy revenues. On the other hand, if
the costs where to have blown out and the price of US natural gas declined, as they
in fact did, then the whole project could have lost money and the investments would
make a loss. Considering the high probability for a loss, the project clearly needed a
substantial return for the natural gas investors.
But on the other side of the deal, if there had been very high profits for such a
project, then the people of the state of Alaska would have felt that they had been
unfairly swindled. It is rather like negotiating the price of a single used car where
no other cars are available. Both sides of the negotiation cannot be sure if they are
getting a good deal and so they haggle over and over again and never eventually have
a transaction. The problem with a natural gas pipeline project though is that you can
lose a window of opportunity to get a natural gas pipeline put in place, in which case
both sides can lose.
The stakes for the project, then, were so high that the negotiations between the
IOCs and the government were bound to be contentious. This is especially so in
Alaska where there is no state-operated petroleum company and where the private
producer companies, the IOCs, need to gauge whether they will do such a project
depending on how good the terms the state can provide. In the case of Alaska devel-
oping its stranded natural gas reserves, which the oil producers had lease ownership
over, the project depended on obtaining favorable state government tax rates, and it
was the state legislature that needed to approve it.

2 The Nature of Natural Gas

In order to understand Alaska’s failed natural gas project more thoroughly, you have
to understand some of the economics of natural gas, which can be quite different than
the economics of oil. The greatest difference between petroleum oil (which includes
hydro carbons above C5, pentane) and natural gas (particularly methane C1), and
where natural gas liquids (NGLs) like ethane (C2), propane (C3) and butane (C4) are
somewhere in the middle, is that oil is dense and natural gas is light weight. What this
means is that natural gas is about a magnitude more expensive per joule (or British
Thermal Unit, BTU) than oil to store. That storage issue is important because in order
to make the economics of natural gas cost effective, you have to use it as soon as you
produce it. So, any time you extract natural gas, it needs to be sent by pipelines or by
Liquefied Natural Gas (LNG), a super cooled liquid (minus 260° Fahrenheit, minus
160 °C), to the consumer to use almost immediately, which makes the natural gas
market rather a lot like the electric power market, where the natural gas consumer
and the natural gas wellhead producer work in synchronous tandem.
The other problem with natural gas is that due to it being less dense and needing to
be squeezed under high pressures to reduce its bulk, the transport system is going to
570 D. B. Reynolds

be cheaper the larger it is, i.e. natural gas has immense economies of scale. Whenever
you have such huge economies of scale there is tendency for a monopoly to buy out
natural gas infrastructure in order to create Rockefeller-esqe high profits. The US
history of natural gas pipelines and regulations shows that natural gas has always
been a problematic fuel even compared to coal or nuclear power because of the
difficulty in storing natural gas, in regulating the natural gas pipeline system and in
assuring high enough profits for the producers.
In the US throughout the twentieth century with plenty of oil supplies and associ-
ated natural gas supplies surrounding those oil supplies, there was quickly established
a natural gas pipeline system from major natural gas producing hubs, like in Texas, to
major natural gas consumer hubs, such as in Chicago. But every time, a new natural
gas pipeline was built to a new city outside of the main hubs, that particular pipeline
created for itself a monopoly to raise consumer prices and lower sales value. There-
fore, the then Federal Power Commission (FPC) was instituted in order to regulate
all pipelines. However, even with regulations in place, the pipeline system did not
keep up with demand and new needs for energy, so by the 1970s, the US regulations
for pipelines were deregulated and changed to finally allow natural gas markets to
be established. Then, natural gas prices started to rise at the wellhead to allow new
exploration and development to occur.
The US supplies of natural gas then were adequate throughout the 1980s and 1990s
for most regions in the USA and indeed natural gas and oil often were substituted for
each other in the US electric utility market. Starting after the year 2000, though, the
US could not keep up with the greater demand for natural gas that the de-regulation
created in the 1980s and 1990s, and the reserves of conventional natural gas started
to go into decline. Then more trouble hit the US economy as natural gas production
declined in 2004 and 2005, which caused natural gas prices to boom well above
oil prices in the US, which had never happened before to such an extent. While oil
was at $30 per barrel, about $5 per mm Btu ($5 per million British Thermal Unit,
or about $5 per Giga Joule) natural gas was twice that price at $10 per mm Btu,
which was an unheard of price inversion between oil and natural gas in America’s
petroleum industry history. Usually natural gas is plentiful and cheap and indeed
more often than not it is a nuisance rather than a valuable commodity, but in 2005,
it was extremely valuable.
Therefore, partly due to an emerging crisis that hit California due to a natural gas
pipeline explosion and due to a drought that reduced available hydro-power, and also
due to concerns for US supplies of natural gas, the US Federal Government passed a
law, the Alaska Natural Gas Pipeline Act of 2004 (ANGPA) that would guarantee a
loan for a large natural gas pipeline from Alaska to the US Lower-48,1 or if need be
a natural gas pipeline from the North Slope to Valdez, Alaska and an LNG project to
the Lower-48. The US Federal Government loan guarantee meant that if the entire
project went bust, the USA would pay back the loan, although usually such a large

1 Note,the USA has 48 contiguous states on the North America continent but where the state of
Alaska is separated by Canada from those 48 states. Therefore, Alaskans often call those 48 states,
the Lower-48 as they are south of Alaska, i.e. lower on the map.
Alaska’s Corporate Social Responsibility: The Economics … 571

project would have take-or-pay contracts by consumer entities, like Chicago, and so
the US Federal Government loan guarantee is more of a subsidy than a full payback.
Nevertheless, this loan guarantee would help immensely in getting a pipeline built,
if the State of Alaska could also help. And so, with the US loan guarantee and the
high natural gas prices, the major oil companies at that time started looking at the
possibility of developing Alaska’s large natural gas resources and connecting them
to the Lower-48.

3 The Push for Alaska Natural Gas

Alaska like most petroleum regions not only wants to develop its oil production
but also its natural gas production. Since oil and gas often occur hand in hand in
most petroleum producing places, then it only makes sense to produce both valu-
able commodities. The problem with developing natural gas though is that it is less
valuable than oil and much more problematic to transport than oil. So natural gas
development often requires a much more involved government to industry collabora-
tion than does oil development such as lower natural gas production taxes, subsidized
infrastructure or out and out state investment into the development of the natural gas
resources. And that kind of help was going to be needed in Alaska, particularly since
Alaska’s natural gas was stranded, i.e. it was thousands of miles away from any
consumer markets, which means it was going to require a huge project with favor-
able taxes to be able to cost effectively get that natural gas to market. This means the
development of natural gas created an even more intertwined relationship between
corporations, government tax and business policy than normal, which can lead to
corruption. Alaska’s VECO example is a striking example.
VECO which stands for Veltri Enterprises and renamed VE Construction or VECO
for short, was never a major oil and gas company in its own right. Nevertheless, it
became a large sub-contractor in Alaska’s oil and gas industry working under the
IOCs. More than that, VECO understood that if a large natural gas project ever came
to fruition, then it would gain immeasurable profits from all the contracting work
that would occur.
Now Alaska had been trying to develop and export its natural gas from the very
beginning of the North Slope development in the 1970s. One of the early plans for
getting that natural gas to market was to actually build a natural gas pipeline and
locate it right on top of the trans-Alaska (oil) pipeline system (TAPS), which was
mostly an above ground pipeline, due to permafrost issues,2 whereby the natural gas
would go to Alaska’s south coast and be transformed into LNG and then shipped for
consumption in Japan. Indeed, some of the design behind TAPS pipeline was done

2 Permafrost is soil that is permanently frozen due to cold winters and cool summers and where
the summer time grasses keep the soil insulated from the sun so that they remain frozen. A hot oil
pipeline could melt that permafrost and cause certain plant and animal species to be disturbed or
killed.
572 D. B. Reynolds

for the deliberate purpose of putting a natural gas pipeline just over the top of the
oil pipeline. Also TAPS was further able to have sliding capabilities so that it could
withstand an earthquake. Nevertheless, the above ground design meant that TAPS
would have been a relatively easy structure to have a natural gas pipeline fit higher
up above the oil pipeline.
However, it was thought that if a natural gas pipeline were on top of the oil pipeline
that it would be too easy to have some sort of gas explosion similar to what happened
to the natural gas pipeline from Texas to California in 2000, but instead of blowing
up the natural gas by itself, such an explosion would stop up the oil as well and
create a double hazard. So when that first idea for a natural gas pipeline and an LNG
facility in South Central Alaska was rejected, then other plans kept surfacing mostly
surrounding the idea of building a large natural gas pipeline, well away from TAPS,
all the way to Valdez and then to sell the natural gas to Japan using LNG. But none
of those proposals gained traction.
Finally, though, in 2005, the price of natural gas in the Lower-48 skyrocketed,
and with the new ANGPA loan guarantee from the US Federal Government, the talk
of an Alaskan natural gas pipeline was heating up, and gave everyone the idea that
Alaskan natural gas could be routed to the US through northern Canada to Alberta
instead of by LNG to Japan. So, the State of Alaska started to promote the idea of
getting involved to help push a natural gas development and build such a natural gas
pipeline, but the producers, who owned the natural gas leases, needed help. The oil
companies insisted that they needed “fiscal stability”, which meant a guaranteed low
Alaska tax rate on petroleum for 40 years. One idea was to change the rate of taxes
on Prudhoe Bay oil and gas and elsewhere on the North Slope so that the natural gas
would be more valuable to develop. However, the state’s constitution did not allow
tax contracts, but based on court cases, the state was allowed to institute a tax subsidy
for about 10 years which would have been a de facto tax contract, but that needed
legislative approval.

4 The Crucial Year 2005

One aspect of CSR is that corporations can actively engage the government to change
laws or rules in the corporations’ favor. Such engagements can be considered respon-
sible if the project gives society an overall gain, or irresponsible if it gives corpora-
tions much more gain than consumers or than local citizens’ gain within a producing
region. The economics of natural gas in 2005 and surrounding VECO show the
balance that is needed for CSR.
The way the VECO scandal played out was as follows. While a huge Alaska
Highway pipeline was certainly looking feasible by 2005 and was extensively looked
into, nevertheless, it would have been a very challenging project economically. Such
a large pipeline could have had cost overruns and the natural gas prices in the Lower-
48 could have gone down, as they in fact did do, and indeed a current analysis of past
proposed pipelines shows scenarios where such a pipeline could have lost money. But
Alaska’s Corporate Social Responsibility: The Economics … 573

at the time, everyone figured that such a pipeline was set to make money. By 2005
with natural gas prices so high and natural gas supplies in the Lower-48 actually
in decline, and a Federal loan guarantee on offer, it was thought that such a long
pipeline was assured to happen. Note, this was just before fracking and shale-gas
technologies came into wide-spread use. Once shale-gas and fracking got going,
the natural gas price went down and Alaska’s natural gas probably would not have
been economic. Although, even without the new fracking technologies, the Alaska
pipeline economics were going to be a challenge.
The only way to make such a proposed pipeline economically viable, even then,
would have been not just hoping for high natural gas prices in the Lower-48 but also
by having a tax contract between the State of Alaska and the oil and natural gas
producers, the IOCs, whereby the contract would set Alaska’s natural gas production
taxes at a low level for at least 10 years into the future. The producers wanted a
40-year contract, but the state constitution only allowed about a 10-year contract,
which still might have worked. Granted, such a project would have helped both the
state of Alaska and the producers, but in any negotiation when both sides see great
opportunity and a sure bet, the perception is that you can gain even more depending
on how hard you negotiate the final outcome. The end result was that a negotiated
outcome was going to have to be voted on by the legislators of the State of Alaska,
so legislators were going to get involved.
What happened then, was that VECO, which was not an IOC, but which worked
as a contractor for IOCs, wanted the State of Alaska to make a deal fast, and with low
taxes so that the oil companies would build the pipeline and develop the natural gas.
Then, in that case, VECO would gain immense wealth through contracts it would
obtain from all aspects of the pipeline construction and the natural gas development.
The way VECO tried to influence the legislators was by bribing individual legislators.
The evidence came to light during a US Federal Government initiated FBI and
US Justice Department probe into bribery. VECO’s head, Bill Allen, and several
legislators were either charged with crimes or found guilty of them, or in some cases
allowed to go free by handing over state evidence on the case.
While the details are clouded in courtroom anonymity, nevertheless, this shows
that one way for IOCs to affect corporate social responsibility is by either accepting
the government’s rules or by trying to change them by means of bribes or corruption.
Alaska, i.e. the United States of America, is no stranger to such occurrences. While the
IOCs were not involved, VECO did subcontract to them and so it would have hurt their
reputations had this come out later during the construction of a potential project had
such a project been sanctioned. Interestingly, one of Alaska’s own US Senators, Ted
Stevens, who was in the US Federal Government’s Congress for decades was accused
of corruption and accepting a bribe in the form of goods in kind. The charges were
dropped on account of failed trial processes, but there was a report of a tape recording
of Stevens actually accepting a bribe. So, even the US can have corruption, and even
Alaskan legislators can be involved in corruption. However, this also shows that one
aspect of how Alaska was able to deal with bribery and corruption was through the
fact that the US Federal Government can always come into Alaska and investigate
any problems based on tips or other information. This shows how Alaska in general
574 D. B. Reynolds

is able to have a higher standard of CSR and a higher level of law enforcement than
it might ordinarily have based on being part of the US where the rule of law is held
to a high standard. Nevertheless, Alaska is not immune to corruption and it shows
that corruption in general can happen to change laws and rules in favor of the oil and
gas or other industries.

5 A Post-VECO Analysis

One question that is often asked is what would have happened had this gigantic
pipeline project gone forward. The rough estimates are that the project would have
cost close to $20 billion in 2005 (about $40 billion in 2019 with normal inflation)
with a possible $3 per MCF (one thousand cubic feet) tariff, plus at least a $1 per
MCF wellhead price, although that could have been more. Since US natural gas
prices in 2005 were as high as $8/MCF, and the since projected prices were expected
to stay that high, then based on that projecting there would have been good profits
on the project.
However, cost estimates were increased due to high inflation and fuel costs to
drive trucks that would put the pipeline in place. Plus the permafrost ground required
a lot of gravel that would be expensive to put in place, so the costs might have been
higher. Even though in 2008, there was another natural gas price spike, nevertheless,
by 2011 the price of natural gas was down to about $3 in Alberta and going down
further. So given these de facto prices and costs, the tariff on the pipeline would have
climbed above $3 per MCF and the price at the Canadian end of the pipeline could
have been lower than $3 per MCF at times, which would have made the pipeline
uneconomic. Although, since there was an ANGPA loan guarantee, that may have
been invoked and could have caused the US Federal Government to be forced to pay
some of the losses.
Interestingly, during the heady years around 2005 with natural gas prices as high
as they were, the concern by US Federal Government Regulators was not if the
pipeline would make money or not, since everyone assumed it would, but rather if
the pipeline owners would allow independent natural gas producers on the North
Slope to transport their natural gas production through that pipeline. You see, on the
one hand, the IOCs were taking a great risk just to build such a huge pipeline and
so they would want to fill it with only their own natural gas in order to profit from
both the pipeline and the production. On the other hand, the US Federal Government,
with its loan guarantee, wanted to require that any independent producer could send
natural gas through that pipeline. So there was a subtle conflict between the major
IOCs on the North Slope and the US Federal Government over allowing all natural
gas resources to be able to go through the pipeline. This also was a point of contention.
This point alone might have made an actual project more problematic had it actually
been built since it can ruin the cost to benefits ratio.
Still, everyone was blinded by the natural gas price forecasts and the potential big
benefits that would roll into the state with this project. There would be benefits to the
Alaska’s Corporate Social Responsibility: The Economics … 575

small independent petroleum producers, i.e. the small oil companies, on the North
Slope due to the Federal requirement that they could have access to the pipeline.
There would be benefits to the Lower-48 if the pipeline were to bring in 4.5 billion
cubic feet (BCF) per day or, if expanded, 6 BCF per day to cut Lower-48 Americans’
energy costs. There would be massive benefits to the state of Alaska with wellhead
natural gas production taxes and cheaper energy within the State of Alaska. Few
thought the project would not happen and so many advocated negotiating longer and
harder, so that Alaska could gain more benefits than the deal being proposed.
It is theoretically possible, though, that had a tax deal and contract been struck
fast enough and regulation been minimal enough, and the US Federal and Canadian
regulatory process smooth enough, and with the loan guarantee, that indeed Alaska
could have gotten a pipeline built to Alberta, Canada, and Lower-48 markets by
2010. And even if such a pipeline had all those loss making years, from about 2011
to about 2020, it might have broken even with the loan guarantee, although it probably
would have lost money due to the shale-gas supplies. Still, in a break-even case, it is
conceivable the pipeline would have provided the state with badly needed revenues,
jobs, and economic activity. So, many will argue that had the bribes been accepted
to a few legislators of a few tens of thousands of dollars, and not found out about,
then the State of Alaska as a whole would have gained billions of dollars in value
compared to it not happening. So, it is easy to see how social welfare can be gained,
or lost, on one deal, which means that corporate social responsibility is important.
But there is a tough balancing act. In this particular case, had the bribes and the
deal gone through, and assuming the pipeline were sanctioned and built, a big if, you
can argue that the State of Alaska would have gained immensely from this project, at
the expense of the US Federal Government and the IOCs, who would have lost. Still,
had news of the bribes come out later, and a project sanctioned and built, the IOCs
would have lost all of their credibility and lawsuits would have happened, and they
might have lost many millions on the whole deal, even if the actual project could have
broken even. Nobody could have predicted the bleak picture for Lower-48 natural
gas prices, and how the shale-gas revolution would bring those prices down later in
the decade, and so the VECO scandal coming out as it did probably helped the IOCs
and the US Federal Government the most.
Since that project, though, Alaska has seen many more planned natural gas
projects, usually encompassing a pipeline from the North Slope to Anchorage, Alaska
and from there a LNG facility to export natural gas to Japan and China. New deals
with China or Japan have been proposed and tax breaks for such projects have been
passed around. But to date, no project has happened. In the end, the natural gas on
the North Slope is still there and can be produced for value to the state and to society
eventually. It is just that it will have to wait for a better market, or more practical
minds.
576 D. B. Reynolds

6 CSR Versus Oil Taxes

In general, corporate social responsibility in Alaska is alive and well. Consider envi-
ronmental issues. While certainly there have been some bad environmental issues in
Alaska such as the Exxon Valdez oil tanker crash and spillage, the BP North Slope oil
pipeline leak and the Williams Alaska Petroleum Inc., North Pole, Alaska refinery
water pollution case, in general Alaska’s environment is in very good shape and the
petroleum industry does a good job of taking care of the environment.
Take the Exxon Valdez oil spill for example. It was one of the worst ever disasters
in the USA to have occurred in one concentrated area. While such a catastrophe
should not have happened with proper over sight, nevertheless most Alaskans would
rather have an oil industry than not considering the jobs and economic growth the
industry has created. However, if we consider the entire territory of Alaska in terms of
the Exxon Valdez oil spill, that amounts to 30,000 tons of oil spilled in Prince William
Sound in 19893 compared to 660,000 square miles (1.7 million square kilometers)
of Alaska.
For comparison, the Seattle area is say 200 square miles and there are roughly
200 tons of motor oil spillages from all the cars in that area every year, or about 1 ton
per square mile. Exxon Valdez in all of Alaska is only 0.05 tons per square mile and
it only happened the one time. So most of Alaska is environmentally cleaner than
most of the Seattle area. This does not mean that the oil industry in Alaska should
always do no harm, but if Alaska had an industrial economy as dense per square mile
as Seattle has, then there would be much more environmental problems in the state.
People not living in Alaska tend to exaggerate environmental problems in Alaska
when most of the state is fairly clean.
If anything, the environmental regulations on the oil producers are too onerous
such as making oil producers wait too long for the winter operating season to start
their North Slope drilling, such that they must delay building ice roads to get to
the oil fields for exploration and development well drilling. The state’s regulators
probably wait too long to open up the tundra.4 In addition, the US Federal regulators
are often too quick to shut down areas of oil exploration to save a small pond or a
lake on the North Slope for the sake of single specie which in turn reduces oil and
gas exploration. When these regulators cause the companies to wait longer, it creates
less ability to drill exploration and other wells and reduces Alaska’ economic well
being.
As far as philanthropic giving is concerned, the petroleum industry does give
millions of dollars to organizations in Alaska such as Alaska’s university and other
groups. The real issue is not the amount of philanthropic giving, the real issue is that
since Alaska’s population is so small, it takes very little philanthropic giving to gain
a high level of good public relation perceptions for the average Alaskan citizen. In
the meantime, the producers who give millions are also earning billions on the oil
they produce, so the government of Alaska could conceivably tax the oil companies

3 For a full account see McBeath et al. (2008).

4 See Wall (2005).
Alaska’s Corporate Social Responsibility: The Economics … 577

at a higher rate than they do and then use those revenues for government sponsored
social welfare.
As the VECO case shows, Alaska has had legislative hearings with public involve-
ment surrounding oil and gas projects. However, partly due to the fairly small popula-
tion of Alaska, its large geographic area and the state of Alaska’s relatively small sized
government, there is still plenty of opportunity for corporations to use corruption or
political pressure as a means to an end to side step public involvement.
For example, when the oil tax change also known as Senate Bill 21 (SB 21)
reduced taxes and gave tax credits to oil producers, the issue went to a public vote.
Clearly, SB 21 was more lucrative for Alaskan producers than the average oil tax
for other states.5 With tax credit of $8 per barrel for oil prices under $80 per barrel,
Alaska has reduced its normal oil take by over a billion a year to the oil companies’
advantage, with Alaska’s government take lower than for other states.6 Yet when the
vote to rescind SB 21 happened in 2015, it was narrowly rejected, i.e. SB 21 was
kept, partly due to the CSR giving to so many community groups.
What you get with such a small population is many opportunities to give money to
local community causes to illicit goodwill while in the meantime, your company can
advocate a lower government take for the petroleum industry in general and make
more profits. On the surface and as far as the public is concerned, the corporations
have a high degree of CSR in terms of their giving but since Alaska’s population is
so small it takes less giving to appear to have a high CSR and that can in turn helps
politically to put in place a reduced government take for the corporations.

7 Conclusion

Not many could believe that corruption and bribing could happen in an advanced
well-policed country like the USA, but when so much money is on the line, not only
do politics become crazy electric, but debates become hardened along polarized
lines, such as trying to extract as much value as you can from a project. On the state
citizen side, you want to obtain the highest possible tax revenues and job prospects.
On the IOC side, you want the best deal possible not just for a normal return on a
given investment but also because of the fear factor that indeed, as actually happened,
profits from low natural gas prices and high cost overruns and additional taxes on
a natural gas project, the pipeline could look at a total loss. The IOCs concerns are
especially well founded since the project requires such a long time frame of stable
prices, costs and taxes, and because the project would have been one of the biggest
construction projects ever in the world since the building of the Great Wall of China.
During the dizzying heights of the natural gas bubble of 2005 and 2008, you could
not have convinced many state residents that the project would not have happened,
just as the IOCs may have been afraid of losing money. Then, when one of the North

5 See Nebert (2019).

6 See Paskavan (2019).
578 D. B. Reynolds

Slope oil service contracting firms, VECO, decided to help smooth the negotiations
with actual bribes to legislators, no one would be surprised. While, on the one hand,
there is a chance that such bribes would have allowed the project to move forward and
benefit the state by many billions of dollars in revenue, jobs, and new industries. On
the other hand, had that project gone forward and actually have broken even, although
looking back in hindsight it probably would have lost money unless the Federal loan
guarantee were invoked, and had the citizens then found out about the bribes, then the
trust of the public would have been lost and the IOCs would have forever been under
the microscope of both the US Federal authorities and State Alaskan authorities. The
IOCs never would have been trusted again, making any new project difficult if not
impossible to move forward.
Nevertheless, in general, Alaska’s environmental quality is high, and some of the
environmental regulations are too onerous. Also, giving philanthropically is fine, but
at a cost of a politically induced lower government take.

References

McBeath, M. Berman, J. R., & Mary F. E. (2008). The Political Economy of Oil in Alaska:
Multinationals vs. the State, Lynne Rienner Publishers, Boulder, Co.
Nebert, D. (2019). An Oil Tax Fix, Fairbanks, Daily-News-Miner, Sept 1 2019, p. C5.
Paskavan, J. (2019). Alaskans should stop giving costly oil tax credits, Fairbanks, Daily-News-
Miner, Mar 17, 2019, p. C5.
Wall, S. (2005). The Economic Implications of the Climate-Change Induced Shortened Oil Explo-
ration Season on Alaska’s North Slope, Master’s Project In Fulfillment of M.S. Resource and
Applied Economics Requirement, Apr 30 2005.
Corporate Social Responsibility
in the Mining Sector in Canada

Jocelyn Fraser and Andre Xavier

Companies working in the extractives sector have become increasingly adept at

managing legal, financial and operating risk. They have also become proficient at
developing expertise in order to mitigate threats to project production schedules
and budgets, and ensuring that their shareholders profit from their investments.
However, in recent decades, two fundamental changes have rattled the business-
as-usual approach and have adversely affected the success of mining and oil and
gas projects. The first is a change in the definition of business success. Milton
Friedman’s belief that the “business of business is business” has largely been super-
seded as companies endorse a new standard of corporate performance—one in which
a growing emphasis is placed on social imperatives as well as financial perfor-
mance, and where profits benefit stakeholders, not just shareholders. The second
change involves an increase, both in number and in cost to companies, of inci-
dents of company–community conflict. From minor disagreements to sustained and
violent conflict, the failure to earn stakeholder approval has emerged as one of the
leading causes of project delays and a key strategic risk. From 2008—the peak of
the super cycle—until 2020, earning a “social license to operate” has been ranked
by industry executives as one of the top business risks faced by the extractive sector.
In other words, for companies whose projects can only be built where deposit exists,
and where the life of an operating facility can extend for several decades, generating
value for both the company and the community is becoming a strategic imperative and

J. Fraser · A. Xavier (B)

Norman B. Keevil Institute of Mining Engineering, University of British Columbia, Vancouver,
Canada
e-mail: [email protected]
J. Fraser
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 579
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_33
580 J. Fraser and A. Xavier

has given rise to initiatives designed to demonstrate corporate social responsibility

(CSR).
Numerous authors and organizations have proposed definitions of CSR. Driven by
the question, “What responsibilities to society may business reasonably be expected
to assume?” Howard Bowen, in his seminal 1953 book Social Responsibilities of
the Businessman, was reluctant to provide a definition. He believed that “the way
to greater responsiveness of businessmen toward their social obligations lies in the
processes of broadly-based discussion and individual soul-searching on the part of
actual participants—not in the spelling out of ‘answers’ by outside observers” (p.
xi). Bowen went on to interpret social responsibilities as the obligations that business
entrepreneurs have to pursuing policies, decision making, and implementing actions
that are desirable in terms of the objectives and values of society (1953: p. 6).
Bowen’s contemporary, Theodore Levitt warned about the dangers of social
responsibility, espousing the more pragmatic view that the goal of for-profit orga-
nizations must be to maximize profits to shareholders while respecting the “rules
of the game”. In 1970, American economist, Friedman (1970) famously declared
that “the one and only one social responsibility of business [is] to use its resources
and engage in activities designed to increase its profits”. Friedman’s article in the
New York Times was one trigger for a more fulsome discussion amongst scholars
and practitioners about the idea of social responsibility. Archie Carrol’s view that
corporate social responsibility “encompasses the economic, legal, ethical, and discre-
tionary (philanthropic) expectations that society has of organizations at a given point
in time” (Carroll 1979, 1991, 2016; Carroll and Shabana 2010) gained popularity and
created a platform for scholars to discuss questions related to social performance,
stakeholder engagement and the importance of value creation. As such, questions
regarding the ways in which a company can work to leave customers, suppliers,
communities, employees and financiers better off (Freeman et al. 2006a, b: 5) took
on greater levels of importance.
In the Canadian context, the first national CSR strategy, Building the Canadian
Advantage (2009), which was developed by Global Affairs Canada (GAC), concep-
tualized CSR as “the voluntary activities undertaken by a company to operate in an
economically, socially, and environmentally sustainable manner” (p. 2). A few years
later, a new definition was proposed in the report entitled Doing Business the Cana-
dian Way, in which GAC defined CSR “as the voluntary activities undertaken by a
company, over and above legal requirement, to operate in an economically, socially
and environmentally suitable manner” (GAC 2014: 3).
In the mining sector, more relevant reflection and discussion about corporate
social responsibility was initiated during the 1992 Sustainable Development confer-
ence in Rio de Janeiro, Brazil. These conversations gained momentum in 1999 in
Davos, Switzerland, and at the Rio +10, in 2002 in Johannesburg, South Africa,
influenced by concern that there was a growing disconnect between mining and
minerals-related practices and the needs and values of society (MMSD 7 Questions
2002: iv). In this context, and in the face of growing social opposition, industry
formalized its commitment to responsible mining with the formation of the Metals,
Corporate Social Responsibility in the Mining Sector in Canada 581

Mining, and Sustainable Development (MMSD) initiative, which, in 2001, gave rise
to the International Council for Metals and Mining (ICMM).
In this chapter, CSR is defined as the initiatives that go “beyond philanthropy
and compliance to address the way companies manage their economic, social, and
environmental impacts and their stakeholder relationships in all their key spheres of
influence: the workplace, the marketplace, the supply chain, the community and the
public policy realm” (Kytle and Ruggie 2005: 9).

1 CSR and the Mining Sector in Canada

Canada is recognized as one of the world’s leading mining nations. The industry
provides direct employment to more than 400,000 and creates an additional 200,000
indirect jobs. There are exploration or mining activities taking place in every province
and territory in the country, with mineral production contributing $97 billion to the
country’s gross domestic product (GDP) in 2017. Vancouver, home to more than
700 exploration companies, is recognized as a global centre for mineral exploration.
Toronto is considered a global centre for mine finance: the Toronto Stock Exchange
has the largest number of listed mining companies of any stock exchange globally.
Over the years, Canadian companies have made significant progress in terms of
environmental and social performance. The concept of a social license to operate
(SLO)1 was introduced in 1997 by Canadian mining executive James Cooney in
response to a growing need to engage with communities and establish ongoing, posi-
tive relationships (Cooney 2017). Cooney’s Canadian colleagues Robert Boutilier,
Susan Joyce and Ian Thompson worked to take the idea of SLO from metaphor to
management tool—an effort that has been built upon by many other scholars.
Mining companies in Canada were the first in the world to develop an externally
verified performance system for sustainable mining practices with the creation of
the Mining Association of Canada’s (MAC) Towards Sustainable Mining (TSM)
tool. Established in 2004, TSM is built on three pillars—communities and people,
environmental stewardship, and energy efficiency. TSM focuses on providing the
tools to enable mining companies to meet society’s needs for minerals, metals and
energy products in the most socially, economically and environmentally responsible
way (MAC 2019). Participation in TSM is mandatory for all MAC members. TSM
reports, produced annually and verified by third parties, provide the public with
an overview of individual company performance in key environmental and social
areas. This award-winning initiative has been adopted in other resource-rich countries
including Argentina, the Philippines, Finland, Botswana and Spain, with a number
of additional countries considering implementation.
The Government of Canada has been clear that it expects Canadian mining compa-
nies operating both at home and abroad to adhere to the highest standards of social

1 SLO can be defined as having the tacit permission of governments and communities to undertake
exploration and mining activities.
582 J. Fraser and A. Xavier

responsibility. In 2009, the government produced a CSR strategy for the international
extractive sector entitled Building the Canadian Advantage. This was followed in
2015 with new legislation—the Extractive Sector Transparency Measures Act—and
by the creation, in January 2018, of the Canadian Office for Responsible Enter-
prise (CORE). In addition, Canada was one of the first countries to call for extrac-
tive companies to negotiate impact benefit agreements (or participation agreements)
with indigenous communities in order to provide compensation for the use of their
traditional lands.
Impact benefit agreements (IBAs) are binding agreements signed between mining
companies and indigenous communities whose traditional territories are impacted by
extractive exploration and operations, and are seen as a way to move towards a more
equitable and sustainable approach to mineral development. In Canada, IBAs are
a mandatory requirement under the Nunavut Land Claims Agreement. In the other
provinces and territories, IBAs are not legally required but are normatively expected.
The primary purpose of IBAs is to address the adverse effects of mining activity
on local communities and their environment, and to ensure that aboriginal peoples
benefit from the development of mineral resources (O’Faircheallaigh and Corbett
2005; Hitch 2006; Tuulentie et al. 2019). IBAs were previously confidential docu-
ments; however, new federal legislation requires disclosure of any payment of over
$100,000, and it is expected that transparency will strengthen the negotiation process
and associated outcomes.
IBAs can cover a range of issues: employment and business contracting oppor-
tunities, training and education (including apprenticeships and scholarships), equity
participation, revenue sharing, cash compensation, social and environmental moni-
toring and/or mitigation measures, archaeological site preservation, access to facil-
ities and infrastructure, information exchange, agreement management and dispute
resolution mechanisms. Recently negotiated IBAs are exploring new ways to support
sustainable development: the IBA concluded in early 2019 between the Nisga’a and
Ascot Gold for the Red Mountain project in British Columbia includes a commitment
to create a Business Opportunities Committee to identify, plan and build capacity
for local procurement. When strategically implemented and effectively monitored,
IBAs can be used to promote resource development in a manner that contributes to
the sustainability of the local environment and economy, and the social and cultural
fabric of affected communities.
At the provincial level, royalty revenue sharing agreements, such as those in use
in British Columbia, Ontario and the Yukon, provide another means for the financial
benefits of mining to be distributed back to communities impacted by the industry.
As well, many companies fund their own social responsibility and community invest-
ment programs, and work with stakeholders and rights holders to identify programs
and initiatives with which companies can become engaged.
These initiatives are both important and relevant but do not address all concerns. In
2019, three Canadian companies were the subject of lawsuits brought by claimants
from abroad that allege human rights abuses by the mining sector, and a number
of Canadian-owned mining operations have been the focus of mining-community
conflict, sometimes referred to as social risk.
Corporate Social Responsibility in the Mining Sector in Canada 583

2 Social Risk and Social Responsibility

As with other terms used in this chapter, the definition of social risk has been
contested. The definition most frequently endorsed by the extractive industry is that of
Kytle and Ruggie (2005) who write, “from a company’s perspective, social risk arises
when an empowered stakeholder takes up a social issue area and applies pressure on
the corporation (exploiting a vulnerability in the earnings drivers—e.g. reputation,
corporate image), so that the company will change policies or approaches in the
marketplace” (p. 6). Those who endorse this definition advocate for using CSR and
stakeholder engagement to collect intelligence then integrate the information into
the organization’s strategic risk paradigm. In other words, they advocate for aligning
social risk with other forms of risk management such as technical, legal, operating,
financial and political risk.
Others (for example, Lapalme 2003; Schafrik and Kazakidis 2011) have suggested
that this definition is not appropriate and argue that social risk is the risk that specific
operations pose to local communities. There is a growing movement that advo-
cates for the differentiation of social risk and business risk (Brereton and Parmenter
2006; Graetz and Franks 2015; Kemp et al. 2016). These scholars suggest that busi-
ness risk and social risk are conflated and that confusion over the definitions of
these terms has the potential to lead to greater conflict. They propose that social
risk should be defined as “the perceived or expected potential future threats to,
and unwanted impact on, individuals and groups of individuals arising from the
processes of social change precipitated by development interventions and the deci-
sions of external actors” (Graetz and Franks 2016: 587). This approach posits that
threats and unwanted impacts on a company’s operations, reputational capital arising
from operational decisions and strategies, and the exogenous response of other actors
to these decisions and strategies, should be labelled as business risk. Scholars (e.g.
Kemp et al. 2016) have suggested that the mining industry is equating social risk
with social acceptability risk, a term introduced by Miller and Lessard in 2001 that
stresses the importance of effective stakeholder engagement for reducing community
opposition to large engineering projects.
In this chapter, we endorse the position that regardless of how social risk is
defined—as a risk to people or as a risk to business—CSR represents an excellent
mechanism through which to address these challenges across the business enterprise
provided that it is an extension of global operations policies, and that CSR programs
are not discretionary expenditures or the target of cost-cutting activities, and that CSR
is strategically linked to core business. In other words, CSR needs to be embedded
as a strategic business imperative and a core element of risk management. This idea
raises a question to be considered in this chapter: which approaches to CSR are most
effective and how is success measured?
There are operational, financial, moral and ethical reasons for companies to create
processes to proactively engage with their communities of interests. Communities
and governments have high expectations that mining projects will deliver socio-
economic benefits to the regions where mining operations take place (Rooke 2016;
584 J. Fraser and A. Xavier

Fraser 2018). Conflicts and opposition to mining projects are often triggered when
communities feel that the engagement process is not adequate or that the local benefits
are limited or unfair (Kapelus 2002; Calvano 2008; Franks et al. 2014; Andrews
et al. 2017; Mercer-Mapstone et al. 2019). Domestic and international experiences
have taught mining companies the importance of consulting and engaging with local
communities of interest. Studies show that the cost of conflict for a company with a
capital expenditure of between US$3 and US$5 billion can go up to $20 million per
week (Franks et al. 2014).
In recent years, access to financing has become one more compelling reason for
project proponents to put robust community engagement strategies in place. Through
the International Finance Corporation (IFC), the World Bank Group was one of the
first organizations to establish performance standards with which companies seeking
project financing with IFC must comply.2 The performance standards align with the
IFC mission of promoting responsible investment in developing countries, reducing
poverty and improving people’s lives, as well as ensuring that projects are socially
and environmentally responsible.
In addition to the financial risks that can arise for a company for not having engaged
adequately with the communities with which they work, there are human rights risks
and impacts that can adversely affect communities of interest, trigger community
discontent and result in negative impacts on businesses. The United Nations Guiding
Principles on Business and Human Rights (UNDRIP), which was endorsed by the
UN Human Rights Council in 2011, provides a global standard for preventing and
addressing these risks and impacts. A specific right pertaining to indigenous peoples,
known as Free Prior and Informed Consent (FPIC), is embodied within UNDRIP
and is important for extractive companies to factor into their engagement and social
responsibility planning.
In Canada, national and provincial governments and industry organizations have
published tools and guidelines to promote proactive engagement with communities of
interest. These guidelines cover the entire mine life cycle from exploration to closure.
Some focus specifically on how to successfully undertake meaningful community
engagement with First Nations groups such as the Exploration and Mine Guide
for Aboriginal Communities published in 2008 by Natural Resources Canada in
partnership with the Prospectors and Development Association of Canada (PDAC),
the Mining Association of Canada (MAC) and the Canadian Aboriginal Minerals
Association.
Over the years, academia, governments, communities and industry have enhanced
their understanding and improved their practices regarding community engagement
in mining projects (Kapelus 2002; Kemp et al. 2006; Lin et al. 2015a, b; Delannon
et al. 2016). It is acknowledged as common practice that project proponents should

2 Other relevant CSR standards include the OECD Guidelines for multinational enterprises, UN
Guiding Principles, Global Reporting Initiative, ISO 26000—Social responsibility, Voluntary Prin-
ciples, United Nations Global Compact, Equator Principles, Extractive Industries Transparency
Initiative, UN Principles for Responsible Investment.
Corporate Social Responsibility in the Mining Sector in Canada 585

engage local communities as early as possible (Zandvliet and Anderson 2009). Simi-
larly, it is expected that national and local governments inform, consult with, and
secure spaces for community participation in the early days of exploration and mining
activities. In addition to “when” community engagement takes place, another critical
piece of the community engagement puzzle is the “how” the engagement takes place
(Rooke 2016).
Once again, there are a variety of tools and guidelines available to support engage-
ment planning. Most agree that the first step for project proponents is to build an
understanding of the communities in which they hope to operate. Publicly avail-
able documents, such as official community plans, council minutes and municipal
budgets, can be reviewed to learn about community-identified issues and priorities.
It is also important to be able to identify who to talk to within the communities
of interest, to determine how best to conduct those talks, and to plan an engage-
ment timeline that recognizes that building relationships takes longer than building a
mine or pipeline. A strategic approach to community engagement should be viewed
as an opportunity to develop trust, meaningful relationships and partnerships with
communities of interest.
The “how” component recognizes that there is a process to be followed in order
for engagement to take place in a proper way. The process may be preceded by
observing cultural rituals, traditions and practices that can be overlooked if a project
proponent’s representatives are driven by a set of short-term performance indicators
when community engagement is approached as simply another box to be checked
on the company’s engagement checklist (Delannon et al. 2016).
Leading practices with respect to successful engagement suggest that the process
should be co-designed and constructed together with the communities of interests
(Bowen et al. 2010). Furthermore, “Co-management relationships are now emerging
as one form of combining community, government, and companies in order to
achieve greater adaptive capacity for resource management” (Rooke 2016: 40). Ulti-
mately, early, proactive and meaningful engagement with communities contributes to
reducing financial and social risks to companies and mining projects, and facilitates
access to financing and supporting companies’ social license to operate.
An example of co-management is the Elk Valley Environmental Monitoring
Committee. The committee is comprised of representatives from Teck, the British
Columbia Ministry of Environment and Climate Change Strategy (ENV), the
Ministry of Energy, Mines, and Petroleum Resources (EMPR) and representatives
from the Ktunaxa Nation Council (KNC) as well as the Interior Health Authority
(IHA). An independent scientist and a professional facilitator are also on the
committee, which monitors selenium concentrations in the biota. The Environmental
Monitoring Committee (EMC) was created in 2015 as a requirement of the Envi-
ronmental Management Act (EMA) permit issued to Teck. The committee reviews
the monitoring and reporting submissions that are required under the permit and
provides technical advice to Teck and the director of the Ministry of Environment
and Climate Change Strategy.
586 J. Fraser and A. Xavier

3 CSR Challenges Facing Extractives Industries

The issue of trust is a concern for extractive projects around the world. Trust is based
on many factors, including respect, inclusivity, transparency and consistency, and
is an essential requirement for local communities’ acceptance of mining projects.
Unfortunately, many communities, both in Canada and abroad, distrust mining
companies and their related governmental institutions (Horowitz 2010; Andrews
et al. 2017; Conde and Le Billon 2017; Moffat et al. 2015). This lack of trust has been
identified as a trigger for conflict and a factor in escalating confrontation (Muradian
et al. 2003; Calvano 2008).
The Edelman Trust Barometer, which surveys more than 30,000 people annually
across 27 countries consistently finds that trust in business, industry and government,
is low. In Canada, for example, trust inequality is at a record high with more than
50% of participants holding the belief that the system is failing them, and with CEOs
and government officials being seen as the least trusted spokespeople amongst the
survey participants (Trust Barometer 2019).
Andrews et al. (2017) identified weak government capacity, corruption and lack
of transparency as key factors that can lead to distrust in government representa-
tives, and which contribute to negative impressions of companies that appear to be
working with government personnel. Moreover, Slack (2012) argues that companies
that do not integrate CSR into their business models end up creating a contradic-
tion between CSR rhetoric and its implementation. This is problematic because
while trust is difficult to develop, it can be compromised or lost with one unethical
or untrustworthy action. In today’s hyper-connected world, incidents of deficient
performance or perceived corporate malfeasance can become known well beyond
immediately impacted stakeholders. Furthermore, while business expects an increase
in trust amongst stakeholders and rights holders by delivering CSR-related activi-
ties, its impacts are limited by the fact that communities often feel that they have not
participated in the process (Conde and Le Billion 2017; Majer 2013).
A shift towards community inclusion in natural resource governance processes
began a few decades ago and manifests today in the form of co-management or
collaborative governance, where the extractive companies establish joint decision-
making processes with communities, rights holders and government (Bowen et al.
2010; Delannon et al. 2016). Successful partnerships and practices of community
inclusion “encompasses mutual influence, with a careful balance between synergy
and individual autonomy, which incorporates mutual respect, equal participation in
decision making, mutual accountability and transparency” (Zurba 2017: 6).
CSR-related activities can result in trust building, provided these activities are
inclusive and participatory. To be effective, CSR needs to deliver results both in the
short term and contribute to the sustainable development of the region, which often
takes time and requires a long-term perspective. Traditionally, many companies have
focused their CSR programs on philanthropic investments and have responded to
community requests for the company to support short-term projects with direct cash
contributions or by providing funding to improve infrastructure or to build roads,
Corporate Social Responsibility in the Mining Sector in Canada 587

hospitals or schools (Frynas 2005; Jenkins and Obara 2006) While philanthropic
investment can improve quality of life for local residents over the short term, many
mining companies, governments and communities have struggled with the fact that
the maintenance of these facilities and the continuation of the services that they
provide are jeopardized when the mine closes either temporarily, as can happen
when commodity prices go down, or permanently, when the resources are exhausted
or are no longer worth extracting (Xavier 2013; Xavier et al. 2015).
An unintended consequence of this traditional approach is that communities can
start to rely on philanthropic investment and look for short-term solutions to the
detriment of long-term solutions that are oriented to contributing to the sustainable
development of the region (Frynas 2005; Bainton and Holcombe 2018). As such,
that which may have made business sense in the early days of a project turns into
a problem with unfulfilled expectations on the part of all parties involved (Taarup-
Esbensen 2019). This situation can become increasingly challenging for compa-
nies since communities and governments frequently expect that the private sector is
responsible for resolving the problem.
Such a situation can lead to resentment, a withdrawal of interest from collabo-
ration, and the erosion of trust between the parties, which could ultimately impede
the parties’ ability to think collaboratively about the design and implementation of
transformative activities and plans for contributing to the sustainable development
of the region.
It is recognized that both old and new mining jurisdictions expect transactional
short-term, philanthropic, easy cash solutions to address community issues, and it
would be unwise for a project proponent to dismiss this situation. Nevertheless,
leading practices in CSR are thorough and purposeful with respect to striving to find
a balance between transactional initiatives and strategies and programs that lead to
transformative outcomes (Zvarivadza 2018; Tuulentie et al. 2019).

4 Approaches to CSR: From Transactional to Transitional

to Transformative

As noted earlier, mining companies are increasingly recognizing the importance

of engaging all stakeholders, not just shareholders or institutional investors, and of
building collaborative relationships with communities proximal to resource deposits.
Different companies employ a variety of CSR strategies at various stages of
the mine life cycle. Approaches are often dictated by the financial and personnel
resources that are available for supporting social responsibility and by the needs of
the communities of interest. Three common categorizations of CSR are illustrated
in Fig. 1.
Transactional engagement provides information or resources to a community
through arm’s length transactions. Philanthropy, employee volunteerism and commu-
nity investment are three examples of transactional, or one-way, engagement. This
588 J. Fraser and A. Xavier

Fig. 1 CSR continuum: moving from transactional engagement through transitional engagement
and arriving at transformative CSR. Adapted from “Strategy and Society: The link between compet-
itive advantage and corporate social responsibility”—Michael Porter & Mark Kramer, HBR, Jan–
Feb 2011 and Network for Business Sustainability Engaging the Community: A Systematic Review
Sept 2008

approach is best described as traditional CSR, whereby companies redistribute wealth

by investing in initiatives and infrastructure that community stakeholders view as
important but that has little relevance to core business. For example, opportunities for
this type of philanthropy include swimming pools, daycare centres, medical equip-
ment and schools. Investing in transactional CSR has a strong appeal: opportunities
are brought forward by the community, the short-term focus (typically one to five
years) allows the transaction to be quickly executed and disclosed to stakeholders,
and the common objective of shareholders who are looking for short-term financial
reports is also met.
One challenge with respect to transactional CSR that is relevant to the mining
sector is the belief that companies should not redistribute wealth created via irre-
sponsible practices. In other words, compensating communities for environmental
and social impacts that have arisen from deficient performance is not aligned with
socially responsible behaviour. Other challenges regarding investments that are based
on community wish lists are that a company may experience that they are chasing a
moving target; the investment may only fulfil the expectations of a small minority;
and philanthropy can create situations where the community cannot afford the annual
operating costs of the facility built by corporate sponsorship (Rodríguez et al. 2014).
Finally, attempting to build relationships based upon transactional CSR may increase
the risk of conflict both because stakeholders compete for funding, and because the
Corporate Social Responsibility in the Mining Sector in Canada 589

more vocal and vociferous the community, the more attention and money it may
receive from company officials, who tend to respond more immediately to aggressive
demands and threats than to polite requests (Zandvliet 2004). Nevertheless, transac-
tional CSR has an important role to play. Communities may expect that wealth from
resource extraction should be redistributed via philanthropy and may be unwilling
to abandon it, especially before trust is built with company representatives.
Transitional CSR, the second stage in the continuum, is characterized by two-
way communication, consultation and collaboration and sees companies investing in
projects that yield benefits to both the business and the community. This type of CSR,
sometimes described as “doing well by doing good” (Aguilera et al. 2007), is seen as
a more strategic approach than pure philanthropy since there is often a link between
the mining company’s business and the communities in which it operates. A criticism
of the transitional approach is that companies may report progress on issues such as
greenhouse gas reduction (GHG), recycling, local procurement, local hiring, energy
conservation and community engagement, without changing the underlying business
practices that cause environmental and social degradation (Stubbs and Cocklin 2008).
Despite these shortcoming, as with transactional engagement, there is a time and place
in the mining cycle when transitional CSR activities can add value. One avenue to
explore involves the ways in which the CSR activities of mining and oil and gas can
align and contribute to communities, and municipal and regional development plans.
Implementing CSR activities that respond to these plans demonstrates commitment
to local issues and avoids the risks of long wish lists that, in many cases, are based
on wants rather than needs.
The third approach is the concept of transformative CSR in which value is created
for both the mining company and the community. Since transformational CSR is
anchored in strategy, results can take longer to achieve. This is due to the need to
prioritize projects aligned with core business, and finding and recruiting partners to
deliver the projects requires trust. Mining projects, where entirely different teams
of people are often used to find, then build, then operate the mine, are particularly
susceptible to changes in the social chain of custody.3 Changes in company personnel
can erode the trust held by community stakeholders, and can also cause CSR initia-
tives to be re-evaluated, adjusted, or abandoned. An example of how such an issue
can be addressed along the CSR continuum is offered in Table 1.
As discussed, there is an expectation that project proponents will engage and
develop relationships with their communities of interests. Many companies purpose-
fully dedicate time and resources to meeting such expectations and create channels
and ongoing spaces for community voices de be heard. Some of these spaces include
participatory processes that allow for the joint oversight of activities, results and the
impacts of mining operations, both with respect to the environment and commu-
nities. Participatory monitoring involves the collaborative process of collecting
and analysing data, as well as communicating results with the aim of identifying
and solving problems together (CAO 2008). As such, participatory environmental

3 Social
chain of custody refers to efforts to maintain reputation capital and social commitments
made throughout the life cycle of a project.
590 J. Fraser and A. Xavier

Table 1 CSR approaches within the continuum. Example illustrating how companies adopting
different CSR approaches might approach dealing with infrastructure issues
CSR approaches using the example of infrastructure
Transactional Transitional Transformative
Donation to capital campaign Augment mine infrastructure Collaborative partnership to
to build infrastructure, for to provide community design shared infrastructure:
example, a recreational facility benefits: e.g. installing a cell e.g. a mine waste water
for the community tower to provide service to the treatment facility that provides
mine and adjacent potable water to adjacent
communities, or road building communities
and maintenance to service the
mine and adjacent
communities
No stakeholder engagement Limited stakeholder Integrated stakeholder
engagement engagement/program
ownership
Limited strategic relevance for Strategic relevance recognized CSR is strategic imperative
business
No correlation between money Little correlation between Addresses macro-economic
spent and business success money spent and business conditions to benefit business
success and society

monitoring programs, as well as socio-economic monitoring programs, have been

increasingly adopted as mechanisms through which to foster and secure community
participation and engagement in the decision-making process.
From the company’s point of view, in addition to allowing it to respond to the
concerns of the community, participatory environmental monitoring can also lead
to earning the community’s approval. Furthermore, the participatory spaces that
are created can facilitate dialogue and create trust between the company and its
communities of interests. This approach can also provide community members with
learning opportunities, skill and training in new technologies (Pareja et al. 2017).
Environmental monitoring programs are concerned with issues related to the fauna
and flora of a region, and most often focus on water quality and quantity, dust, animal
migration, biodiversity and greenhouse gas emissions.
Following a similar pattern, companies are setting up joint programs through
which to monitor and evaluate the socio-economic benefits that a mining project
brings to a region. In common with participatory environmental monitoring, the aim
of socio-economic monitoring is to understand a project’s contributions to the local
people, to identify opportunities through which to maximize benefits, and to find and
address issues that may be limiting the communities’ full potential to benefit from the
existence of a mine operation. Socio-economic monitoring programs often examine
issues related to local employment, training, education, indigenous employment and
local businesses development.
In general, participatory monitoring programs can help companies, governments
and communities with the early identification of concerns so that they can be corrected
Corporate Social Responsibility in the Mining Sector in Canada 591

and mitigated in a timely manner. Such programs can also help establish baseline
information and allow communities to participate in the decision-making process
related to their local environment and socio-economic future. However, if these
participatory monitoring programs are perceived as token exercises without rele-
vant participation from the communities of interest, it can lead to discontent and
mistrust (Himley 2014).
There are many examples of CSR approaches across the continuum described in
Fig. 1. It is important to recognize that different strategies can be used at different
stages of the life cycle of a mine—from exploration through to closure. To illustrate
how transformative CSR can be employed throughout the life of a mining project,
three applied examples are offered.

4.1 Exploration: Early Engagement to Creating and Sharing

Value

The exploration phase is the time when communities have their first contact with
prospective miners. These first impressions can make or break trust, which is a crit-
ical attribute for negotiating company–community relationships. Erdene Resource
Development Corporation, a Canadian exploration company, is working to advance a
gold discovery towards a mine development in Mongolia’s Gobi Desert. The nearest
town is about 90 km away from the exploration site and was built in an area with no
access to potable water. Due to Erdene’s community engagement, company personnel
were aware of the town’s interest in improving its access to potable water. In 2017,
when Erdene commissioned hydrogeological work to source a water supply for the
potential mine, the company offered to expand the area for the water investigation to
include the town. This led to the discovery of a potable water source three kilometres
from the town centre. Local municipal officials and Erdene personnel then worked
together to drill the new water well, which now provides drinking water to local
residents and replaces the need to truck potable water from the provincial capital,
more than 200 km to the north.

4.2 Operations: First Nations and Local Procurement

Practices in Saskatchewan’s Uranium Industry

Cameco’s mining operations are located in the northern part of the Canadian province
of Saskatchewan. The company was one of the first in Canada to sign collaboration
agreements with communities near its operations, and its corporate social respon-
sibility strategy aims to build relationships, strengthen partnerships and secure the
support of nearby communities. Cameco’s strategy is focused on workforce and
592 J. Fraser and A. Xavier

business development, community engagement and investment, as well as envi-

ronmental stewardship. Through its Northern Preferred Supplier Program, Cameco
provides guidelines to develop northerners’ capacity to provide safe, high-quality
and cost-effective goods and services. Since 2004, $3.76 billion worth of goods
have been procured locally for the mine. In 2018, 89% of the mine’s goods and
services including catering, transportation, general construction and maintenance
support, were supplied by local businesses. In addition to contributing to local busi-
ness development in the region, Cameco recognizes that local suppliers reduced the
company’s operational risks (Partnerships in Procurement—understanding aborig-
inal business engagement in the Canadian mining industry (2016) https://www.ccab.
com/research/partnerships-in-procurement-2016-ccab-and-msv/).

4.3 Closure: New Gold’s Cerro San Pedro Mine

The impending closure of New Gold’s gold mine was of concern to the 4000 residents
living in the municipality of Cerro de San Pedro in central Mexico: the mine was the
principal employer in the region and a key economic contributor to the community.
As the end of mining approached, the importance of ensuring that site workers and the
surrounding community would be able to transition to a post-mining economy was
recognized as a core planning need, and provided the impetus for the development
of the Cerro San Pedro Integrated Mine Closure Program. The program was co-
designed with the community with the aim of empowering local citizens to play an
integral role in designing the closure plan and to establish a mechanism through
which to support economic diversification. This community engagement strategy
was recognized with a 2019 TSM Award of Excellence for community engagement
from the Mining Association of Canada.

5 The Way Forward

Corporate social responsibility in the extractives sector has advanced significantly

in the last 20 years. Canadian companies and governments have made contributions
towards this progress by establishing concepts such as social license to operate, a
term that is perhaps even more relevant today than it was when introduced in the
late 1990s. The importance of a social license is evidenced by the fact that more
than 50% of mining executives surveyed by Ernst Young in 2018 predicted that SLO
would be the most significant business risk facing the extractives sector in the next
two to three years. As noted earlier in this chapter, made-in-Canada toolkits and
guidance initiatives are available to support companies wishing to demonstrate their
commitment to social responsibility. Industry’s use of the TSM reporting protocol
provides further evidence of the sector’s broad acceptance of the idea that extractives
must deliver benefits to stakeholders and rights holders, not just shareholders.
Corporate Social Responsibility in the Mining Sector in Canada 593

Nevertheless, there remains room for improvement. Media coverage and social
networks illustrate that extractive companies—regardless of country of origin—
continue to fail to meet social expectations in multiple jurisdictions around the
world.
One part of the challenge for oil and gas and mining companies is that they need
to better understand social risk. Some have argued that industry’s tendency to view
social risk as a business risk is problematic (Graetz and Franks 2014; Kemp et al.
2016). These authors suggest that there are in fact two separate risks—risks to people,
and risks to the project, and that conflating the two can lead to problems. For mining
companies to be able to properly assess “social” risk, we believe that it is important
for CSR to be considered as a core and strategic business function. To accomplish
this objective, companies will need to break down entrenched organizational silos,
increase collaboration and provide training for cross-functional teams. Assembling
an integrated team to address social issues should result in stronger internal alignment
and create synergy across business lines. This alignment should then enable more
effective social risk management and support the identification of opportunities for
company–community collaboration to create value.
The idea of creating value is an important one. Extractives contribute much to
society that is valued, including materials required to transition to a low-carbon
economy. Despite this, the industry is not commonly viewed positively by resource-
rich communities and governments. Transformative approaches to CSR offer an
opportunity through which the extractives sector can be realigned with the values
of society, as well as the potential to rebuild trust through a new social contract. An
economic management strategy, called creating shared value (CSV), is one approach
companies could embrace to ensure the extractive sector contributes to the long-term
sustainable development of the communities and countries in which they operate.
The CSV terminology was introduced by Porter and Kramer (2011) and
establishes a framework for identifying opportunities to improve socio-economic
outcomes and related core business performance (e.g. decreased operational costs,
enhanced productivity, and/or a predictable and stable business environment). The
objective of CSV is to find the points of intersection between the needs of business and
society, and then build collaborative partnerships to address complex social problems
that are at the root of market failures—situations in which socio-economic conditions
prevent conventional business models from succeeding (Kramer and Pfister 2016).
In the mining sector, points of intersection between what local communities need
and what miners need to be successful are not hard to find. For example, both benefit
from an educated workforce and healthy communities, both need access to water, both
require energy and infrastructure. Creating shared value does not replace corporate
social responsibility. Instead, it brings business strategy into the equation, creating
the opportunity for more relevant and impactful contributions from companies.
Efforts to prove the connection between financial performance and performance
on social issues have proven problematic for many companies with CSR frequently
viewed as a sunk cost, one that offers little, or a questionable, return on investment.
In this chapter we have argued that CSR needs to be reframed as a strategic business
imperative. The objective of a strategic approach to CSR is for extractive companies
594 J. Fraser and A. Xavier

to build more positive relationships with communities that host operations, reduce
conflict and increase the probability that projects can earn the approval required
to build and operate facilities with impacts on society and the environment. We
believe that, moving forward, the best-practice examples of CSR will share three
features. First, CSR will be business strategy with parallel goals: improving company
performance while delivering economic value to host communities. Second, CSR
programs will focus on issues affecting both company and community, recognizing
that the more closely tied a social issue is to a company’s business, the greater the
opportunity to leverage the firm’s resources and benefit society. Third, collaboration
with stakeholders will improve business performance while delivering tangible social
benefits.

List of Resources, Best Practice Documents and Websites

Amor-Esteban, V., Galindo-VillardónM-P, García-Sánchez I.-M., & David, F. (2019). An extension

of the industrial corporate social responsibility practices index: New information for stakeholder
engagement under a multivariate approach. Corporate Social Responsibility and Environmental
Management, 2019(26), 127–140.
Amor-Esteban, V., & Galindo-VillardónM-P, García-Sánchez I.-M. (2018). Useful information for
stakeholder engagement: A multivariate proposal of an Industrial Corporate Social Responsibility
Practices Index. Sustainable Development, 2018(26), 620–637.
Bodruzic, D. (2015). Promoting international development through corporate social responsibility:
The Canadian government’s partnership with Canadian mining companies. Canadian Foreign
Policy Journal, 21(2), 129–145.
Böhling, K., Murguía, D. I., & Godfrid, J. (2019). Sustainability reporting in the mining sector:
Exploring its symbolic nature. Business and Society, 58(1), 191–225.
Buchanan, S., & Marques, J. C. (2018). How home country industry associations influence MNE
international CSR practices: Evidence from the Canadian mining industry. Journal of World
Business, 53(1), 63–74.
Chollet, P., & Sandwidi, B. W. (2018). CSR engagement and financial risk: A virtuous circle?
International evidence. Global Finance Journal, 38, 65–81.
Conde, M. (2017). Resistance to mining. A review. Ecological Economics, 132, 80–90.
Conde, M., & Le Billon, P. (2017). Why do some communities resist mining projects while others
do not? The Extractive Industries and Society, 4(3), 681–697.
Corrigan, C. C. (2018). Corporate social responsibility and local context: The case of mining in
Southern Africa. Resources Policy, 55(C), 233–243.
Craik, N., Gardner, H., & McCarthy, D. (2017). Indigenous-corporate private governance and
legitimacy: Lessons learned from impact and benefit agreements. Resources Policy, 52, 379–388.
Dashwood, H. (2007). Canadian mining companies and corporate social responsibility: Weighing
the impact of global norms. Canadian Journal of Political Science, 40(1), 129–156.
Dashwood, H. S. (2014). Sustainable development and industry self-regulation: Developments in
the global mining sector. Business and Society, 53(4), 551–582.
Davis, G. A., & Manzano, O. (2018). The extractive industries in Central America. The Extractive
Industries and Society, 5(3), 215–217.
de Lange, W., de Wet, B., Haywood, L., Stafford, W., Musvoto, C., & Watson, I. (2018). Mining at
the crossroads: Sectoral diversification to safeguard sustainable mining? The Extractive Industries
and Society, 5(3), 269–273.
Corporate Social Responsibility in the Mining Sector in Canada 595

de Loë, R. C., Murray, D., & Brisbois, M. C. (2016). Perspectives of natural resource sector firms
on collaborative approaches to governance for water. Journal of Cleaner Production, 135, 1117–
1128.
Devenin, V. (2018). Collaborative community development in mining regions: The Calama Plus
and Creo Antofagasta programs in Chile. Resources Policy.
Devenin, V., & Bianchi, C. (2018). Soccer fields? What for? Effectiveness of corporate social respon-
sibility initiatives in the mining industry. Corporate Social Responsibility and Environmental
Management, 25(5), 866–879.
Diavik Diamond Mines Inc. (1999). Diavik Diamonds Project Socio-Economic Monitoring
Agreement (Rep.)
Dilling, P. (2016). Reporting on long-term value creation—The example of public canadian energy
and mining companies. Sustainability, 8(9), 938.
Engineers Without Borders Canada and Canadian Council for Aboriginal Business. Partnerships in
procurement: Understanding aboriginal business engagement in the Canadian mining industry
(Rep.).
Fitzpatrick, P., Fonseca, A., & McAllister, M. L. (2011). From the whitehorse mining initiative
towards sustainable mining: Lessons learned. Journal of Cleaner Production, 19(4), 376–384.
Fontana, E. (2018). Corporate social responsibility as stakeholder engagement: Firm–NGO collab-
oration in Sweden. Corporate Social Responsibility and Environmental Management, 25(4),
327–338.
Frederiksen, T. (2018). Corporate social responsibility, risk and development in the mining industry.
Resources Policy, 59, 495–505.
Frederiksen, T. (2019). Political settlements, the mining industry and corporate social responsibility
in developing countries. The Extractive Industries and Society, 6(1), 162–170.
Freeman, R. E., & Dmytriyev, S. (2017). Corporate social responsibility and stakeholder theory:
Learning from each other. Symphonya. Emerging Issues in Management, 1, 7–15.
Freeman, R. E., Velamuri, S. R., & Moriarty, B. (2006). Company stakeholder responsibility: A
new approach to CSR. Business Roundtable Institute for Corporate Ethics, 19.
Gibson, G., & Klinck, J. (2005). Canada’s resilient North: The impact of mining on aboriginal
communities. Pimatisiwin: A Journal of Aboriginal and Indigenous Community Health, 3(1),
116–139.
Gorman, M. R., & Dzombak, D. A. (2018). A review of sustainable mining and resource manage-
ment: Transitioning from the life cycle of the mine to the life cycle of the mineral. Resources,
Conservation and Recycling, 137, 281–291.
Government of the Northwest Territories. (2014). Diavik socio-economic monitoring agreement
(Rep.).
Graetz, G. (2015). Energy for whom? Uranium mining, indigenous people, and navigating risk and
rights in Australia. Energy Research & Social Science, 8, 113–126.
Gustafsson, M. T., & Scurrah, M. (2019). Unpacking the extractivist state: The role of weak state
agencies in promoting institutional change in Peru. The Extractive Industries and Society, 6(1),
206–214.
Haslam, P. A., Tanimoune, N. A., & Razeq, Z. M. (2018). Do Canadian mining firms behave worse
than other companies? Quantitative evidence from Latin America. Canadian Journal of Political
Science/Revue canadienne de science politique, 51(3), 521–551.
Heisler, K., & Markey, S. (2013). Scales of benefit: Political Leverage in the negotiation of corporate
social responsibility in mineral exploration and mining in Rural British Columbia, Canada. Society
& Natural Resources, 26(4), 386–401.
Horowitz, L. S. (2010). “Twenty years is yesterday”: Science, multinational mining, and the political
ecology of trust in New Caledonia. Geoforum, 41(4), 617–626.
Idemudia, U., & Kwakyewah, C. (2018). Analysis of the Canadian national corporate social respon-
sibility strategy: Insights and implications. Corporate Social Responsibility and Environmental
Management, 25(5), 928–938.
596 J. Fraser and A. Xavier

Intergovernmental Working Group on the Mineral Industry. (2016). Good practices in community
engagement and readiness (Rep.).
Jeswiet, J. (2017). Including towards sustainable mining in evaluating mining impacts. Procedia
CIRP, 62, 494–499.
Karakaya, E., & Nuur, C. (2018). Social sciences and the mining sector: Some insights into recent
research trends. Resources Policy, 58, 257–267.
Kasimba, S. A., & Lujala, P. (2019). There is no one amongst us with them! Transparency and
participation in local natural resource revenue management. The Extractive Industries and Society,
6(1), 198–205.
Khalid, S. M., Atkins, J., & Barone, E. (2019). Sartrean bad-faith? Site-specific social, ethical
and environmental disclosures by multinational mining companies. Accounting, Auditing &
Accountability Journal, 32(1), 55–74.
Kivinen, S., Vartiainen, K., & Kumpula, T. (2018). People and post-mining environments: PPGIS
mapping of landscape values, knowledge needs, and future perspectives in Northern Finland.
Land, 7(4), 151.
Knierzinger, J., & Sopelle, I. T. I. (2019). Mine closure from below: Transformative movements in
two shrinking West African mining towns. The Extractive Industries and Society, 6(1), 145–153.
Laplante, J. P., & Nolin, C. (2014). Consultas and socially responsible investing in Guatemala: A
case study examining Maya perspectives on the indigenous right to free, prior, and informed
consent. Society & Natural Resources, 27(3), 231–248.
Larsen, R. K., Österlin, C., & Guia, L. (2018). Do voluntary corporate actions improve cumulative
effects assessment? Mining companies’ performance on Sami lands. The Extractive Industries
and Society, 5(3), 375–383.
Lawrence, R., & Moritz, S. (2019). Mining industry perspectives on indigenous rights: Corporate
complacency and political uncertainty. The Extractive Industries and Society, 6(1), 41–49.
Li, X., Wang, S. S., & Wang, X. (2017). Trust and stock price crash risk: Evidence from China.
Journal of Banking & Finance, 76, 74–91.
Lin, P. T., Li, B., & Bu, D. (2015a). The relationship between corporate governance and community
engagement: Evidence from the Australian Mining Companies. Resources Policy, 43, 28–39.
Littlewood, D. (2014). ‘Cursed’ communities? Corporate social responsibility (CSR), company
towns and the mining industry in Namibia. Journal of Business Ethics, 120(1), 39–63.
Louw, H., & Marais, L. (2018). Mining and municipal finance in Kathu, an open mining town in
South Africa. The Extractive Industries and Society, 5(3), 278–283.
Lujala, P. (2018). An analysis of the extractive industry transparency initiative implementation
process. World Development, 107(2018), 358–381.
Majer, M. (2013). The practice of mining companies in building relationships with local
communities in the context of CSR formula. Journal of Sustainable Mining, 12(3), 38–47.
Manning, S. M. (2016). Intersectionality in resource extraction: A case study of sexual violence
at the Porgera mine in papua New Guinea. International Feminist Journal of Politics, 18(4),
574–589.
McLennan, S., & Banks, G. (2019). Reversing the lens: Why corporate social responsibility is
not community development. Corporate Social Responsibility and Environmental Management,
26(1), 117–126.
Nicholls, A., & Dees, J. G. (2015). Social Innovation. International encyclopedia of the social &
behavioral sciences (2nd ed., pp. 355–361)
O’Faircheallaigh, C. (2013). Extractive industries and indigenous peoples: A changing dynamic?
Journal of Rural Studies, 30, 20–30.
Owen, J. R., & Kemp, D. (2014). ‘Free prior and informed consent’, social complexity and the
mining industry: Establishing a knowledge base. Resources Policy, 41, 91–100.
Papillon, M., & Rodon, T. (2017). Proponent-indigenous agreements and the implementation of the
right to free, prior, and informed consent in Canada. Environmental Impact Assessment Review,
62, 216–224.
Corporate Social Responsibility in the Mining Sector in Canada 597

Saenz, C. (2018). The context in mining projects influences the corporate social responsibility
strategy to earn a social licence to operate: A case study in Peru. Corporate Social Responsibility
and Environmental Management, 25(4), 554–564.
Selmier, W. T., II, Newenham-Kahindi, A., & Oh, C. H. (2015). “Understanding the words of
relationships”: Language as an essential tool to manage CSR in communities of place. Journal
of International Business Studies, 46(2), 153–179.
Slack, K. (2012). Mission impossible?: Adopting a CSR-based business model for extractive
industries in developing Countries. Resources Policy, 37(2), 179–184.
St-Laurent, G. P., & Le Billon, P. (2015). Staking claims and shaking hands: Impact and benefit
agreements as a technology of government in the mining sector. The Extractive Industries and
Society, 2(3), 590–602.
Stapenhurst, F., Karakas, F., Sarigöllü, E., Jo, M. S., & Draman, R. (2017). The supply and demand
sides of corruption: Canadian extractive companies in Africa. Canadian Foreign Policy Journal,
23(1), 60–76.
Vivoda, V., & Kemp, D. (2019). How do national mining industry associations compare on
sustainable development? The Extractive Industries and Society, 6(1), 22–28.
Wang, J., Huang, X., Hu, K., & Li, X. (2018). Evaluation on community development programs in
mining industry: A case study of small and medium enterprise in China. Resources Policy, 59,
516–524.
Wasylycia-Leis, J., Fitzpatrick, P., & Fonseca, A. (2014). Mining communities from a resilience
perspective: Managing disturbance and vulnerability in Itabira, Brazil. Environmental manage-
ment, 53(3), 481–495.

References

Aguilera, R. V., Rupp, D. E., Williams, C. A., & Ganapathi, J. (2007). Putting the S back in
corporate social responsibility: A multilevel theory of social change in organizations. Academy
of Management Review, 32(3), 836–863.
Bainton, N., & Holcombe, S. (2018). A critical review of the social aspects of mine closure.
Resources Policy, 59, 468–478.
Barnett, M. L. (2007). Stakeholder influence capacity and the variability of financial returns to
corporate social responsibility. Academy of Management Review, 32(3), 794–816.
Barnett, M. L. (2019). The business case for corporate social responsibility: A critique and an
indirect path forward. Business & Society, 58(1), 167–190. https://doi.org/10.1177/000765031
6660044.
Barnett, M. L., & Salomon, R. M. (2012). Does it pay to be really good? Addressing the shape of the
relationship between social and financial performance. Strategic Management Journal, 33(11),
1304–1320.
Blowfield, M., & Frynas, J. G. (2005). Editorial setting new agendas: critical perspectives on
corporate social responsibility in the developing world. International affairs, 81(3), 499–513.
Bowen, F., Newenham-Kahindi, A., & Herremans, I. (2008). Engaging the community: A systematic
review. Research Network for Business Sustainability, 1(1).
Bowen, F., Newenham-Kahindi, A., & Herremans, I. (2008b). Engaging the community: A system-
atic review. A synthesis of academic and proactionner knowledge on best practices in community
engagement. London, Ontario: Research Network for Business Sustainability.
Bowen, F., Newenham-Kahindi, A., & Herremans, I. (2010). When suits meet roots: The antecedents
and consequences of community engagement strategy. Journal of Business Ethics, 95(2), 297–
318.
Brereton, D., & Parmenter, J. (2006). Water, communities and mineral resource development—
understanding the risks and opportunities. Proceedings of Water in Mining, 14–16
598 J. Fraser and A. Xavier

Calvano, L. (2008). Multinational corporations and local communities: A critical analysis of conflict.
Journal of Business Ethics, 82(4), 793–805.
CAO, J. (2008). Participatory water monitoring; A guide for preventing and managing conflict.
The Office of the Compliance Advisor/Ombudsman. http://www.caoombudsman.org/howwew
ork/advisor/documents/watermoneng.pdf. Accessed on April 16, 2019.
Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy
of Management Review, 4(4), 497–505.
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management
of organizational stakeholders. Business Horizons, 34(4), 39–48.
Carroll, A. B. (2016). Carroll’s pyramid of CSR: Taking another look. International Journal of
Corporate Social Responsibility, 1(1), 3.
Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A
review of concepts, research and practice. International Journal of Management Review, 12(1),
85–105.
Cooney, J. (2017). Reflections on the 20th anniversary of the term ‘social license’. Journal of Energy
& Natural Resources Law, 1–4. https://doi.org/10.1080/02646811.2016.1269472
Delannon, N., Raufflet, E., & Baba, S. (2016). Corporate community engagement strategies and
organizational arrangements: A multiple case study in Canada. Journal of Cleaner Production,
129, 714–723.
Edelman, Inc. (2019). Edelman trust barometer (Rep.)
Engineers Without Borders Canada and Canadian Council for Aboriginal Business. Partnerships in
procurement: Understanding aboriginal business engagement in the Canadian mining industry
(Rep.).
Foreign Affairs Trade and Development Canada. (2018, January 17). Doing business the canadian
way: A strategy to advance corporate social responsibility in Canada’s extractive sector abroad.
Retrieved from https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-
domaines/other-autre/csr-strat-rse.aspx?lang=eng
Franks, D., Davis, R., Bebbington, A., Ali, S., Kemp, D., & Scurrah, M. (2014). Conflict trans-
lates environmental and social risk into business costs. Proceedings of the National Academy of
Sciences, 111(21), 7576–7581. https://doi.org/10.1073/pnas.1405135111.
Fraser, J. (2018). Mining companies and communities: Collaborative approaches to reduce social
risk and advance sustainable development. Resources Policy. https://doi.org/10.1016/j.resourpol.
2018.02.003. In press.
Freeman, R. E., Velamuri, S. R., & Moriarty, B. (2006b). Company stakeholder responsibility: A
new approach to CSR. Institute for Corporate Ethics Bridge Paper: Business Roundtable.
Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits.
New York Times Magazine.
Frynas, G. J. (2005). The false developmental promise of CSR: Evidence from multinational oil
companies. International Affairs 81(3) (Critical Perspectives on Corporate Social Responsibility).
Graetz, G., & Franks, D. (2016). Conceptualising social risk and business risk associated with
private sector development projects. Journal of Risk Research, 19(5), 581–601.
Himley, M. (2014). Monitoring the impacts of extraction: Science and participation in the
governance of mining in Peru. Environment and Planning A, 46(5), 1069–1087.
Hitch, M. (2006). Impact and Benefit Agreements and the political ecology of mineral development
in Nunavut.
Jenkins, H., & Obara, L. (2006, September). Corporate social responsibility (CSR) in the mining
industry-the risk of community dependency. In Corporate Responsibility Research Conference
(pp. 4–5), Dublin.
Kapelus, P. (2002). Mining, corporate social responsibility and the “community”: The case of Rio
Tinto, Richards Bay Minerals and the Mbonambi. Journal of Business Ethics, 39(3), 275–296.
Kemp, D., Boele, R., & Brereton, D. (2006). Community relations management systems in the
minerals industry: Combining conventional and stakeholder-driven approaches. International
Journal of Sustainable Development, 9(4), 390–403.
Corporate Social Responsibility in the Mining Sector in Canada 599

Kemp, D., Worden, S., & Owen, J. (2016). Differentiated social risk: Rebound dynamics and
sustainability performance in mining. Resources Policy, 50, 19–26.
Kramer, M., & Pfister, M. (2016). The ecosystem of shared value. Harvard Business Review, 94(10),
80–89.
Kytle, B., & Ruggie, J. G. (2005). Corporate social responsibility as risk management: A model
for multinational companies. Harvard. Cambridge, MA: John F Kennedy School of Government.
Retrieved March 16, 2015, from https://www.ksg.harvard.edu/m-rcbg/CSRI/…/workingpaper_
10_kytle_ruggie.pdf
Lapalme, L. A. (2003). The social dimension of sustainable development and the mining industry.
Ottawa: Natural Resources Canada.
Lapierre, D. M., & Bradshaw, B. (2008, May). Why mining firms care: Determining corporate ratio-
nales for negotiating impact and benefit agreements. In Canadian institute of mining, metallurgy
and petroleum conference, Edmonton.
Levitt, T. (1958). The dangers of social-responsibility. Harvard Business Review, 36(5), 41–50.
Lin, P. T., Li, B., & Bu, D. (2015b). The relationship between corporate governance and community
engagement: Evidence from the Australian mining companies. Resources Policy, 43, 28–39.
Mercer-Mapstone, L., Rifkin, W., Louis, W., & Moffat, K. (2019). Power, participation, and exclu-
sion through dialogue in the extractive industries: Who guets a seat at the table? Resources Policy,
61, 190–199.
Mining, Minerals and Sustainable Development North America. (2002). Seven questions to
sustainability (Rep.).
O’Faircheallaigh, C., & Corbett, T. (2005). Indigenous participation in environmental management
of mining projects: The role of negotiated agreements. Environmental Politics, 14(5), 629–647.
Porter, M., & Kramer, M. (2011). Creating shared value. Harvard Business Review, 89(1–2), 62–77.
Prno, J., & Bradshaw, B. (2007). Assessing the effectiveness of impact and benefit agreements from
the perspective of their Aboriginal signatories. Canadian Association of Geographers.
Rodríguez, L., Montiel, I., & Ozuna, T. (2014). A conceptualization of how firms engage in corporate
responsibility based on country risk. Business and Society, 53(5), 625–651.
Rooke, R. (2016). Investigating relationships: How mining companies and Aboriginal communities
can improve impact mitigation for terrestrial wildlife and traditional harvesting practices in the
Canadian Arctic. Doctoral dissertation.
Schafrik, S., & Kazakidis, V. (2011). Due diligence in mine feasibility studies for the assessment
of social risk. International Journal of Mining, Reclamation and Environment, 25(1), 86–101.
Stubbs, W., & Cocklin, C. (2008). Conceptualizing a “sustainability business model”. Organization
& Environment, 21(2), 103–127. https://doi.org/10.1177/1086026608318042.
Taarup-Esbensen, J. (2019). Managing risk through dependency: how do mining MNEs strategize
to legitimize business continuity? The Extractives Industries and Society, 6, 489–497.
Tuulentie, S., Halseth, G., Kietavainen, A., Ryser, L., & Simila, J. (2019). Local community
participation in mining in Finnish Lapland and Northern British Columbia, Canada—Practical
applications of CSR and SLO. Resources Policy, 61, 99–107.
Xavier, A. (2013). Socio-Economic Mine Closure (SEMC) framework: A comprehensive approach
for addressing the socio-economic challenges of mine closure. Doctoral dissertation, University
of British Columbia. Retrieved from https://circle.ubc.ca/handle/2429/45595
Xavier, A. M., Veiga, M., & van Zyl, D. (2015). Introduction and assessment of a socio-economic
mine clsoure framework. Journal of Management and Sustainability, 5(1), 38. https://doi.org/10.
5539/jms.v5n1p38.
Zandvliet, L. (2004). Redefining corporate social risk mitigation strategies. Washington: World
Bank. Retrieved April 28, 2017, from http://documents.worldbank.org/curated/en/200261468
778821090/Redefining-corporate-social-risk-mitigation-strategies
Zandvliet, L., & Anderson, M. (2017). Getting it right: Making corporate-community relations
work. London: Routledge.
600 J. Fraser and A. Xavier

Zurba, M. (2017). Long-term and meaningful community leadership and engagement in natural
resources and environmental governance through university access programs. Journal of Adult
and Continuing Education, 23(1), 5–14. https://doi.org/10.1177/1477971416686582.
Zvarivadza, T. (2018). Large scale miners—Communities partnerhsips: A plausible option for
communities furvival beyond mine closure. Resources Policy, 56, 87–95. https://doi.org/10.1016/
j.resourpol.2017.12.005.
Corporate Social Responsibility
in Australia

Martin Brueckner

Abstract Corporate Social Responsibility (CSR) in Australia has had a slow start
and—while gaining momentum—continues to lag behind international trends and
developments. This chapter seeks to describe the state, and characterise the nature of
CSR ‘Down Under’, offering explanations for the somewhat lacklustre approach by
business and government to operationalise and regulate CSR, respectively. Answers
provided, based on select industry examples, will point to Australia’s political
economy of CSR and prevalent ideologies among corporate and political decision-
makers as drivers of a kind of CSR that is largely reactive and based on economic
legitimacy.

1 Civic Virtue “Down Under”

It is widely recognised that different economic systems give rise to different forms
of CSR (Matten and Moon 2008; Gjølberg 2009) and Australia in this regard is no
exception. Since white occupation in the late eighteenth century, the country has
been pursuing an aggressive development agenda, evolving into the kind of ‘stock
market capitalism’ (Dore 2000) found in other Anglo-Saxon countries such as the
USA and the UK. The size of the country and its small population base have fuelled
fears since colonisation of economic underdevelopment of successive governments
and may help explain Australia’s developmentalist ambitions, especially from the
1960s onwards; particularly, in resource-rich states such as Queensland and Western
Australia (Layman 1982; Kellow and Niemeyer 1999). Developmentalism (following
Thurbon 2012: 275) can largely be understood as viewing national economic pros-
perity and security as a primary priority of government thus granting governing
elites an active role in facilitating the transformation and upgrading of the national
techno-industrial infrastructure. In some state jurisdictions, governments even had a

M. Brueckner (B)
Centre for Responsible Citizenship and Sustainability, Murdoch University, Perth, WA, Australia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 601
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_34
602 M. Brueckner

central role in “attracting, facilitating and supporting development through providing

key infrastructure, and being prepared occasionally to underwrite projects through
bearing or sharing risk” (Phillimore 2014: 42). Unsurprisingly, the moral standing of
development in Australia, as observed by Trigger (1997: 164) in relation to Australia’s
extractive sector, tends to be promoted routinely by industry and governments alike;
an equation of economic development with moral progress.
The country’s strong pro-development stance has had a bearing on the evolu-
tion, extent and nature of CSR in Australia. In the international comparison, a little
over a decade ago, the uptake of CSR among Australian companies was still very
limited, evidenced, for example, by the relatively small number of non-financial
reports published (20% of top 100 listed companies); disclosure was largely restricted
to multinational, foreign-owned or government-owned entities (Australian Govern-
ment Department of the Environment and Heritage 2004). A national survey as
recent as 2014 described Australian firms’ progress on CSR as slow and insufficient
(Australian Centre for Corporate Social Responsibility 2014), with higher levels
of CSR maturity within Australian companies not recorded before 2017 (Australian
Centre for Corporate Social Responsibility 2017). While recent progress in this space
has elevated the ‘Australian CSR brand’ internationally (ROBECOSAM 2017), other
measures of responsible business conduct generally do not rate Australian busi-
ness enterprises. Forbes (2017) and the Corporate Knights Index (Corporate Knights
Inc. and Innovest Strategic Value Advisors Inc. 2007), for example, only rank two
Australian firms within their respective top 100 most sustainable1 companies; ironi-
cally, both companies had their CSR credentials publicly questioned in recent years
and been the subject of a Royal Commission2 investigation (Gluyas 2016; Schmulow
et al. 2019). Further, Australian mining companies regularly stand in the media
crossfire over claims of irresponsible business conduct (Saunders et al. 2015; Camp-
bell 2017), along with aged care, financial advice services and the superannuation
industry, only to mention a few, are other sectors in the Australian economy with
their CSR reputation tarnished in recent years. This state of play reflects poorly on
the CSR performance of Australian firms and makes understandable the diminished
public trust in the private sector, which today stands at an all-time low (Humpage
2014; Edelman 2017).
For the purposes of this chapter, the state of play in Australian CSR sketched above
will be seen in the context of the country’s development approach and economic
system. In what follows, it will be shown how a particular political-cum-commercial
CSR discourse has enabled a particular CSR framing that sees development itself as
an expression of CSR. This framing serves to reduce CSR to a matter of economic
legitimacy and explains the gulf between corporate performance and societal expec-
tations on company conduct. Select industry cases will be presented to illustrate the

1 Differences between CSR and sustainability are acknowledged here. Both concepts within the
business context fall within what is referred to as firms’ environmental, social and governance (ESG)
performance.
2 In Australia, Royal Commissions are appointed by the government to look into matters of great

importance and usually controversy. Commission findings and recommendations are then to be
responded to by government.
Corporate Social Responsibility in Australia 603

key points of the argument. An ensuing discussion will seek to problematise the
Australian approach to CSR.

2 Econo-Political Constructions of CSR

As suggested earlier, Australia’s development approach has helped to give rise to a

particular kind of CSR that is rooted in economic legitimacy. The country’s devel-
opment focus, so the argument here, has helped foreground companies’ economic
contributions in terms of employment and wealth generation; frequently at the
expense of broader social and environmental objectives (Brueckner and Mamun
2010; Pini et al. 2010; Wesley and MacCallum 2014; Luke 2017). The prevailing
CSR discourses in Australia are further explored below for they hold clues about
how CSR is being constructed by econo-political decision-makers and how these
discourses help shape particular company practices. Of particular note are discourse
features around the issue of voluntarism and wealth creation and the way in which
these features are reflected in the treatment of CSR by the authorities. These issues
will be addressed in turn.
The CSR discourse globally has long been favouring non-mandatory approaches
to CSR. Despite mounting critiques on self-regulation (Blowfield 2005; Doane 2005;
Banerjee 2006; Epstein 2007), a seeming trend towards mandated CSR in countries
such as India, Indonesia and Mauritius (Waagstein 2011; Pillay 2016; Subramaniam
et al. 2017) and tightening company disclosure regulations across Europe (Szabó and
Sørensen 2015), indirect forms of regulation and a range of internal CSR instruments
in the form of voluntary corporate codes of conduct, as well as strategic stakeholder
partnerships are still widely considered adequate substitutes for ‘hard’ regulatory
approaches (Shamir 2004, 2010; Enoch 2007). Especially, in countries committed to
neoliberal economics, a regulatory approach is largely being avoided3 (Hanlon 2011).
Unsurprisingly, thus, in Australia, with its strong neoliberal leanings since the 1980s
(Connell 2010) successive governments have championed industry self-regulation, a
policy position unlikely to shift in the near future. To illustrate, a review by the Parlia-
mentary Joint Committee on Corporations and Financial Services (2006) explored
the extent to which organisational decision-makers (should) have an existing regard
for the interests of stakeholders (other than shareholders) and the broader community.
The review, which involved government, industry, research bodies, consultancies and
industry coalitions, resulted in the reaffirmation of companies’ ‘enlightened self-
interest’ as a sufficient guarantor for adequate industry self-regulation amidst fears
expressed by the business community about the implications of tighter rules imposed
by government. Chiefly among them were concerns that regulation would be heavy-
handed, stifle economic growth and overly constrain the entrepreneurial, innovative
forces of business. Industry groups argued that CSR activities were more likely to

3 Central
to this neoliberal consensus are corporate desires to avoid government regulation and
governments’ intent to have companies fulfil duties that were abandoned by the state.
604 M. Brueckner

be embedded within corporations’ mindsets if these were voluntary and governed

through corporate self-regulation (Parliamentary Joint Committee on Corporations
and Financial Services 2006; Wesley 2014).
Central to the industry arguments listed above are the purported risks any form
of government regulation might pose to companies’ financial success, and wealth
creation is frequently invoked as the key welfare contribution of Australian compa-
nies. The argument takes the form of a perversity thesis (after Hirschman 1991), for
it suggests that any kind of government regulation would end up hurting the very
people it seeks to protect. In other words, society would suffer the consequences of
any government intervention in the CSR space. The welfare contribution of business
is highlighted routinely in public statements by industry. For example, the Business
Council of Australia, a key lobby group and industry association that comprises
the chief executives of more than 100 of Australia’s biggest corporations, states in
its submission to the Parliamentary Joint Committee on Corporations and Financial
Services (2006: 10) that “it is important to note that … the greatest social contribu-
tion made by corporations is through the goods and services they provide, the wealth
they create and the employment they generate”. In a similar vein, mining production
company Alcoa suggests that its “investment has provided essential infrastructure
and supported the growth of regional communities” (Parliamentary Joint Committee
on Corporations and Financial Services 2006: 10), again invoking the notion of
development as a moral good.
Industry sentiments such as these are often echoed in Australia’s political realm.
At the national political level, a firm commitment can be observed to “corporate
self-determination” and the governance of CSR through “liberal and indirect means
of steering” (Vallentin and Murillo 2012: 827) reflected in policies that merely
encourage and facilitate “socially responsible activities, via communication, educa-
tion, incentives (financial) and regulatory trade-offs for undertaking responsible busi-
ness practice” (Wesley 2014: 124). Over the years and irrespective of political persua-
sion, numerous federal politicians have been vocal about the win–win logic of CSR,
advocating how it can “contribute to long term profitability of corporate Australia
and deliver benefits to the community” (Sherry 2009).
The win–win logic is at the very heart of the widely promoted ‘business case for
CSR’ (World Business Council for Sustainable Development 2000), which rests on
the assumed interdependencies between business and society for the improvement
of living standards and social conditions and for the creation of jobs and wealth
(Hoque 1985). This mutual dependence between business and society enables the
equation of community well-being and companies’ economic interests, overcoming
“entrenched perceptions of an incompatibility between economic and social goals”
(Brueckner and Mamun 2010: 328). The integration of CSR into business (Lee 2008)
is said to enable firms to align their capabilities with the opportunities their social
environment presents and to deliver both societal benefits and competitive advan-
tage (Munilla and Miles 2005; Miles et al. 2006). While the critical CSR literature
raises concerns about areas where the interests of business do not merge with the
interests of society (e.g. environmental impacts, social inequality, etc.) (e.g. Newell
2001; Banerjee 2007), in Australia, the virtues of economic development seem to
Corporate Social Responsibility in Australia 605

trump these fears. This sentiment is expressed, for example, by the Chair of Western
Australia’s Regulatory Impact Assessment Process Review who suggests in connec-
tion with environmental impacts from resource development that “the environment
is an important consideration, but it is not always—or even often—the only one. A
weak economy is a far greater threat to the environment than is responsible mining”
(Government of Western Australia 2009: 1–2). This stance is reflective of a partic-
ular ideology that gives primacy to economic development, implicitly treating it—as
suggested earlier—as a moral end in itself and as the very foundation of nation
building.
The above illustrates how in Australia both industry and government frame a
particular CSR discourse, effectively blending corporate self-interest within the
mantra of responsibility (Selznick 2002). The economic responsibility of the firm
is being foregrounded and in a Friedmanite (Friedman 1970) tradition and elevated
to the all-encompassing societal contribution of business. It thus follows that direct
regulatory responses by the Australian government are largely absent or decidedly
light touch as profit-making and the protection of shareholder interests are given
first priority (Madsen and Ulhøi 2001; Farrar 2008). While the Australian Corpo-
rations Act (2001) compels company directors to have regard for the interests of
stakeholders other than shareholders, it leaves open questions about the extent to
which this fosters corporate practice beyond strategic, relational CSR (Brueckner
and Mamun 2010). When taking CSR reporting systems of Australian companies as
a proxy, these are seen to be primarily aimed at serving the interests of equity holders
(Chen and Bouvain 2009: 304).
Below, a number of case examples are presented with a view to illustrate the
impacts of Australia’s discursive CSR landscape on companies’ CSR practices, the
broader implication of which will be discussed subsequently.

3 CSR at Work in Australia: Case Examples

The industry cases detailed below shed light on the ways in which both Australian
state and federal governments tend to protect industry interests, generally, by way of
reference to how business secures, and contributes to, the well-being of the country
and its citizens. Even in situations of public disquiet over widely publicised corporate
wrong-doing or unacceptable environmental risks, governments are often found to
be in support of the implicated business entities and/or to be defending the adequacy
of existing industry regulation.

3.1 Banking

Australia’s banking industry self-describes as “solid, safe and efficient” and to be

“at the heart of [the Australian] economy and […] community. Banks [purportedly]
606 M. Brueckner

allow […] Australian families to realise their dreams […], help Australian busi-
nesses start and grow, be profitable and well governed, and create jobs” (Australian
Bankers’ Association Inc. 2015: 1). In short, strong banks = strong Australia. This
stout sense of responsibility is also reflected in Australia’s major banks’ value and
mission statements. The Commonwealth Bank, for example, speaks of a “vision
[…] to excel at securing and enhancing the financial well-being of people, busi-
nesses and communities” and a commitment to maintain the highest professional
standards and [to] act with integrity during the course of [their] business activities”
(Commonwealth Bank 2019). Similarly, National Australia Bank (2019) states to
have Corporate Responsibility at the heart of their approach and to be seeking to
“make a positive and sustainable impact on the lives of [their] customers, people,
shareholders, communities, and on the environment in which [they] operate, while
Australia and New Zealand Banking Group (2019) speaks of seeking “to build strong
and lasting relationships with [their] customers” and to provide “banking that […]
is delivered in a responsible manner by [their] people and in accordance with the
highest standards of integrity”.
Australia’s major banks have long been seen in a similar light in the political
realm—mostly by politicians of a conservative persuasion—where they have been
described as “among the best-run, the most prudentially supervised, and the most
well-capitalised in the world” (Anon 2017a). Also, the former Treasurer and current
Prime Minister suggest that “[w]e want a banking system that is strong” for “healthy
and profitable banks [are] a ‘pillar’ of the economy” (Kehoe 2016).4
Despite the accolades, the banking industry has been plagued by numerous scan-
dals over the years (Verrender 2017), having faced allegations of fraud, deception, and
money laundering, among various other crimes (Vedelago 2018). In recent years, calls
for an inquiry into the banks became louder, “emanating from a broad section of the
community — from farmers, small business and households, jaded and disillusioned
with the industry’s rampant profiteering, fee gouging and blatant disregard for the
law” (Verrender 2017). Notwithstanding the seriousness of the allegations, members
of government and the conservative liberal party continued to defend the banking
sector, suggesting the alleged scandal was “all a conspiracy theory, whipped up by
populists for cheap political gain” and describing the called-for Royal Commission
as “rank socialism” (Anon 2017a). The banking inquiry was decried as a “populist
whinge” and as “reckless political games with one of the core pillars of our economy”
that could “[…] undermine confidence in the banking and finance system” (Knott
2016). Again, a conflation of corporate success and national economic well-being
become visible here.

4 The view that Australia’s banks are indispensable for Australia’s economic well-being (too big to
fail) may explain the political protection banks have received over the years. For example, banks
benefited from the government’s deposit guarantee scheme during the Global Financial Crisis in
2008 (Australian Government 2008), which sought to maintain the banks’ credit ratings and their
access to lucrative overseas loans. While scaled back since 2008, the ongoing guarantee scheme,
which critics have likened to ‘agrarian socialism’ (Verrender 2017), has cost the taxpayer AUS$5
billion in 2017 alone in bank subsidies (Joye 2017).
Corporate Social Responsibility in Australia 607

Due to a series of media revelations about misconduct and mounting pressure

from the public and the political opposition the government reluctantly announced a
Royal Commission into the banking sector in late 2017. In its seven rounds of public
hearings, the inquiry unearthed systematic breaches of corporate law by the banks,
including money laundering for drug syndicates and terrorism financing as well as
failures to comply with statutory reporting responsibilities and impropriety in foreign
exchange trading. Other breaches included fees without service, inappropriate advice
and conduct among others in the “pursuit of short-term profit at the expense of basic
standards of honesty” (Hayne 2018, p. xix). Lack of government oversight was also
identified as an enabling factor and the lack of regulatory intervention by the relevant
government authorities. As Commission’s Interim Report (2018: xix) suggests:
The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punish-
ment for misconduct. The prudential regulator, APRA, never went to court. Much more often
than not, when misconduct was revealed, little happened beyond apology from the entity, a
drawn out remediation programme and protracted negotiation with ASIC of a media release,
an infringement notice, or an enforceable undertaking that acknowledged no more than that
ASIC had reasonable ‘concerns’ about the entity’s conduct.

The Commission handed down its final report (Hayne 2019) in early 2019, spelling
out 76 separate recommendations, targeting banks’ corporate culture and gover-
nance as well as lending and advisory practices. While the government has promptly
accepted most of the Commission’s recommendations (Murphy 2019), at the time
of writing it was still considering its full policy response to the inquiry, flagging that
the implementation of the recommendations would not commence prior to the next
federal election scheduled for May 2019 (Remeikis 2019). At the same time, the
government warned that it “would balance action on a tougher regulatory framework
against the need to ensure there was a free flow of credit”, which it described as the
“lifeblood of the economy” (Coorey 2019). There is widespread concern, given the
high level of political support the industry enjoys and the government’s reluctance
to commission the inquiry in the first place that it will affect its willingness to imple-
ment the Commission’s recommendations, which some commentators saw as too
lenient on the banks (Keane and Dyer 2019a; b). As such, media speculation may be
warranted that another banking inquiry will be a matter of course within a few years
(Linden and Staples 2019).

3.2 Coal Mining

Australia is resource-rich and many minerals and metals are some of the country’s key
export commodities, including coal (Connor et al. 2009). Climate change concerns,
however, makes the extraction and combustion of coal increasingly untenable amidst
moves globally towards decarbonising industrial processes and power generation
(International Energy Agency 2017). Thus, unsurprisingly, the proposed Carmichael
coal mine in the north of the Galilee Basin in Central Queensland is currently one of
Australia’s most contentious econo-political and environmental issues (Brueckner
608 M. Brueckner

and Eabrasu 2018). The AUS$16.5 billion project proposed by Adani Mining Pty
Ltd., involves six open-cut and five underground coal mines. The Carmichael coal
mine is expected to yield 60 million tons of thermal coal per annum, amounting to
2.3 billion tonnes over its expected 60-year life (Slezak 2017b). The mine proves
controversial on environmental, economic and socio-cultural grounds, with public
opinion polls showing growing opposition to the project (Slezak 2017a; Massola
2018).
With regard to environmental matters, as detailed by Brueckner and Eabrasu
(2018), the coal extracted is projected to produce emissions of about 77 million
tonnes of CO2 -e per annum and produce a total of 4.6 billion tonnes CO2 -e over
the expected lifetime of the mine (Meinshausen 2015). Moreover, the Queensland
government’s granting of unlimited access to groundwater from the Great Artesian
Basin until the year 2077 is a key concern to water-poor Queensland farming commu-
nities. While the mine is likely to require 12 billion litres of water per year, Adani
will merely be required to monitor and report the amount of water extracted (Hannam
2017). Finally, the mine poses a risk to the Great Barrier Reef, one of Australia’s
environmental icons and UNESCO-listed heritage areas, indirectly through coral
bleaching due to rising ocean temperatures consequent to climate change (Hughes
et al. 2017) but also more directly due to the transport of coal to export markets via
ship, increasing the dispersion of coal dust and risks of collisions and spills (Climate
Council 2017a; Sparrow 2017). Adani’s poor track record on environmental steward-
ship (Environmental Justice Australia 2015,2017) has further heightened concerns
about the mine’s potential to harm the environment and local communities.
In economic terms, the mine promises to deliver 10,000 jobs for Queensland where
the unemployment rate is currently at 6.4%, with even higher rates experienced in
some regional areas (Australian Government 2018). While the promise of job creation
explains strong support of the project by the Queensland government (Robertson
2017), which echoes Adani’s job figures (Queensland Government 2018), only 1464
jobs are considered likely to result from the project (Fahrer 2015). At the same
time, the Carmichael mine may also create job losses in coal producing states such
as New South Wales (NSW) (Long 2017) but also in the tourism sector due to
impacts on Great Barrier Reef-based tourism, which employs (both directly and
indirectly) around 64,000 people (Pearce 2017). The economic case for the mine
is also considered weak, evidenced by 19 major banks refusing to underwrite the
project owing to environmental, reputational and viability concerns (Climate Council
2017b). The project is also deemed “unbankable” (Cox 2015; Institute for Energy
Economics and Financial Analysis 2017) because of Adani’s high level of debt,
unclear corporate structure and use of offshore entities as well as diminished future
prospects for coal in a carbon constrained global economy (International Energy
Agency 2017).
There is also considerable opposition to the mine on cultural grounds as the
proposed mine is to be built on traditional Wangan and Jagalingou land (W&J).
The W&J Traditional Owners Family Council opposes the Adani Carmichael coal
mine and has mounted a Federal Court challenge against the project. After having
rejected a land rights deal with Adani on four separate occasions since 2012 (Wangan
Corporate Social Responsibility in Australia 609

and Jagalingou Family Council 2018), the Council rejects the legitimacy of the
Indigenous Land Use Agreement (ILUA) Adani has struck with traditional owners
of the land, alleging the use of duress and bribery payments (Anon 2017c).
The case description shows that Adani has been able to secure both political and
legal licences for the development of the Carmichael mine, albeit with consider-
able legal challenges and immense public outcry over the political support given
to the project. While public anti-coal sentiments are on the rise, the proposed mine
enjoys political support at state and federal level. Despite various court challenges by
conservation groups, the mine received Federal Government approval (with condi-
tions) under the Environment Protection and Biodiversity Conservation Act 1999 in
2015 as well as conditional approval by the Queensland Department of Environment
and Heritage Protection in 2016 (Queensland Government 2016), helping Adani to
secure its legal licenses for the project.
The coal industry has long been enjoying a close relationship with, and bilateral
support from, Australian state and federal governments (Connor et al. 2009). This
is what Baer (2016) describes as the state/coal industry nexus, with the corporate
sector being the dominant player and governments ideological wedded to coal. This is
evidenced by governments continuing to do the bidding on behalf of the increasingly
besieged coal industry as shown in statements by former Australian Prime Minister
Tony Abbott: “Coal is good for humanity, coal is good for prosperity, coal is an
essential part of our economic future” (Anon 2014). Even in the face of growing calls
for a phase out of coal-fired power generation and a push towards decarbonisation,
Australia’s former Treasurer and current Prime Minister Scott Morrison brandished a
lump of coal in front of parliament, mocking his political opponents’ alleged aversion
to coal: “This is coal—don’t be afraid, don’t be scared “, suggesting that coal gave
Australia “an energy competitive advantage for more than 100 years, delivering
prosperity to businesses and ensuring industry had been able to remain competitive
in a global market” (Anon 2017b).
The case illustrates how the government’s pro-industry discourse offers polit-
ical protection to a sunset industry that faces public opposition on environmental,
economic and cultural grounds. The promise of jobs and wealth generation (despite
the case for it being rather weak) seems to override the broad range of CSR concerns
levelled at Adani and its Carmichael project.

3.3 Unconventional Gas

The resource-rich state of Western Australia is believed to have some of the country’s
largest reserves of offshore conventional gas as well as onshore unconventional gas
(Geoscience Australia & Australian Bureau of Agricultural and Resource Economics
2010), a potential that the industry has been eager to tap in recent years.5 (Committee

5 The state of the unconventional gas industry in Western Australia is described in detail by Luke
et al. (2018).
610 M. Brueckner

for Economic Development of Australia 2012; Upstream Petroleum Resources

Working Group Report to COAG Energy Council 2015). The industry’s enthusiasm
for the exploration of unconventional gas (Australian Petroleum Production & Explo-
ration Association 2015) has been matched by that of successive Western Australian
state governments, which have been actively supporting gas development in recent
years (Australian Mining 2013; Government of Western Australia 2015). Support
was provided by way of public information campaigns about the purported safety of
the extraction of unconventional gas (see Department of Mines and Petroleum 2017)
and public statements made about the economic benefits the industry will deliver to
the state (Verstegen 2018).
Notwithstanding, the arrival of the unconventional gas industry in Western
Australia was met with considerable public opposition, especially in relation to
fracking.6 Protests took the form of organised community action groups (e.g. Frack
Free WA and Lock the Gate WA), anti-fracking campaigns by environmental groups
(The Wilderness Society 2018) as well as a number of communities declaring them-
selves ‘Gasfield Free’ to pre-empt the establishment of the industry (e.g. Christian
2015; de Poloni 2017). The industry is being opposed for a number of reasons,
ranging from concerns about health impacts and fugitive emissions to groundwater
contamination and the disclosure of chemical substances. Community concern was
the trigger for a number of independent studies into the impacts of unconventional gas
exploration (Vogwill 2017; Hare et al. 2018) and the establishment of a parliamentary
inquiry into the implications of fracking for unconventional gas.
In its final report, the inquiry (Western Australian Standing Committee of Environ-
ment and Public Health Affairs 2015: 170), while vindicating community concerns
and highlighting the need for ongoing community consultation, overall found the
issues surrounding the industry to be manageable. An independent review of the
inquiry (Haswell 2017), however, pointed to failures in the assessment of potential
risks and benefits of the industry to human health, urging ‘the Western Australia
government to conduct an updated and fully comprehensive review of the potential
direct and indirect impacts of proceeding with an unconventional gas industry on
human health and well-being’ (p. 3).
Ensuing community agitation against fracking (Smith 2017) prompted a newly
elected state government to introduce a ban in 2017 on fracking for existing and
future petroleum titles in the South-West, Peel and Perth metropolitan regions and
a moratorium on fracking throughout the rest of Western Australia (Government of
Western Australia 2017). The government set up an inquiry into fracking to “deter-
mine whether the moratorium may be lifted in locations or circumstances where
potential risks can be mitigated to an acceptable level” (Government of Western
Australia 2017). The year 2018 saw considerable industry lobbying and reportedly
pressure applied by the federal government, threatening states with the reduction
of their share of federal funding from the Goods and Services Tax (ABC 2018)
unless state-imposed bans on fracking were lifted. In late 2018, following the release

6 Fracking stands for hydraulic fracturing using high pressure to inject liquids into subterranean
rocks to open existing fissures for the extraction of oil or gas.
Corporate Social Responsibility in Australia 611

of the report from the 12-month inquiry, the Western Australian state government
announced the lifting of its moratorium on fracking but maintained a fracking ban
in the state’s socio-economically strong and politically well-connected South-West.
While Australia’s oil and gas industry welcomed the government’s decision to lift
the hydraulic fracturing moratorium for onshore gas projects (Oil and Gas Australia
2018), industry opponents saw in the decision proof that the government was “more
supportive of big mining, oil and gas companies than they are about the environ-
ment and the future generations of Western Australians” (Jenkins 2018). Critics also
feared that the lifting of the moratorium would enable the expansion of the unconven-
tional gas industry and with it trigger a raft of adverse environmental, social, cultural
and economic impacts (Verstegen 2018).7 Independent analysis of the industry’s
economic impact on Western Australia showed little potential for economic gain and
job creation but instead a large potential for negative community impacts and higher
gas prices (Campbell et al. 2018).
In light of the industry’s ‘political licence’ (after Brueckner et al. 2014) provided
by the state government, its future growth in Western Australia seems certain.
Industry-community conflicts centred on unconventional gas are thus likely to inten-
sify in years to come as communities are vowing to fight the industry every step of
the way (Farcic 2018).

4 Discussion and Concluding Comments

The data presented in this chapter highlight the strong economic focus on the side
of industry and government in connection with CSR, one that is restricted largely to
the generation of jobs, income and government revenue. This economic logic was
shown to contrast starkly with community expectations concerning company conduct
and acceptable levels of impact as shown in the cases of banking, coal mining and
unconventional gas development. Australia’s dominant development narrative has
produced narrowly construed CSR discourses and practices, which frequently collide
with communities’ social, cultural and environmental interests as evidenced by a
large number of industry-community conflicts around the country (see Higginbotham
et al. 2010; Cleary 2012; Duus 2013; Scambary 2013; White 2013; Brueckner 2014;
Brueckner and Eabrasu 2018; Luke et al. 2018); it shows that the CSR agenda extends
far beyond mere questions of employment and income.
The combination of developmentalism and voluntary CSR was found to protect
industry interests by way of promoting an approach to CSR that closely ties corpo-
rate success to the national interest. It is tantamount to a transformation of CSR from
an attempt at reducing, mitigating or eliminating negative impacts associated with

7 Ina similar vein, attempts by the Western Australian Environmental Protection Authority (EPA)
in early 2019 to require industry projects with direct carbon emissions over 100,000 tons per annum
to create carbon offsets not only faced fierce industry opposition but also pressure from the federal
resources minister and the Western Australian government, prompting the EPA to withdraw its
guidelines (Hastie and Latimer 2019).
612 M. Brueckner

company conduct or doing good for society to the mere demonstration of economic
benefits to company stakeholders. CSR, originally rooted in critiques of orthodox
economics and laissez faire capitalism (e.g. Clark 1916), strikes in the Australian
context as having wealth creation as its central leitmotif (Windsor 2001). The civic
virtues of corporate self-interest and rent-seeking, however, are highly questionable
for a CSR limited to a narrow business case is unlikely to deliver corporate contribu-
tions to social welfare beyond arguments of economic efficiency (Kok et al. 2001).
Such a CSR is also likely to prove ineffective in addressing “the very social dilemmas
it is meant to solve” and prone to overlook “critical structural and procedural aspects
of industry-community conflicts as they relate to issues such as power and stakeholder
dissent” (Brueckner and Mamun 2010: 328).
While company mission statements, as those of Australian banks, are employing
the kind of high-minded rhetoric Matten and Moon (2008) would describe as an
explicit form of CSR, stating steadfast commitments to, and responsibility for,
communities, company actions and public reactions towards them often demon-
strate their failure to effectively balance the ‘efficiency-legitimacy dichotomy’ (after
Banerjee 2006). The expectation for companies in an unregulated CSR environment
to get this balance right also strikes as wishful as suggested by Reich (2008) even
though proponents of voluntarism continue to invest faith in their ability to do so.
With Australia’s development orthodoxies well entrenched there is little hope at
present that political pressure will be brought to bear on companies with a view to
improve their CSR performance. Community disquiet in response to adverse industry
impacts or misconduct continues to be routinely overridden by a pro-development
discourse that backs business-as-usual approaches under the façade of progress and
nation building with systemic blind spots towards issues at the heart of commu-
nity grievances. In this regard, Australia appears to be years behind international
‘best’ practice in relation to CSR and is likely to remain a CSR laggard for years to
come unless communities find ways of increasing commercial and political risks for
decision-makers that would render CSR concerns too precarious to ignore. Yet, years
of neoliberal atomisation of society and rising levels of political apathy (Clark 2018)
coupled with a limited and partisan media landscape with overt pro-industry leanings
(Lidberg 2019) augur poorly for such changes to occur as these barriers effectively
militate against political mobilisation. At the same time, “citizens who take their
responsibility to democracy (and/or social and environmental matters] seriously” are
often seen to “pose a dire threat to corporate [and political] power” (Giroux 2019)
and thus frequently face vilification and disparagement in the media and in political
debate, as was seen in connection with anti-mining and climate justice protests in
recent years (e.g. Anon 2018). In part, this is why some political commentators in
the media even raise the spectre of a ‘lost decade’ (Keane 2019), referring to the
current era in Australian politics that is marked by a political laziness that panders
to special interests, blocks reforms and maintains the status quo. As such, in terms
of future outlook for CSR in Australia, it seems the stakes would need to increase
significantly for public demands to affect changes in corporate CSR practices or to
prompt intervention by government.
Corporate Social Responsibility in Australia 613

References

Anon. (2014, October 13). Coal ‘good for humanity’, Prime Minister Tony Abbott says at $3.9b
Queensland mine opening. ABC News. Retrieved from https://www.abc.net.au/news/2014-10-13/
coal-is-good-for-humanity-pm-tony-abbott-says/5810244
Anon. (2017a, November 23). Bank royal commission ‘rank socialism’: Howard. Perthnow.
Retrieved from https://www.perthnow.com.au/politics/bank-royal-commission-rank-socialism-
howard-ng-fb2e65449dc582adb1697179546e0bb3
Anon. (2017b, February 9). Don’t be afraid, it’s only coal: MPs told. SBS News. Retrieved from
https://www.sbs.com.au/news/don-t-be-afraid-it-s-only-coal-mps-told
Anon. (2017c, December 4). Traditional owners file Adani injunction. Sunshine Coast Daily.
Retrieved from https://www.sunshinecoastdaily.com.au/news/traditional-owners-file-adani-inj
unction/3281604/
Anon. (2018, November 30). Climate change protest will lead to dole queue, minister tells students.
The Sydney Morning Herald. Retrieved from https://www.smh.com.au/politics/federal/climate-
change-protest-will-lead-to-dole-queue-minister-tells-students-20181130-p50jbt.html
Australia and New Zealand Banking Group. (2019). Corporate sustainability. Retrieved from
https://www.anz.com/about-us/corporate-sustainability/customers/
Australian Bankers’ Association Inc. (2015). Australia’s banks: An integral part of the economy
and the community. Economic report. Sydney.
Australian Government. (2008). Guarantee scheme for large deposits and wholesale funding.
Retrieved from https://www.guaranteescheme.gov.au
Australian Government. (2018). Unemployment rate by state and territory. Retrieved from https://
lmip.gov.au/default.aspx?LMIP/LFR_SAFOUR/LFR_UnemploymentRate
Australian Government Department of the Environment and Heritage. (2004). The state of
sustainability reporting in Australia. Canberra.
Australian Mining. (2013). WA Government throws support behind fracking. Retrieved from https://
www.miningaustralia.com.au/news/wa-government-throws-support-behind-fracking
Australian Petroleum Production & Exploration Association. (2015). The shale gas opportunity.
Retrieved from https://www.appea.com.au/oil-gas-explained/benefits/the-shale-gas-opportunity/
Baer, H. A. (2016). The nexus of the coal industry and the state in Australia: Historical dimensions
and contemporary challenges. Energy Policy., 99, 194–202.
Banerjee, B. S. (2007). Corporate social responsibility: The good, the bad and the ugly. Cheltenham,
UK: Edward Elgar.
Banerjee, S. B. (2006). The problem with corporate social responsibility. In S. Clegg & C. Rhodes
(Eds.), Management ethics: What is to be done? (pp. 55–76). New York: Palgrave.
Blowfield, M. (2005). Corporate social responsibility - the failing discipline and why it matters for
international relations. International Relations, 19(2), 173–191.
Brueckner, M. (2014). On the social sustainability of development in Western Australia: A commu-
nity perspective. In M. Brueckner, A. Durey, R. Mayes, & C. Pforr (Eds.), Resource curse or cure?
On the sustainability of development in Western Australia (pp. 239–255). Heidelberg: Springer.
Brueckner, M., Durey, A., Pforr, C., & Mayes, R. (2014). The civic virtue of developmentalism:
On the mining industry’s political licence to develop Western Australia. Impact Assessment and
Project Appraisal, 32(4), 315–326.
Brueckner, M., & Eabrasu, M. (2018). Pinning down the social license to operate (SLO): The
problem of normative complexity. Resources Policy, 59, 217–226.
Brueckner, M., & Mamun, M. A. (2010). Living downwind from CSR: A community perspective
on corporate practice. Business Ethics: A European Review, 19(4), 326–348.
Campbell, E. (2017, March 9). World’s largest sovereign wealth fund threatens corrupt and polluting
firms with divestment. ABC News. Retrieved from https://www.abc.net.au/news/2017-03-09/nor
way-sovereign-wealth-fund-threatens-unethical-firms/8341372
Campbell, R., Ogge, M., & Murray, C. (2018). The economic impacts of unconventional gas in
Western Australia. Canberra.
614 M. Brueckner

Chen, S., & Bouvain, P. (2009). Is Corporate Responsibility Converging? A Comparison of Corpo-
rate Responsibility Reporting in the USA, UK, Australia, and Germany. Journal of Business
Ethics, 87(1), 299–317.
Christian, B. (2015). WA town of Irwin declares itself gas field-free. ABC News. Retrieved from
https://www.abc.net.au/news/2015-06-14/wa-town-goes-frack-free/6545188
Clark, J. E. S. (2018). Network homogenisation & party disengagement: The political sociology
of post-industrial democracies: An Australian case study. Doctoral Thesis, The University of
Adelaide.
Clark, J. M. (1916). The changing basis of economic responsibility. the Journal of Political Economy,
24(3), 209–229.
Cleary, P. (2012). Mine-Field. The dark side of Australia’s resources rush. Collingwood: Black Inc.
Climate Council. (2017a). New report: Adani monster mine could damage climate, health, tourism.
Retrieved from https://www.climatecouncil.org.au/carmichaelmediarelease
Climate Council. (2017b). Risky business: Health, climate and economic risks of the Carmichael
coalmine.
Committee for Economic Development of Australia. (2012). Australia’s unconventional energy
options. Melbourne.
Commonwealth Bank. (2019). How we implement sustainable business practices. Retrieved
from https://www.commbank.com.au/about-us/opportunity-initiatives/opportunity-from-good-
business-practice/sustainable-business-practices.html#Corporate%2520governance
Connell, R. (2010). Understanding neoliberalism. In S. Braedley & M. Luxton (Eds.), Neoliberalism
and everyday life (pp. 22–36). Montreal: McGill-Queen’s University Press.
Connor, L., Freeman, S., & Higginbotham, N. (2009). Not just a coalmine: Shifting grounds of
community opposition to coal mining in Southeastern Australia. Ethnos, 74(4), 490–513.
Coorey, P. (2019, 4 February). Banking royal commission final report: Coalition pulls punches
on broker crackdown. Australian Financial Review. Retrieved from https://www.afr.com/bus
iness/banking-and-finance/banking-royal-commission-coalition-rules-out-broker-crackdown-
20190203-h1aszv
Cox, L. (2015, 30 June). Adani’s Carmichael mine is unbankable says Queensland Treasury. The
Sydney Morning Herald. Retrieved from https://www.smh.com.au/business/companies/adanis-
carmichael-mine-is-unbankable-says-queensland-treasury-20150630-gi1l37.html
de Poloni, G. (2017, 6 November). Gas exploration proposal draws fire in Western Australia’s key
south-west agricultural region. ABC News. Retrieved from https://www.abc.net.au/news/2017-
11-06/wa-south-west-farmers-say-no-to-gas-exploration/9120728
Department of Mines and Petroleum. (2017). The facts about natural gas and fracture stimulation
in Western Australia. Perth.
Doane, D. (2005). Beyond corporate social responsibility: Minnows, mammoths and markets.
Future, 37, 215–229.
Dore, R. P. (2000). Stock market capitalism: Welfare capitalism: Japan and Germany versus the
Anglo-Saxons. Oxford: Oxford University Press.
Duus, S. (2013). Coal contestations: Learning from a long, broad view. Rural Society, 22(2), 96–110.
Edelman. (2017). 2017 Edelman trust barometer—Global results. Retrieved from https://www.ede
lman.com
Enoch, S. (2007). A greener potemkin village? Corporate social responsibility and the limits of
growth. Capitalism Nature Socialism, 18(2), 79–90.
Environmental Justice Australia. (2015). A review of the Adani group’s environmental history in
the context of the Carmichael coal mine approval. Carlton, Victoria.
Environmental Justice Australia. (2017). The Adani brief. What governments and financiers need
to know about the Adani Group’s record overseas. Carlton, Victoria.
Epstein, E. M. (2007). The good company: Rhetoric or reality - corporate social responsibility and
business ethics redux. Amercian Business Law Journal, 44(Summer), 207–222.
Fahrer, J. G. (2015). Indiviidual report to the Land Court of Queensland. Melbourne.
Corporate Social Responsibility in Australia 615

Farcic, E. (2018, 3 December). Fracking protesters pledge to fight on The West Australian. Retrieved
from https://www.pressreader.com
Farrar, J. (2008). Corporate governance. Theories, principles and practice (3rd ed.). Sydney: Oxford
University Press.
Friedman, M. (1970, 13 September). The social responsibility of business is to increase its profits.
New York Times Magazine, pp. 122–126.
Geoscience Australia, & Australian Bureau of Agricultural and Resource Economics. (2010).
Australian gas resource assessment 2012. Canberra.
Giroux, H. A. (2019). Beyond dystopian education in a neoliberal society. Fast Capitalism, 10(1).
Gjølberg, M. (2009). Measuring the immeasurable? Constructing an index of CSR practices and
CSR performance in 20 countries. Scandinavian Journal of Management, 25, 10–22.
Gluyas, R. (2016, 18 April). Are Australia’s banks really behaving badly? The Australian.
Retrieved from https://www.theaustralian.com.au/news/inquirer/are-australias-banks-really-beh
aving-badly/news-story/f575d114197c1785d0b922530df97abb
Government of Western Australia. (2009). Regulatory impact assessment process review. Perth.
Government of Western Australia. (2015, 8 June). Focus on future of WA’s emerging gas industry.
Media Release. Retrieved from https://www.mediastatements.wa.gov.au/Pages/Barnett/2015/06/
Focus-on-future-of-WAs-emerging-gas-industry.aspx
Government of Western Australia. (2017). The State Government has stopped the use of hydraulic
fracture stimulation (fracking) for onshore petroleum exploration or development in Western
Australia. Perth.
Hanlon, R. J. (2011). Engineering corporate social responsibility: Elite stakeholders, states and the
resilience of neoliberalism. Contemporary Politics, 17(1), 71–87.
Hannam, P. (2017, 4 April). ‘Barbaric’: Farmers rattled as Adani coal mine granted unlimited
water access. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/enviro
nment/barbaric-farmers-rattled-as-adani-coal-mine-granted-unlimited-water-access-20170404-
gvdk5v.html
Hare, B., Roming, N., Fuentes Hutfilter, U., Schaeffer, M., & Beer, M. (2018). Western Australia’s
gas gamble. Berlin, Germany.
Hastie, H., & Latimer, C. (2019, 14 March). EPA buckles under pressure from WA government, oil
and gas sector. The Sydney Morning Herlad. Retrieved from https://www.smh.com.au/business/
the-economy/epa-buckles-under-pressure-from-wa-government-oil-and-gas-sector-20190314-
p5144l.html \
Haswell, M. (2017). Health concerns associated with unconventional gas mining in Western
Australia: A critical review. Brisbane.
Hayne, K. (2018). Interim report—royal commission into misconduct in the banking. Canberra:
Superannuation and Financial Services Industry.
Hayne, K. (2019). Final report—royal commission into misconduct in the banking, superannuation
and financial services industry. Canberra.
Higginbotham, N., Freeman, S., Connor, L., & Albrecht, G. (2010). Environmental injustice and air
pollution in coal affected communities, Hunter Valley, Australia. Health & Place, 16(2), 259–266.
Hirschman, A. O. (1991). The rhetoric of reaction. Cambridge: Harvard University Press.
Hoque, K. B. (1985). Social responsibilities of business: Myth or reality? The Dhaka University
Studies, 42(1 (Part A)), 119–127.
Hughes, T. P., Kerry, J. T., Álvarez-Noriega, M., Álvarez-Romero, J. G., Anderson, K. D., Baird, A.
H. … Berkelmans, R. (2017). Global warming and recurrent mass bleaching of corals. Nature,
543(7645), 373
Humpage, L. (2014). Policy change, public attitudes and social citizenship: Does neoliberalism
matter? Bristol, UK: Policy Press.
Institute for Energy Economics and Financial Analysis. (2017). IEEFA Update: An increasingly
cursed Australian coal project. Ohio: Cleveland.
International Energy Agency. (2017). Market report series: Coal 2017. Paris.
616 M. Brueckner

Jenkins, C. (2018, 30 November). WA Labor opens the gate to fracking. Greenleft Weekly. Retrieved
from https://www.greenleft.org.au/content/wa-labor-opens-gate-fracking
Joye, C. (2017, 19 May). Big bank subsidy worth more than $5 billion annually. Australian Financial
Review. Retrieved from https://www.afr.com/markets/equity-markets/big-bank-subsidy-worth-
more-than-5-billion-annually-20170518-gw8491
Keane, B., & Dyer, G. (2019, 6 February). What Hayne should have done. Crikey. Retrieved from
https://www.crikey.com.au/2019/02/06/hayne-royal-commission-recommendations
Keane, B., & Dyer, G. (2019, 9 October). A stagnant government has created a stagnant Australia.
Crikey. Retrieved from https://www.crikey.com.au/2019/10/08/a-stagnant-government-has-cre
ated-a-stagnant-australia/
Kehoe, J. (2016, 7 October). Treasurer Scott Morrison defends ‘strong banks’ in US. Australian
Financial Review. Retrieved from https://www.afr.com/news/politics/treasurer-scott-morrison-
defends-strong-banks-in-us-20161006-grw2tf
Kellow, A., & Niemeyer, S. (1999). The development of environmental administration in Queensland
and Western Australia: Why are they different? Australian Journal of Political Science, 34(2),
205–222.
Knott, M. (2016, 7 August). Scott Morrison slams banking royal commission proposal as nothing
more than a ‘populist whinge’. Sydeny Morning Herald. Retrieved from https://www.smh.com.
au/politics/federal/scott-morrison-slams-banking-royal-commission-proposal-as-nothing-more-
than-a-populist-whinge-20160807-gqms5y.html
Kok, P., van der Wiele, T., McKenna, R., & Brown, A. (2001). A corporate social responsibility
audit within a quality management framework. Journal of Business Ethics, 31(4), 285–297.
Layman, L. (1982). Changing resource development policy in Western Australia, 1930s to 1960s.
In E. J. Harman & B. W. Head (Eds.), State, capital and resources in the North and West of
Australia (pp. 149–165). Nedlands, WA: UWA Press.
Lee, M.-D.P. (2008). A review of the theories of corporate social responsibility: Its evolutionary
path and the road ahead. International Journal of Management Reviews, 10(1), 53–73.
Lidberg, J. (2019). The distortion of the Australian public sphere: Media ownership concentration
in Australia. AQ: Australian Quarterly, 90(1), 12–20.
Linden, A., & Staples, W. (2019, 5 February). Banking inquiry’s omissions mean we’ll need another
royal commission. INDaily. Retrieved from https://indaily.com.au/opinion/2019/02/05/banking-
inquirys-omissions-mean-well-need-another-royal-commission/
Long, S. (2017, July 6). Galilee Basin mines will slash coal output, jobs elsewhere, Wood Mackenzie
says. ABC News. Retrieved from https://www.abc.net.au/news/2017-07-06/galilee-basin-mining-
project-will-reduce-coal-output:-research/8682164
Luke, H. (2017). Social resistance to coal seam gas development in the Northern Rivers region of
Eastern Australia: Proposing a diamond model of social license to operate. Land Use Policy, 69,
266–280.
Luke, H., Brueckner, M., & Emmanouil, N. (2018). Unconventional gas development in Australia:
A critical review of its social license. The Extractive Industries and Society.
Madsen, H., & Ulhøi, J. P. (2001). Integrating environmental and stakeholder management. Business
Strategy and the Environment, 10, 77–88.
Massola, J. (2018, February 1). Big surge in opposition to Adani, new polling reveals. The Sydney
Morning Herald. Retrieved from https://www.smh.com.au/politics/federal/big-surge-in-opposi
tion-to-adani-new-polling-reveals-20180131-p4yz4o.html
Matten, D., & Moon, J. (2008). ‘Implicit’ and ‘explicit’ CSR: A conceptual framework for a compar-
ative understanding of corporate social responsibility. Academy of Management Review, 33(2),
404–424.
Meinshausen, M. (2015). Individual report to the Land Court of Queensland on “Climate Change—
Emissions”. Melbourne.
Miles, M., Munilla, L., & Darroch, J. (2006). The Role of Strategic Conversations with Stakeholders
in the Formation of Corporate Social Responsibility Strategy. Journal of Business Ethics, 69(2),
195–205.
Corporate Social Responsibility in Australia 617

Munilla, L. S., & Miles, M. P. (2005). The corporate social responsibility continuum as a component
of stakeholder theory. Business and Society Review, 110(4), 371–387.
Murphy, K. (2019, February 4). Yes, Kenneth: the Coalition response to the banking inquiry is pure
politics. The Guardian. Retrieved from https://www.theguardian.com/australia-news/2019/feb/
04/coalition-response-banking-inquiry-pure-politics
National Australia Bank. (2019). We’re more than money. Retrieved from https://www.nab.com.au/
about-us/corporate-responsibility
Newell, P. (2001). Citizenship, accountability and community: The limits of the CSR agenda.
Journal of International Development, 13(3), 907–919.
Oil & Gas Australia. (2018). Oil and gas industry welcomes lifting of WA fracking moratorium.
Retrieved from https://webcache.googleusercontent.com/search?q=cache:x4oJ-Oz5JGwJ:www.
oilandgasaustralia.com.au/oil-gas-industry-welcomes-lifting-wa-fracking-moratorium/+&cd=
16&hl=en&ct=clnk&gl=au&client=safari
Parliamentary Joint Committee on Corporations and Financial Services. (2006). Corporate
responsibility: Managing risk and creating value. Canberra.
Pearce, L. (2017, 26 June). The Great Barrier Reef is worth $56 billion to our economy. Here’s the
proof. Huffington Post (Australian Edition). https://www.huffingtonpost.com.au/2017/06/26/the-
great-barrier-reef-is-worth-56-billion-to-our-economy-here_a_23001277/
Phillimore, J. (2014). The politics of resource development in Western Australia. In M. Brueckner, A.
Durey, R. Mayes, & C. Pforr (Eds.), Resource curse or cure? On the sustainability of development
in Western Australia (pp. 25–40). Heidelberg: Springer.
Pillay, R. G. (2016). The limits to self-regulation and voluntarism: From corporate social
responsibility to corporate accountability. Amicus Curiae, 2014(99), 10–13.
Pini, B., Mayes, R., & McDonald, P. (2010). The emotional geography of a mine closure: A study
of the Ravensthorpe nickel mine in Western Australia. Social and Cultural Geography, 11(6),
559–574.
Queensland Government. (2016). Adani’s Carmichael coal mine environmental authority approved.
Brisbane.
Queensland Government. (2018). Carmichael coal mine and rail project. Brisbane.
Reich, R. (2008). Supercapitalism. The transformation of business, democracy and everyday life.
Melbourne: Scribe.
Remeikis, A. (2019, February 10). Banking reform won’t happen until after the election, Christopher
Pyne says. Retrieved from https://www.theguardian.com/australia-news/2019/feb/10/banking-ref
orm-wont-happen-until-after-the-election-christopher-pyne-says
ROBECOSAM. (2017). Country sustainability ranking.
Robertson, J. (2017, June 6). Adani gives ‘green light’ to $16bn Carmichael coal mine. The
Guardian. Retrieved from https://www.theguardian.com/environment/2017/jun/06/adani-gives-
green-light-to-16bn-carmichael-coal-mine
Saunders, A., Timson, L., & Desloires, V. (2015, November 11). Report shows safety issues
at BHP Billiton’s failed Brazilian dam were highlighted two years ago. The Sydney Morning
Herald. Retrieved from https://www.smh.com.au/business/mining-and-resources/report-shows-
safety-issues-at-bhp-billitons-failed-brazilian-dam-were-highlighted-two-years-ago-20151111-
gkwb5w.html
Scambary, B. (2013). My country, mine country: Indigenous people, mining and development
contestation in remote Australia. Canberra: ANU E Press.
Schmulow, A., Fairweather, K., & Tarrant, J. (2019). Restoring Confidence in Consumer Financial
Protection Regulation in Australia: A Sisyphean Task? Federal Law Review, 47(1), 91–120.
Selznick, P. (2002). The communitarian persuasion. Baltimore, MD: Johns Hopkins University
Press.
Shamir, R. (2004). The de-radicalisation of corporate social responsibility. Critical Sociology, 30(3),
669–689.
Shamir, R. (2010). Capitalism, governance, and authority: The case of corporate social responsi-
bility. Annual Review of Law and Social Science, 6(1), 531–553.
618 M. Brueckner

Sherry, N. (2009, February 5). Government to provide assistance for establishment of responsible
investment academy. Retrieved from https://ministers.treasury.gov.au/
Slezak, M. (2017a, October 7). Most Australians oppose Adani mine, poll shows, amid national
protests. The Guardian. Retrieved from https://www.theguardian.com/environment/2017/oct/07/
most-australians-oppose-adani-mine-poll-shows-amid-national-protests
Slezak, M. (2017b, 16 August). Why Adani’s planned Carmichael coalmine matters to Australia—
and the world. The Guardian. Retrieved from https://www.theguardian.com/business/2017/aug/
16/why-adanis-planned-carmichael-coalmine-matters-to-australia-and-the-world
Smith, K. (2017, June 6). Anger in WA as Labor reneges on gas promises. Green Left Weekly, p. 6.
Sparrow, J. (2017, April 7). It’s either Adani or the Great Barrier Reef. Are we willing to fight for
a wonder of the world? The Guardian. Retrieved from https://www.theguardian.com/commen
tisfree/2017/apr/07/its-either-adani-or-the-great-barrier-reef-are-we-willing-to-fight-for-a-won
der-of-the-world
Subramaniam, N., Kansal, M., & Babu, S. (2017). Governance of mandated corporate social respon-
sibility: Evidence from Indian government-owned firms. Journal of Business Ethics, 143(3),
543–563.
Szabó, D. G., & Sørensen, K. E. (2015). New EU directive on the disclosure of non-financial
information (CSR). Nordic & European Company Law Working Paper(15–01).
The Wilderness Society. (2018). The truth about fracking and the environment. Retrieved from
https://wilderness.org/article/truth-about-fracking-and-environment
Thurbon, E. (2012). From Developmentalism to Neoliberalism and Back Again? Governing the
Market in Australia from the 1980s to the Present. In C. Kyung-Sup, B. Fine, & L. Weiss (Eds.),
Developmental Politics in Transition: The Neoliberal Era and Beyond (pp. 274–295). London:
Palgrave Macmillan UK.
Trigger, D. S. (1997). Mining, landscape and the culture of development ideology in Australia.
Ecumene, 4(2), 161–180.
Upstream Petroleum Resources Working Group Report to COAG Energy Council. (2015). Coal
seam, shale and tight gas in Australia: Resources assessment and operation overview. . Caberra.
Vallentin, S., & Murillo, D. (2012). Governmentality and the politics of CSR. Organization, 19(6),
825–843.
Vedelago, C. (2018, May 11). Cocaine, girls, million-dollar fraud: What the Commonwealth Bank
lender did next. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/business/
banking-and-finance/cocaine-girls-million-dollar-fraud-what-the-commonwealth-bank-lender-
did-next-20180511-p4zeqt.html
Verrender, I. (2017, November 27). Royal commission into banking: The inquiry that could kill
the Government. ABC News. Retrieved from https://www.abc.net.au/news/2017-11-27/how-bad-
are-our-banks/9194984
Verstegen, P. (2018, December 18). Western Australia is being opened to fracking on misleading
and ill-founded grounds The Guardian. Retrieved from https://www.theguardian.com/commen
tisfree/2018/dec/18/western-australia-is-being-opened-to-fracking-on-misleading-and-ill-fou
nded-grounds
Vogwill, R. (2017). Western Australia’s tight gas industry - A review of groundwater and
environmental risks. Perth.
Waagstein, P. R. (2011). The mandatory corporate social responsibility in Indonesia: Problems and
implications. Journal of Business Ethics, 98(3), 455–466.
Wangan and Jagalingou Family Council. (2018). Our fight. Retrieved from https://wanganjagali
ngou.com.au/our-fight/
Wesley, A. (2014). The socio-political construction and experience of corporate social responsi-
bility (CSR): An investigation into the conflict surrounding the James Price Point LNG precinct,
Kimberley, Western Australia. Ph.D., Curtin University, Perth.
Wesley, A., & MacCallum, D. (2014). The political economy of corporate social responsibility in
the resource sector in Western Australia. A case study of the proposed James Price Point LNG
Corporate Social Responsibility in Australia 619

precinct. In M. Brueckner, A. Durey, R. Mayes, & C. Pforr (Eds.), Resource curse or cure? On
the sustainability of development in Western Australia (pp. 59–73). Heidelberg: Springer.
Western Australian Standing Committee of Environment and Public Health Affairs. (2015).
Implications for Western Australia of hydraulic fracturing for natural gas. Report 42. Perth.
White, R. (2013). Resource extraction leaves something behind: Environmental justice and mining.
International Journal of Crime and Justice, 2(1), 50–64.
Windsor, D. (2001). The future of corporate social responsibility. the International Journal of
Organizational Analysis, 9(3), 225–256.
World Business Council for Sustainable Development. (2000). Corporate social responsibility:
making good business sense. Geneva.
CSR in the Norwegian Context

Siri Granum Carson and Heidi Rapp Nilsen

Abstract In this chapter, we sketch the rise of explicit CSR in the Norwegian
context by focusing on the extractive industries’ entry into a global market and
the resulting legitimacy challenges arising from this transition. Explicit CSR, in the
sense of expressing social and environmental responsibility and voluntarily commit-
ting to promote societal benefits, can be viewed as a strategy by which the companies
attempt to fill the governance gaps of global capitalism. We review two major Norwe-
gian companies, Hydro and Statoil/Equinor, and argue that while their CSR strategy
has been quite successful, it is challenging to reconcile the role of a socially and
environmentally responsible company with being an actor in the global extractive
industries.

Keywords Implicit CSR · Explicit CSR · Globalisation · Hydro · Statoil/Equinor

The extractive industries have significant impact on the environment and on the
societies in which they operate, and should arguably take on environmental and social
responsibilities accordingly. Corporate Social Responsibility (CSR) is a concept
suggesting that private companies have obligations towards society beyond making a
profit. Following internationalisation and increasing expectations from stakeholders,
CSR has become a central management concept in the extractive industries also in
Norway.
An important driver for CSR in the Norwegian context has been the perceived
governance gap in the global economy, and official Norwegian CSR policy was
primarily directed towards business operations abroad. The need for explicit CSR

S. G. Carson (B)
Department of Philosophy and Religious Studies, Norwegian University of Science and
Technology (NTNU), Trondheim, Norway
e-mail: [email protected]
H. R. Nilsen
Department of Industrial Economics and Technology Management, Norwegian University of
Science and Technology (NTNU), Trondheim, Norway
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 621
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_35
622 S. G. Carson and H. R. Nilsen

in the relatively highly regulated domestic market, where labour rights and environ-
mental performance is secured through laws, regulation and tripartite agreements,
was initially viewed as low. But eventually, globalisation also affects the domestic
socio-cultural and political environment of business challenging the traditional ideals
of the Nordic countries, among other things through a higher level of industry’s
self-regulation.
In this chapter, we look into how Hydro and Equinor, two large and partly state-
owned companies of the extractive industries in Norway, have addressed some of
these issues. Both companies operate domestically and abroad. Both companies have
a history of high ambitions of CSR and corporate sustainability, among other things
through their involvement in initiatives such as Extractive Industries Transparency
Initiative (EITI). In the Hydro example, we explore the historic development of an
explicit CSR policy in response to the cross-pressure of internationalisation. In the
Equinor example, we look into some specific challenges of a national oil company
in terms of political and environmental responsibility.

1 From Implicit to Explicit CSR in Norway1

Matten and Moon (2008) introduce a distinction between two kinds of CSR.
Depending on the nature of the overall business-society relations, CSR may be char-
acterised as either explicit, i.e. codified as corporate policies explicitly formulated by
(or for) the companies, or implicit, i.e. codified as institutional frameworks implic-
itly assumed by the companies. Although European companies traditionally have
kept a lower profile on the topic of CSR than American companies, Matten and
Moon argue that no evidence suggests that European companies in general are less
socially responsible. The difference between American and European companies
is, thus, not necessarily a matter of more or less socially responsible business, but
rather a difference between what they call “explicit and implicit forms of CSR”. In
other words: American companies have typically developed company-specific and
explicit policies on social and environmental responsibility, while European compa-
nies have not—rather, corporate responsibility has been implied in the overall struc-
tures of the business-society relations. Explicit CSR has, however, gained ground,
also in the Western and Northern parts of Europe (Matten and Moon 2008). Matten
and Moon specify business-society relations using Whitley’s comparative business
system framework, which identifies four key elements: The political system (power
and engagement of the state), the financial system (form and distribution of corporate
ownership), education and labour systems, and the cultural system (broad assump-
tion about society, business and government) (cf. Whitley 1997). They employ this
framework in order to understand the historic differences between the US and Europe
when it comes to CSR:

1 This section and the next section with the Hydro example draws heavily on Carson et al. (2015).
CSR in the Norwegian Context 623

U.S.-style CSR has been embedded in a system that leaves more incentive and opportunity for
corporations to take comparatively explicit responsibility. European CSR has been implied
in systems of wider organisational responsibility that have yielded comparatively narrow
incentives and opportunities for corporations to take explicit responsibility (Matten and
Moon 2008: 409).

Whitley’s theory of national business systems explains how American and

European forms of CSR are different. Further, Matten and Moon refer to neo-
institutionalism in order to explain why these differences are gradually dissolving.
The neo-institutionalist thesis of homogenisation suggests that organisations become
increasingly similar because popular ideas and recipes for organisational manage-
ment—such as CSR—gradually become standard criteria for the legitimacy of an
organisation and therefore becomes institutionalised all over the world. Tradition-
ally, European companies did not articulate and promote their contributions to the
enhancement of social and environmental goods as “CSR”. Changes within the
national business systems of Europe has, however, increasingly led companies to
adopt explicit CSR strategies, even in the Nordic context (cf. Strand 2013; Vallentin
and Murillo 2010; Røvik 2007). Explicit CSR, thus, increasingly becomes a strategic
tool for the enhancement of corporate reputation in order to build public trust. Carson
et al. (2015) analyses the transition from implicit to explicit CSR in the Norwegian
context, and identifies two drivers for this development: Re-legitimising and organ-
isational expressiveness, which can both be viewed as strategic adjustments to the
ongoing globalisation processes changing both the market-and production conditions
for Scandinavian companies.
The development of the Nordic welfare states from World War II up until the
1990s has historically conditioned implicit CSR. Much of what has been framed
as the social responsibilities of U.S. companies—specifically in relation to labour
rights such as workers’ pay, benefits and safe working conditions—has in the Nordic
context typically been negotiated and institutionalised through political compromises
and tripartite agreements. A consensual political culture, a strong social-democratic
welfare state, and well-functioning partnerships between business, government and
labour organisations can be viewed as characteristic of a “Nordic” or “Scandinavian”
model of implicit CSR (cf. e.g. Vallentin and Murillo 2010; Gjølberg 2010; Midttun,
Gautesen and Gjølberg 2006). In this perspective, offering safe working conditions
and social benefits is primarily a matter of complying with laws and agreements.
The same is arguably the case for environmental issues. Midttun et al. (2006) argue
that Nordic countries have strong traditions of regulation and social embeddedness
of business behaviour, which give them certain advantages when it comes to insti-
tutionalising CSR. Scandinavian companies have strong traditions for stakeholder
engagement beyond what the law requires (cf. Rhenman 1964, 1968; Näsi 1995),
which can be framed as a “cooperative advantage” of these companies in a global
market (Strand 2009; Strand/Freeman 2013).
Gjølberg (2010) argues that CSR in the Nordic countries builds on a certain
“Nordic normative legacy” in the way solidarity, decency and respect is institution-
alised (Gjølberg 2010). This leads up to a Nordic consensus that CSR is more or
less superfluous in the domestic context, but could nevertheless be important for
624 S. G. Carson and H. R. Nilsen

Nordic companies when they get involved in operations abroad, in the absence of
a global, multilateral framework. Among the Nordic countries, the specific Norwe-
gian approach to CSR is characterised by the substantial state ownership in large
companies, notably in the extractive industries operating in high-risk markets like
Nigeria, Angola and Azerbaijan (Equinor), Qatar and Vietnam (Hydro). As a major
operator in these countries, the Norwegian government has perceived a rising need
to explicitly address questions regarding business and human rights, corruption and
environmental hazards, and to develop an official policy on CSR. Official Norwe-
gian CSR policy has thus, almost exclusively focused on business operations abroad,
illustrated by the fact that the CSR initiatives of the Norwegian government from the
beginning were coordinated from the Ministry of Foreign Affairs. The governmental
“White Paper” on CSR (Norwegian Ministry of Foreign Affairs 2008/2009) also
reflects this focus concerning impact and responsibility of Norwegian companies
involved in activities abroad:
Increasing internationalisation means that Norwegian companies are operating to a greater
extent than before in countries where there is little respect for human rights. Working condi-
tions are often unacceptable and child labour is used in production processes. There is
discrimination in the workplace on the basis of gender, religious belief or ethnic background.
Too little account is taken of environmental impacts; corruption may be widespread. Often
these conditions are related to deficiencies in legislation, weak enforcement or a lack of
sanctions. In many cases, the individual company thus faces a number of fundamental ques-
tions. Should we, or should we not, become engaged in the country? What can reasonably
be required or expected of our company, and how can we meet these expectations?2

This view was also supported by the employers’ association the Confederation
of Norwegian Enterprise (NHO), as well as by the Norwegian Labour Organisation
(LO). CSR was perceived as mainly voluntary, versus national questions of labour
rights, which should be kept within the framework of binding tripartite agreements.
Trygstad and Lismoen (2008) argue that the Norwegian, highly institutionalised
and law-regulated labour situation represents the paradigm of implicit CSR. This
general agreement concerning the business–society relation is the reason why the
CSR debate in Norway primarily has centred on Norwegian companies’ activities
abroad (cf. Trygstad and Lismoen 2008). Gjølberg points out that the perceived
governance gap in the global economy is an important driver behind Norwegian
CSR, thus “the Norwegian approach to CSR remains decidedly global, and even
explicitly non-domestic, in its orientation” (Gjølberg 2010).
Globalisation affects the socio-cultural and political environment of business
within the Norwegian labour situation as well, and contributes to the rise of explicit
CSR. The traditional ideal of labour rights being negotiated through tripartite agree-
ments and secured at a national level is challenged by a competing ideal of industry’s
self-regulation of labour standards. In the 1997 reform of the safety, health and envi-
ronment (SHE) systems in Norway called “internal control”, the direct control of
SHE conditions was delegated from the government to the enterprises (cf. Hovden
1998; Saksvik and Quinlan 2003). When individual companies become responsible

2 https://www.regjeringen.no/en/dokumenter/report-no.-10-to-the-storting-2008-2009/.
CSR in the Norwegian Context 625

for implementing SHE, this promotes explicit statements from the companies on how
they address these issues, and can thus be seen as an early driver of explicit CSR in
the Norwegian context.
The explication of CSR in Scandinavia might be seen as a rise in organisational
expressiveness” (Schultz et al. 2000), with increasing attention to the image, reputa-
tion, identity, and values of products and organisations. This tendency is especially
striking when it comes to social and environmental issues (Røvik 2007). Globali-
sation and the resulting increased competition lead to more focus on the expanded
product concept in order to differentiate products, brands and companies. Organisa-
tions seek to be associated with positive values, and environmental and social perfor-
mance becomes strategically important for branding and image building (Hagen
2009). CSR as a popular management concept (Røvik 2007) and a “corporate mega-
trend” (Midttun 2013), is the ultimate expression of this expressiveness. CSR blurs the
boundaries between marketing and public relations, e.g. when a petroleum company
address environmental threats with the voice of a worried “corporate citizen”, but at
the same time might be seen to act as a reputation-building commercial actor. The
move towards explicit CSR, where Norwegian companies become more expressive
regarding social and environmental values, can be seen as a strategic move by which
the companies attempt to manage corporate legitimacy in the complex situation of a
global market (Carson 2019).

2 “The Hydro Way”

Hydro is a Norwegian aluminium producer with activity in over 50 countries,

employing 35,000 people. Its headquarters is in Oslo, nearly two-thirds of the shares
of the company are in Norwegian hands, and the Norwegian government is the major
shareholder with 34% of the shares. The company was established by engineer Sam
Eyde in 1905 as an innovative producer of fertiliser based on Norwegian hydropower
(Andersen 2005). Later, the company developed into a conglomerate with diverse
activities: fertilisers, aluminium, oil and gas, and aquaculture. Aluminium eventu-
ally became the core activity. Aluminium production is a very energy-demanding
activity, and Norway’s abundance of hydropower created favourable natural precon-
ditions for this industry. Hydro first established aluminium works at Karmøy (1967),
and later bought several works in Norway, among others Årdal og Sunndal Verk
(ÅSV), with factories in Årdal, Sunndalsøra and Høyanger—industrial locations
where the aluminium works were the cornerstones of the respective local commu-
nities (Frøland and Karlsen 2008). After 2000, Hydro abandoned the diversification
strategy3 and became a pure aluminium company with global ambitions. Wholesale
purchase of German and French aluminium works, building of a large aluminium

3 The fertilizer production was spun off as a separate business under the name of Yara in 2004, while

the oil and gas activity was sold and merged with Statoil in 2007.
626 S. G. Carson and H. R. Nilsen

factory in Qatar, and buying up smelting works and raw material producers in Brazil
were among the moves to secure this position (Røyrvik 2008).
In terms of social responsibility, Hydro tends to point to its historic role as a
cornerstone company in vulnerable local communities along the Norwegian coast-
line. Hydro’s position in these communities may be conceptualised as “implicit
CSR”, with a perceived consistency between the needs of the company and the local
community. Hydro’s initiatives towards e.g. building schools, roads and railways,
arose out of a kind of “enlightened self-interest”, constituting a win-win situation for
company and local community (cf. Reiten 2007). In the 1960s and -70 s, however,
the debate concerning Hydro’s obligations towards society changed character. The
relocation of business operations, specifically the move of the nitrate production
from Rjukan to Herøya in the 1960s (Sagafoss 2005), was controversial. These
were economically motivated decisions, which went against the benefit of the local
community, thus the established assumption that what was good for Hydro was
good for the community as well did not hold anymore. The growing environmental
concerns also created controversy for Hydro. The narrow fjord arms of Høyanger and
Årdal were for a period deeply affected by fluoride emissions from the electrolysis
(Andersen and Yttri 1997). Since the end of the 1980s, these emissions decreased
considerably as a result of investments in new technology, but in general, the envi-
ronmental challenges of Hydro remained high on the agenda. Civil society protests
and demonstrations pointed out major shortcomings in the environmental policy of
Hydro.
In the beginning, Hydro dealt with these challenges reactively, almost reluctantly.
Throughout the 1980s and 1990s, social and environmental issues were primarily
addressed in response to external pressure. Eventually, this policy changed and
Hydro aimed to become more proactive, for example, by releasing environmental
information before the protesters or the media did—even if the information was
negative. From 1989, the company published an environmental report in addition to
the annual report. At the time, this was seen as pioneering work that set a standard
for all companies. In the 1990s, Hydro managers participated in the establishment of
the World Business Council for Sustainable Development (Sagafoss 2005). In 1999,
Hydro hosted an international seminar resulting in the publication of “Invitation to
Dialogue” in 2000. This was the first of several Hydro publication on CSR.
The background for this strategic move was the internationalisation processes that
Hydro was involved in, and the increasing competition the company faced as a result
of this. Hydro closed down several of their operations along the coastline of Norway,
among them Årdal and Høyanger, with significant social and economic impacts as
these plants constituted the cornerstones of their respective communities (Sagafoss
2005). At the same time, Hydro invested heavily in large, new plants abroad. These
investments generated novel challenges for the company with regard to both social
and environmental responsibility. In December 2001, Hydro withdrew from a contro-
versial mining project in Orissa in India, following protests and critique from local
community and environmental and human rights organisations. The protests were
based on fear of losing access to water resources and arable land. In addition, in the
area where the mining operations were to take place, there was a mountain held to be
CSR in the Norwegian Context 627

holy by one of the local tribes. Hydro allocated considerable resources to solving the
conflicts in the area, among other things by organising stakeholder dialogues. Even-
tually, they decided that the conflicts ran too deep and risks were too high, and that the
prudent thing was to withdraw from the whole project. That did not put a complete
stop to the protest against the company, however. A Norwegian NGO argued that
Hydro should stay involved in order to take responsibility for the continuation of the
process, rather than choosing an exit strategy.4
Another example illustrating Hydro’s new dilemmas is their involvement in the
building of a gigantic aluminium smelting works in Qatar in collaboration with the
Qatari national petroleum company. The factory opened in 2011, and the project
was heavily criticised for a number of reasons: for jeopardising Norwegian jobs,
for accepting CO2 emissions way above Norwegian standards, and for disregarding
basic human rights. As regards the latter point: Unionising is against the law in Qatar,
and Hydro was forced to accept this condition for a large majority of the workers
on the project. In addition, Hydro had to accept considerable differences in salaries
based on the worker’s nationality in their aluminium factory in Qatar.5
In February 2018, Hydro faced serious accusations of contaminating drinking
water supply in Brazil’s metropolitan area of Para’s capital in the Amazon region.
Heavy rains led to the overflow of several basins, and samples taken by the Brazilian
ministry’s technicians found high levels of lead, aluminium, sodium, and other
substances harmful to human and animal health (The Rio Times 2018). Hydro was
accused that their plant Alunorte, in the affected area, was the cause of this contam-
ination by the heavy rain triggering the leaking of these harmful substances. Hydro
denied this and said that they cooperated with the relevant authorities to address both
the environmental situation and the accusations, and as of January 2019 the produc-
tion embargo on Alunorte was lifted. Hydro has in this same period strengthened
their cooperation and engagement with the local community, including handing out
drinking water to the local inhabitants (Hydro 2019).
These examples illustrate the cross-pressure that constitutes the basis of Hydro’s
CSR policy, between old domestic expectations and new demands abroad. In response
to this, the company develops an explicit CSR strategy which they term “The Hydro
Way”, framed as the explication of the already existing core values of the company,
cf. their annual report from 2004:
Hydro has always taken special pride in doing things that help build a better society. When
Hydro was founded 100 years ago, we helped build a country, not just a company. That
sense of responsibility remains with us today. We have developed our businesses in ways
that contribute more over time, not just to customers and shareholders, but also to society in
general (Hydro 2004: 5).

This quote points to certain implicit values of the company, which they now
explicate in order to emphasise that the company should still be perceived as a
“community builder”. Hydro claims a history as community builder in the Norwegian
context, and on this basis point forward towards taking on global challenges. While

4 Cf. Carson and Skauge (2019: 196).

5 Dagens Næringsliv 21.11.2011.
628 S. G. Carson and H. R. Nilsen

social responsibility used to be viewed as a commitment towards small, vulnerable

local communities in Norway, Hydro today frames social responsibility more in
terms of global challenges such as sustainable development and energy efficiency.

3 The Political and Environmental Responsibility

of Equinor

Equinor, formerly Statoil, is the National Oil Company (NOC) in Norway. It is

one of the largest producers of petroleum in the world, and the Norwegian state is
the majority owner. Since the 1990s, the company has moved from extracting and
producing only on the Norwegian continental shelf, towards internationalisation in
both extraction and production. Today, it is represented in more than 30 countries
among which some, such as Angola and Azerbaijan, are estimated to be among the
most corrupt regimes in the world.6
In 2018, Equinor changed their brand, among other things in order to communicate
a commitment to be part of the transition towards a post-carbon society. However,
the main production is still, and will in the foreseeable future, be carbon-based. As
an international petroleum company, Equinor is unavoidably involved in environ-
mentally degrading activity, and operates in several countries marked by poverty,
inequality, and political oppression. Thus, one might expect that it would have a
hard time passing as a socially responsible company. Nevertheless, the company
has performed very well on international ratings of socially responsible companies.
In 2011, Equinor (then Statoil) ranked as the number one petroleum company on
Fortune Magazine’s “World’s Most Admired Companies” ranking, and the company
has for a number of years scored top marks on Dow Jones Sustainability Index. The
company has participated actively in the shaping of CSR initiatives regarding trans-
parency and the protection of human rights, and is award-winning for its community
projects. From the company’s own perspective, these initiatives are justified in terms
of «enlightened self-interest»: Maintaining good relations to its surroundings is part
of a strategy to achieve competitive advantages, and their good results on these areas
could be seen as indications that this is a successful strategy. However, this strategy
also indicate limits when it comes to the social responsibilities of the company, in
the sense that the commitment to promote social and environmental good only go as
far as what benefits the company.
As we saw above, the Norwegian government’s white paper on CSR brought up
the question whether Norwegian companies should be involved in countries where
there is little respect for human rights, and whether they should use their influence
in these situations. The white paper expresses high expectations that Norwegian

6 These are ranked at, respectively, number 165 (Angola) and 152 (Azerbajan) out of 180 on Trans-

parency International’s Corruption Perception Index of 2018, ranking 180 countries and territories
by their perceived level of public sector corruption according to experts and businesspeople, cf.
https://www.transparency.org/cpi2018, accessed Sept. 9, 2019.
CSR in the Norwegian Context 629

companies should promote good societal and environmental values in the countries
where they operate, and specifically under conditions where the standard and level
of regulation is low. It is reasonable to expect that a company such as Equinor,
where the state is majority owner, will be among the companies that meet the highest
expectations in terms of upholding high standards. Representatives from Equinor
express such high standards, but at the same time take care to communicate the
limits of their responsibility. This is typically the case when questions about the
human rights situation in the countries where they operate are raised, for example
here in a statement from the information director in 2013:
We as a company must follow rules and human rights, while the government should promote
human rights. We take care that our activities contribute to value creation, both for the society
and the shareholders […] This may in itself contribute to a positive development, but we
cannot take on a political responsibility. This is an obligation for the political authorities, for
which we do not have a mandate.7

From one perspective, parts of Equinor’s activity seem to run counter to explicit
political goals of the Norwegian government. In a collection of case studies of the
role of National Oil Companies in global markets, Richard Gordon and Thomas
Stenvoll (2007) write:
[Norway] has taken a proactive stand in the involvement of ethics in foreign policy as a
contributor of aid and supporter of peace processes. On the other hand, as the primary owner
of Statoil, the Norwegian government is involved in the extraction of resource wealth and
the implicit subsidy of regimes that go against the very principles that Norwegian foreign
policy is trying to work against.

The authors mention Angola and Azerbaijan as core examples of this apparent
contradiction, where the activities of the Norwegian NOC help create and enforce
the very same resource curse that Norwegian foreign policy seeks to counteract in
these countries.
Equinor’s CSR strategy in these countries is to support and build initiatives in three
key areas: transparency, labour and human rights, and community projects. These
initiatives are, however, explicitly formulated within the limits of a so-called business
case for CSR, where building good relation to stakeholders is part of a strategy to
gain a competitive advantage.8 In other words: The CSR strategy is only successful to
the extent that Equinor achieves improved economic results in these areas, compared
to other companies that do not to the same extent promote transparency human rights
and community development (cf. Carson 2015).
Even though there has been a development towards exercising political influence
in the countries where they operate (cf. Gulbrandsen and Moe 2005), one could
argue that the CSR initiatives of Equinor only scratch the surface of the problems
with doing business in a country such as Azerbaijan. Azerbaijan is one of the most

7 Petromedia, May 21, 2013, http://petro.no/statoil-vi-kan-ikke-ta-over-et-politisk-ansvar/20003,

Accessed Aug 27, 2015.
8 Cf. e.g. 2013 Sustainability Report (Statoil 2014), p. 1:”The approach is based on our fundamental

belief in the business case for sustainability—efficiency in resources and therefore costs, a long-term
social license to operate and technology that will secure future business opportunities”.
630 S. G. Carson and H. R. Nilsen

corrupt regimes of the world, and a country where a small, ruling elite enjoys the
wealth created by the petroleum industry, while these riches do not benefit the poor
and politically oppressed majority of the people. Arguably, by conducting business
under these circumstances, Equinor serves the enriching and further strengthening
of the ruling elite, thus stalling a potential development in the direction of civil
rights and political freedom (Gordon and Stenvoll 2007). Is Equinor as a company
responsible for this situation in the sense that they ought to take measures towards
changing it (e.g. by attempting to influence the Azeri government or by supporting
its opponents), or are such measures beyond the sphere of corporate social respon-
sibility? In this particular example, the general questions concerning the limits of
corporate responsibility are further complicated by the state ownership, in the sense
that it could be argued that the Norwegian state as a responsible owner is obligated
by certain principles of foreign policy.
The increasing severe situation with climate change (IPCC 2018) constitutes
another challenge to Equinor’s stated ambition to be a socially and environmentally
responsible company while at the same time, remaining a producer of fossil fuels.
The Norwegian Government Pension Fund Global (GPFG) is built on revenues from
the petroleum extraction on the Norwegian continental shelf, primarily executed by
Statoil/Equínor. Recently, GPFG made a decision to exclude oil companies from
its portfolio, in order to reduce the risk for a permanent decline in the oil price
towards the transition to a post-carbon society (The Norwegian Government 2019).
A nuance in this decision is to not exclude companies which also engage in production
of renewable energy, and Equinor are among the companies that do so, although by
only 5 per cent of their total investments (Aftenposten 2018). However, the domestic
policy of the Norwegian government’s petroleum policy remains unchanged, with
no limitations on exploration and production of oil from the Norwegian continental
shelf, including for Equinor’s operations also elsewhere in the world. Still, there is no
doubt that the decision of excluding oil companies from the portfolio puts Norway’s
continuous exploration of oil in a paradox, or even ironic situation as suggested by
a foreign reporter (Canadian public radio 2019). For Equinor, the decision by GPFG
constitutes a challenge when it comes to the objective to portray themselves as a
socially responsible company.

4 Conclusion

The development of the Nordic welfare states has historically conditioned implicit
CSR. Much of what has been framed as voluntary initiatives—and explicitly as
CSR—in the USA has in the Nordic context been negotiated and institutionalised
through political compromises and tripartite agreements. Hence, the “Nordic” model
of CSR has largely been that of implicit CSR. However, an increasing, globalised
business world with a perceived governance gap with regard to environmental stan-
dards and human rights has spurred Nordic and Norwegian firms to explicate CSR,
especially linked to their business operations abroad.
CSR in the Norwegian Context 631

In this chapter, we have sketched the rise of explicit CSR in the Norwegian
context by focusing on the extractive industries’ entry into a global market and
the resulting legitimacy challenges arising from this transition. Explicit CSR, in the
sense of expressing social and environmental responsibility and voluntarily commit-
ting to promote societal benefits, can be viewed as a strategy by which the extrac-
tive companies attempt to fill the governance gaps of global capitalism. Our brief
review of Hydro and Statoil/Equinor indicates that this strategy has been relatively
successful for these two major Norwegian companies, but it also shows that the role
of a socially and environmentally responsible company can be hard to reconcile with
being an actor in the global extractive industries. For Hydro, this is especially chal-
lenging with regard to portraying themselves as being a “community builder” while
facing strong criticisms from the very same communities, both at home and abroad.
For Statoil/Equinor, there is an increasing discrepancy between their proportionally
minor contribution to production of renewable energy and their claim to be perceived
as a socially responsible energy company in the age of a mounting climate crisis.

References

Aftenposten. (2018). Statoil skryter av sin grønne satsing men bruker mer enn 95% av investerin-
gene på olje og gass. Downloaded Mar 2019 from: https://www.aftenposten.no/okonomi/i/a27
oqd/Statoil-skryter-av-sin-gronne-satsing–men-bruker-mer-enn-95-prosent-av-investeringene-
pa-olje-og-gass.
Andersen, K. G. (2005). Flaggskip i fremmed eie. Hydro 1905–1945 [Flagship in foreign hands.
Hydro 1905–1945]. Oslo: Pax Forlag.
Andersen, K. G., & Yttri, G. (1997). Et forsøk verdt: Forskning og utvikling i Norsk Hydro
gjennom 90 år [Worth a trial. Research and development in Hydro through 90 years]. Oslo:
Universitetsforlaget.
Canadian public radio’s national evening show, 8 Mar 9 (2019). Downloaded 15 March 2019
from: https://www.cbc.ca/radio/asithappens/as-it-happens-friday-edition-1.5048766.
Carson, S. (2015). Bedrifters politiske ansvar (The political responsibility of corporations). Magma
Tidsskrift for Økonomi og Ledelse, 6, 22–29.
Carson, S. G. (2019). The corporate legitimacy matrix–A framework to analyze complex business-
society relations. Philosophy of Management, 18(2),169–187.
Carson, S. G., Hagen, Ø., & Sethi, S. P. (2015). From implicit to explicit CSR in a Scandinavian
context: The cases of HÅG and Hydro. Journal of Business Ethics, 127(1), 17–31.
Carson, S. G., & Skauge, T. (2019). Etikk for beslutningstakere [Ethics for decision makers]. Oslo:
Cappelen Damm Akademisk.
Frøland, H. O., & Karlsen, A. (2008). Innledning: Globalisering gjennom et århundre. Langsiktige
trekk ved norsk aluminiumsindustri [Globalization through a century. Long-term features of
Norwegian aluminum industry]. In J. Henden, H. O. Frøland, & A. Karlsen (Eds.), Globalisering
gjennom et århundre. Norsk aluminiumsindustri 1908–2008 (pp. 7–32). Bergen: Fagbokforlaget.
Gjølberg, M. (2010). Varieties of corporate social responsibility (CSR): CSR meets the “Nordic
Model”. Regulation & Governance, 4(2), 203–229.
Gordon, R., & Stenvoll, T. (2007). Statoil: A study in political entrepeneurship. The Changing Role
of National Oil Companies in International Energy Markets. The James A. Baker III Institute for
Public Policy, Rice University.
Gulbrandsen, L. H. & Moe, A. (2005). Oil Company CSR Collaboration in ‘New’ Petro-States.
Journal of Corporate Citizenship, 20(12), 53–64.
632 S. G. Carson and H. R. Nilsen

Hagen, Ø. (2009). Do socially responsible brands lead to socially responsible companies? Under-
standing change in expressive organizations. PhD Thesis, Norwegian University of Science and
Technology, Trondheim.
Hovden, J. (1998). The ambiguity of contents and results in the Norwegian internal control of safety,
health and environment reform. Reliability Engineering and System Safety, 60(2), 133–141.
Hydro. (2004). Corporate social responsibility—Invitation to action. Oslo: Hydro. Retrieved April
10, 2012, from http://www.hydro.com/pagefiles/7233/CSR_en.pdf.
Hydro. (2019). Strengthening our community engagement. Downloaded 17 Mar 2019 from:
https://www.hydro.com/en/press-room/the-situation-in-brasil/timeline-of-key-events/strengthe
ning-our-community-engagement/.
IPCC. (2018). Global Warming of 1.5°C, an IPCC special report on the impacts of global warming
of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in
the context of strengthening the global response to the threat of climate change, sustainable
development, and efforts to eradicate poverty. Downloaded Oct 2018 from http://www.ipcc.ch/
report/sr15/.
Matten, D., & Moon, J. (2008). ‘Implicit’ and ‘explicit’ CSR: A conceptual framework for a compar-
ative understanding of corporate social responsibility. Academy of Management Review, 33(2),
404–424.
Midttun, A. (Ed.). (2013). CSR and beyond. A Nordic perspective. Oslo: Cappelen Damm
Akedemisk.
Midttun, A., Gautesen, K., & Gjølberg, M. (2006). The political economy of CSR in Western
Europe. Corporate Governance, 6(4), 369–385.
Näsi, J. (1995). A Scandinavian approach to stakeholder thinking: An analysis of its theoretical and
practical uses, 1964–1980. In J. Näsi (Ed.), Understanding stakeholder thinking (pp. 97–115).
Helsinki: LSR-Julkaisut Oy.
Norwegian Ministry of Foreign Affairs. (2008/2009). Corporate Social Responsibility in a Global
Economy. Report No. 10 (2008-2009) to the Storting.
Reiten, E. (2007). Askeladden og den globaliserte økonomien—Hydro i endring. [Askeladden (The
rising star) and the global economy—Hydro changing]. Kristofer Lehmkuhl Lecture, Norges
Handelshøyskole. Retrieved April 10, 2012, from http://brage.bibsys.no/nhh/bitstream/URN:
NBN:no-bibsys_brage_24761/1/Lehmkuhl_2007.pdf.
Rhenman, E. (1964). Foeretagsdemokrati och foeretagsorganisation [Industrial democracy and
industrial management]. Stockholm: Thule.
Rhenman, E. (1968). Industrial democracy and industrial management. London: Tavistock.
Røvik, A. (2007). Trender og Translasjoner: Ideer som former det 21. århundrets organisasjon.
[Trends and Translations: Ideas Shaping the 21st Century’s Organization]. Universitetsforlaget,
Oslo.
Røyrvik, E.A. (2008). Directors of creation: an anthropology of capitalist conjunctures in the
contemporary. PhD Thesis, Norwegian University of Science and Technology, Trondheim.
Sagafos, O.J. (2005). Progress of a different nature. Hydro 1905-2005. Oslo, Pax Forlag.
Saksvik, P. Ø., & Quinlan, M. (2003). Regulating systematic occupational health and safety
management: Comparing the Norwegian and Australian experience. Industrial Relations, 58(1),
33–56.
Schultz, M., Hatch, M. J., & Larsen, M. H. (2000). The expressive organization: Linking identity,
reputation, and the corporate brand. Oxford: Oxford University Press.
Strand, R. (2009). Corporate responsibility in Scandinavian supply chains. Journal of Business
Ethics, 85, 179–185.
Strand, R. (2013). The chief officer of corporate social responsibility: A study of its presence in top
management teams. Journal of Business Ethics, 112(4), 721–734.
Strand, R., & Freeman, R.E. (2013). Scandinavian cooperative advantage: The theory and practice
of stakeholder engagement in scandinavia….
CSR in the Norwegian Context 633

The Norwegian Government (2019). Excludes exploration and production companies from the
Government Pension Fund Global. Press release 8 March 2019. Downloaded Mar 2019 from:
https://www.regjeringen.no/en/id4/.
The Rio Times (2018). Downloaded 17 Mar 2019 from: https://riotimesonline.com/brazil-news/
rio-politics/toxic-water-seeps-from-norwegian-mining-site-in-brazils-amazon/.
Trygstad, S., & Lismoen, H. (2008). Fagbevegelsen og CSR [The trade union movement and CSR].
Oslo: Fafo.
Vallentin, S., & Murillo, D. (2010). Government, governance and collaborative social responsibility.
In A. Tencati & L. Zsolnai (Eds.), The Collaborative Enterprise. Bern: Peter Lang.
Whitley, R. (1997). Business systems. In A. Sorge & M. Warner (Eds.), The IEBM handbook of
organizational behaviour (pp. 173–186). London: International Thomson Business Press.
Conclusion

Jonathon W. Moses, Eduardo G. Pereira, and Rochelle Spencer

Abstract This concluding chapter surveys the importance of the extractive indus-
tries across twelve countries in terms of their level of (national) dependence on those
industries and their role as global providers. We then consider some of the lessons
generated by comparing the results offered in the preceding 35 chapters, in terms of
their implementation of sovereign wealth funds, local content policies and corporate
social responsibility.

Keywords Resource dependence · Sovereign wealth funds · Local content

policies · Corporate social responsibility

It is not easy to generalise about how our 12 different countries manage their extrac-
tives industries, as their national contexts, industries, interests, needs and strate-
gies vary so significantly. Such a smorgasbord of difference is the attraction of an
anthology of the sort we have collected. It should not be surprising, then, to learn
that these cases also differ in the ways that they employ the three main instruments
we have studied more carefully.
In this concluding chapter, we take a step back and consider what larger patterns
can be deciphered in the anthology. To do so, this chapter is divided into four parts

J. W. Moses (B)
Department of Sociology and Political Science, Norwegian University of Science and
Technology, Trondheim, Norway
e-mail: [email protected]
E. G. Pereira
Siberian Federal University, Krasnoyarsk, Russia
e-mail: [email protected]
The University of West Indies, St. Augustine Campus, St. Augustine, Trinidad and Tobago
University of São Paulo, São Paulo, Brazil
R. Spencer
Centre for Responsible Citizenship and Sustainability, Murdoch University, Perth, WA, Australia
e-mail: [email protected]

© The Editor(s) (if applicable) and The Author(s), under exclusive license 635
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8_36
636 J. W. Moses et al.

and a conclusion. The first provides some general country characteristics, as gleaned
from reading all of the case contributions. This contextual comparison provides a
foundation and reminds us of the varied nature of our selection of cases. We then move
to discuss the findings vis-à-vis each of the three central tools under investigation:
sovereign wealth funds, local content policies and corporate social responsibility,
before ending with a conclusion.

1 Contextual Comparisons

As we saw in the introduction, the cases in this collection come from a wide variety
of states, at different levels of economic development and political aggregation. In
an effort to impose some order to this variation, we have introduced each case by
their national level of human development, using the HDI as an organising operator,
and as explained in the introductory chapter.
But there are other important ways in which these states differ. Some of the more
interesting differences concern their approach to ownership and Contractual regimes.
As regards to the first, the case contributions showcase an important difference: in
some cases, it is possible to have private ownership of subnational petroleum and
mineral rights. In most other cases, however, it is the state itself (local or federal) that
owns the resource. For those of us working in a single national/cultural context,
it is important to bear this variation in mind. It is easy, but often incorrect, to
assume that legal conditions elsewhere are similar to those at home. With respect to
contract/licensing forms, we find even more variation. Several states rely on conces-
sion or royalty-based regimes (as are common in North America), but other cases
rely on production sharing contracts (PSCs), service contracts, or a combination of
different contract forms.
One important difference separating our cases is the degree to which they, as a
country or a province/state, depend upon the extractives sector. In countries that are
heavily reliant on natural resources, the cost of mismanaging those resources can be
particularly high. This level of dependence is difficult to compare across our cases,
as the cases rely upon different extractives sectors (mining, oil, gas, etc.), but also
because many of the cases are subnational in form (states or provinces in federal
arrangements), making it difficult to find comparable statistics. Table 1 provides a
couple of grounds for making comparisons along these lines. Here, there are two
patterns worth noting.
The first concerns level of energy dependence. The left-hand side of Table 1
compares the degree of reliance, across cases, as captured by two main indicators.
The first compares the size of the natural resource rents, as a percentage of GDP,
using the World Bank’s indicator.1 This gives us an idea of how important the natural
resource is, in any given case, as a share of the national economy. Here, we find

1 World Bank (2020a: [NY.GDP.TOTL.RT.ZS]). This indicator captures “… the sum of oil rents,
natural gas rents, coal rents (hard and soft), mineral rents, and forest rents”. The World Bank
calculates rents as the difference between the value of production at world prices and the total costs
of production. This is made clear when it calculates oil and gas rents (see, e.g. World Bank 2019a,
b).
Conclusion 637

Table 1 Energy Reliance across our 12 countries

Nation Subnational Regional Total Fuel exports % of World Energy
share of natural (% Production (2018)
energy resource merchandise Oil Gas Coal Rare
(%) 2018 rents/GDP exports) earth
(%) 2017 2018 metals
Australia 7.2 24.4 0.3 3.4 6.1 11.1
Western 56
Australia
Brazil 3.5 12.5 3.1 0.7 – 0.6
Canada 8 1.7 24.7 5.7 4.8 0.7
British 20.1
Columbia
Northwest 4.7
Territories
Quebec 19.6
Alberta 5.6
Guyana 25.3 0 – – – –
Indonesia 3.5 23.2 0.9 1.9 6.8 –
Iran 17.8 70.8 4.9 6.2 – –
Kenya 2.5 1.0 – – – –
Nigeria 8.7 94 2.2 1.3 – –
Norway 5.9 62.3 1.9 3.1 – –
Russian 10.7 52 12.6 17.3 5.5
Federation
Trinidad 7.7 48.9 0.1 0.9 – –
and Tobago
United 0.5 13.7 15 21.5 8.6 9
States
Alaska 1.7
Note The regional share of energy is determined differently in each country. In Australia, the share
covers both mineral and petroleum production. In Canada, we look at just mineral shares. It is for this
reason that Alberta scores so low. In terms of crude oil production, Alberta’s share is much larger,
about 80%. In the USA, we look at total energy production. See the relevant references for more
information. The “Fuel Exports” data uses the World Bank indicator, where “fuels” is operationalised
at the commodities in SITC section 3 (mineral fuels, lubricants and related materials) and measured
as a percentage of merchandise exports. In this category, the Trinidad and Tobago data are from
2015; the Iran data are from 2017
Sources World Energy Shares: BP (2019); Natural Resource Rents: World Bank (2020a); Fuel
Exports: World Bank (2020b); Regional Shares: GWA (2018: 43); Chap. 11; and EIA (2017)
638 J. W. Moses et al.

that the resource value in Guyana is extremely high (25.3% of GDP) and still very
high in countries like Iran and the Russian Federation. As we do not have a similar
indicator at the subnational level, it is difficult to compare these cases, but Western
Australia seems particularly exposed to the natural resource rent, considering that
more than half of Australia’s mineral and petroleum production comes from that state.
Indeed, in the Chapter “Local Content Policies for Regional Economic Development
in Western Australia”, we learn that mining accounts for 30% of the Gross State
Product in Western Australia. In Canada, mining seems to be more evenly spread
across different provinces, but the majority of extractive resources (especially for oil
and gas) remain in Alberta. In the US case, Alaska provides a surprisingly small share
of total US energy production. Of course, Alaska (or these other states/provinces)
can still be very dependent upon petroleum resources, even if the USA is not very
dependent upon Alaska.
Another indicator of reliance can be seen in the column titled “Fuel Exports” as
a share of merchandise exports. This column also relies on a World Bank (2020b)
measure to capture cases of more extreme natural resource dependence (e.g. Nigeria,
but with Iran and Norway not far behind). As Guyana has just begun exporting the
energy it has in reserves, it displays a very low score on this indicator, and Kenya
is clearly not a major fuel exporter. For these cases, the extractives industry is an
important, but not necessarily the most important source of exports or GDP.
In addition, we should consider how dependent the rest of the world is on these
cases for supplying their energy needs. This is done with the columns on the right-
hand side of Table 1. Here too, we find that the cases in this anthology are important,
but not particularly dominant in the world market for oil, gas, coal and rare earth
metals. From our own selection of cases, the most important market players seem to
be Russia (oil and gas), the USA (gas) and Australia (rare earth metals).
We now have a better foundation for understanding the role these states play in
the global energy economy and their degree of dependence on the extractives sectors.
All in all then, our sample of cases offers a very good picture of the challenges facing
most states with access to natural resources wealth. We can now examine the most
significant patterns in each of our three case groupings: sovereign wealth funds; local
content policies and corporate social responsibility.

2 Sovereign Wealth Funds

The chapters included in the sovereign wealth fund (SWF) section offer a very good
place to start thinking about national strategies for managing resource wealth. This is
so for at least two reasons. First, most of these chapters cover more than the creation
and management of their SWFs: they also provide important background information
about the nature of the resource that each case relies on (oil/minerals/hydro…); the
national legislation and licensing/contract forms used to bring that resource to market;
different ways that governments capture the revenue streams from their extractive
Conclusion 639

industry; and how these streams are channelled into (or not) their SWFs. In short,
there is a lot of conceptual territory covered in these chapters.
Second, the focus in this section is on the development and use of SWFs, and
we find a remarkable variation across the sample set. Our cases include some of the
oldest SWFs in the world (Alberta and Alaska), alongside some of the youngest (e.g.
Guyana). We include the world’s largest SWF (Norway) and two cases (Indonesia
and Kenya) that have yet to adopt SWFs. The current allure of SWFs can be seen
in the case of Guyana, which has gone to the trouble of creating legislation for a
SWF, without yet accessing the resource, whose wealth it hopes will fill it. Guyana’s
priorities seem to differ significantly from what we see in the Norwegian and Indone-
sian cases (for example), where petroleum revenues were first ploughed back into
the domestic economy before there was any thought of setting them aside in a SWF
(in Norway it came much later—27 years after commercially viable oil was discov-
ered; in Indonesia, that day has yet to come). The reason for this may be Guyana’s
potential to become extremely dependent on the resource, once it hits the market,
as seen in Table 1 (Natural Resource Rents/GDP). Most of the money collected in
these funds is used to support their respective government budgets. In other cases,
the government distributes its SWF earnings directly to the people (e.g. Alaska). Still
other cases keep the SWF money trapped offshore (e.g. Norway), to minimise its
effect on the economy. In this section, our aim is to try and make some sense from
this remarkable variation.
While our original case selection covers 12 countries, the SWF section introduced
16 different sovereign wealth funds, as several of our cases employ more than one
SWF. This variance, and the list of SWFs covered, can be seen in Table 2. It is very
difficult to evaluate the utility or success of these SWFs, given the varied contexts in
which they are found, but we can say something about common tendencies.
Let us begin with the last column, on the right-hand side, of Table 2. Here, we
provide an estimate of the value of these SWFs, converted to US dollars. The range
in value is not particularly surprising, considering the range in size and level of
development across our sundry cases. After all, our collection stretches from the
largest SWF in the world (the Norwegian GPFG), which is worth over a trillion US
dollars, to several cases where published values are simply not available. The fact that
governments are not making these (value) figures easily available is both remarkable
and frightening. The smallest fund in our selection (of those for whom we could
find figures) was the Western Australia Futures Fund, at $923,287,000. The HSF in
Trinidad and Tobago is perhaps the most surprising SWF, given the large amount
of money it has amassed (over $6 billion) and its relatively small population (ca 1.4
million).
Other than value, we have noted four important differences separating these cases:
degree of transparency/accountability; the type of fund; its source of revenue; and
how the money can be spent (including expenditure conditionality).
Table 2 SWFs described in this collection
640

Acronym Fund name Case Year founded Type Revenue source Withdrawal Value 2019 USD
conditions
FGF Future Generations Nigeria 2011 Savings Budget surplus No 1,690,440,000
Fund
NIF Nigerian Infrastructure Nigeria 2011 Savings Budget surplus No
Fund
NSF Stabilisation Fund Nigeria 2011 Stabilisation Budget surplus No
– – Kenya – – – – –
– – Indonesia – – – – –
NDF National Development Iran 2011 Savings Mostly oil/gas Some 91,000,000,000
Fund of Iran
BSF Social Fund Brazil 2010 Mostly savings Mostly oil/gas No 4,123,940,000
HSF Heritage and Trinidad and Tobago 2007 Both Budget surplus No 6,255,349,599
Stabilisation Fund
NRF Natural Resource Fund Guyana 2019 Both Petro + mining and Some 0
forest
NWF National Welfare Fund Russia 2008 Both Budget surplus Unclear 124,140,000,000
PF Permanent Fund Alaska 1976 Savings Petroleum No 67,208,500,000
BCPF British Columbia Canada 2013 Savings Natural gas No Unclear
Prosperity Fund
NWHF Northwest Territories Canada 2012 Savings Non-renewable Yes 13,098,200,000
Heritage Fund resources
WGF Quebec’s Generation Canada 2006 Savings Hydro, mining, No 6,866,220,000
Fund alcohol
AHF Alberta Heritage Fund Canada 1976 Savings Petroleum No 86,289,300,000
(continued)
J. W. Moses et al.
Table 2 (continued)
Acronym Fund name Case Year founded Type Revenue source Withdrawal Value 2019 USD
conditions
Conclusion

FF Future Fund Australia 2006 Savings Budget surplus No 112,019,000,000

WAFF Western Australia Australia 2012 Savings Minerals Yes (until 923,287,000
Futures Fund 2032)
GPFG Government Pension Norway 1990 Both Petroleum Yes 1,098,820,000,000
Fund Global
Note All information is gained from the chapter contributions, except the estimated value (right-hand column). The estimated values come mostly from SWFI
(2019) except for the data on Brazil (InfoRoyalties 2020); the NWT Heritage Fund (CBC 2018) and Quebec’s Generations Fund (Finances Quebec 2019). The
NWT Heritage Fund data is from 2018. See original data sources for more information
641
642 J. W. Moses et al.

2.1 Independence and Transparency

When we consider the role of SWFs in managing resource wealth generated by the
extractives sector, one of the most important issues to address is the degree to which
that wealth is managed in a professional, transparent way, devoid of corruption. In
doing so, we are forced to ask a number of questions, including: How does the SWF
interact with the government’s regular budgetary functions? Are the objectives of the
SWF made clear and explicit? Can the money be used to support domestic political
projects, or are there constraints on how it can be used? Are their expectations on
how the money should be invested (e.g. maximise returns?) Who decides what is to
be deposited in the SWF, and what is withdrawn? Is it possible to hold the relevant
decision makers responsible?
To our surprise, we found that it is astonishingly difficult to get information on
many of these SWFs—on how they are managed, on the limits of the authority, even
their current market value (as we saw in Table 2). This is especially surprising in the
case of several of the subnational Canadian funds (although not Alberta), where we
would expect to see much more transparency.
It is difficult to compare answers across such a wide array of questions, but their
content might be boiled down to three main (and related) concerns: legal autonomy
(or independence), transparency and accountability. Citizens are concerned that their
SWF will be raided by corrupt officials or squandered on poor investments. Investors
are concerned that these funds may be puppets of governments. For both groups, one
of the most important questions that we can ask is: How transparent and accountable
are these SWFs?
Questions about autonomy and transparency go to the heart of governance and
remind us of the opening epigraph in the introductory chapter by Edmund Burke:
that the revenues of the state are the state. When states create a SWF, we should
wonder about their intent: What exactly do they hope to achieve with this fund? Why
is a SWF an appropriate vehicle for those investments? After all, governments have
a long history of savings and investments and have a variety of instruments at their
disposal. Most central banks have experience with managing their reserves: they
invest in safe government paper, with relatively low (but low-risk) returns. Why not
place the money in a government deposit account, or with the central bank, in safe
government bonds, where it remains in open political space? Norway did this early
on, and the Russian National Welfare Fund and the NW Territories Heritage Fund in
Canada continues to do so today.
From where do we get this new appetite, among states, for higher risks and returns?
Are the people aware of the risks that are involved? If the money is to be ploughed
back into the domestic economy, why not use traditional budget instruments? Is the
SWF being used to hide money from public scrutiny? These are the sort of questions
we are left with after examining the SWFs employed by our cases.
Once a SWF is chosen as a sort of savings or spending vehicle, the next set of
questions to ask are: How can the people keep policymakers accountable for the
investment decisions and returns on this money? How do we know that the money is
Conclusion 643

being invested wisely (and not in pet political projects that will deliver less certain
returns)? How will we know that policymakers cannot access these funds in the
middle of the night and whisk them away to secret and private foreign bank accounts?
Perhaps the easiest way to check if a SWF is legally autonomous, accountable and
transparent is to turn to the International Forum on Sovereign Wealth Funds (IFSWF)
and their so-called Santiago Principles (IWGSWF 2008). The Santiago Principles
are a list of 24 generally accepted principles, in which IFSWF members voluntarily
endorse to demonstrate that they comply with applicable regulatory and disclosure
requirements and embrace transparent government structures. The assessment is
voluntary and self-imposed, and in 2019, there were 36 member funds, three of
which were associate members (see Table 3). Thus, IFSWF membership functions
as a sort of gold standard for investors—signalling which SWFs are at least trying
to look legitimate and attractive.
Among the total list of IFSWF members, we find only six of our case coun-
tries (listed in italics), but only five of our 16 funds. The Alaskan Permanent
Fund, Australia’s Future Fund, the National Development Fund of Iran, the Nigeria
Sovereign Investment Authority and The Heritage and the Stabilisation Fund in
Trinidad and Tobago are all signatories to the Santiago Principles, and readers can
turn to the IFSWF homepage to find their self-reported assessment of how they
meet those principles. The Russian Federation also has a fund that has agreed to
the Santiago Principles (the Russian Direct Investment Fund, or RDIF), but it is not
among our cases.
These differences can be explained, in part, by the nature of the funds concerned.
While investors and markets are looking for funds that are de-coupled from politics,
the people in each country may be looking for a fund that responds more directly to
their concerns. In short, the interest of international investors and domestic citizens
does not always coincide. Countries that are concerned about their reputations and
those which hope to attract foreign investors use the Santiago Principles as a way
to demonstrate that they have tied their political hands (whether they have actually
done so, is a matter of discussion, as we saw in the Nigerian case).
This is why the Russian Direct Investment Fund (RDIF) is a member of the IFSWF.
The RDIF was created in 2011 as a “catalyst for direct investment in Russia” (RDIF
2020). It aims to attract market actors who may be otherwise afraid of investing in
Russia. For this reason, it needs to present itself as a technical, non-political and
investment machine that can promise top-shelf returns. But the RDIF does not invest
the wealth generated from Russia’s extractives sector—it relies on a global set of
investors to contribute money. For this reason, it was not included among our SWFs.
What is perhaps more revealing, however, are two of the cases in our selection
that are not members of the IFSWF: Alberta and Norway. Alberta is an interesting
example; in that, the Alberta Heritage Savings Trust is the largest of the Canadian
SWFs and one of the world’s oldest. Although its objectives have changed signifi-
cantly over the years, it enjoys a high level of transparency and independent oversight
over the fund (see Chapter “Non Renewable Resource Revenue Savings and Distri-
bution in Canada: Alberta”). Still, it is not a member of the IFSWF, for reasons that
are not entirely clear to us.
644 J. W. Moses et al.

Table 3 IFSWF members, 2019

Fund name Country Membership
Abu Dhabi Investment Authority United Arab Emirates Full
Agaciro Development Fund Rwanda Full
Alaska Permanent Fund USA Full
BpiFrance France Full
Budgetary Income Stabilisation Fund Mexico Full
CDP Equity SpA Italy Full
China Investment Corporation China Full
Fonde de Ahorro de Panamá Panama Full
Fonds Souverain d’Investissements Stratégiques S.A. Senegal Full
Fundo Soberano de Angola Angola Full
Future Fund Australia Full
GIC Private Limited Singapore Full
Intergenerational Trust Fund for the People of the Nauru Full
Republic of Nauru
Ireland Strategic Investment Fund Ireland Full
Ithmar Capital Morocco Full
JSC National Investment Corporation of the National Kazakhstan Full
Bank of Kazakhstan
JSC Samruk-Kazyna Kazakhstan Full
Khazanah Nasional Berhad Malaysia Full
Korea Investment Corporation Republic of Korea Full
Kuwait Investment Authority Kuwait Full
Libyan Investment Authority Libya Full
National Development Fund of Iran Iran Full
New Zealand Superannuation Fund New Zealand Full
Nigeria Sovereign Investment Authority Nigeria Full
Palestine Investment Fund State of Palestine Full
Qatar Investment Authority Qatar Full
Russian Direct Investment Fund Russia Full
State General Reserve Fund Oman Full
State Oil Fund of the Republic of Azerbaijan Azerbaijan Full
The Heritage and Stabilisation Fund Trinidad and Tobago Full
The Pula Fund Botswana Full
Timor-Leste Petroleum Fund Timor-Leste Full
Turkey Wealth Fund Turkey Full
Future Heritage Fund Mongolia Associate
National Infrastructure Investment Fund India Associate
(continued)
Conclusion 645

Table 3 (continued)
Fund name Country Membership
National Investment Fund Cyprus Associate
Source IFSWF (2020)

The absence of the Norwegian case is perhaps more informative, in at least two
regards. First, the Norwegian fund (GPFG) is not included on the list of members—
even though Norway was an active player in launching the IFSWF. As was the case
in Alberta, it is not exactly clear to us why this is the case, but it may be that the
inclusion of many rather questionable funds and the use of voluntary assessments
have raised some Norwegian eyebrows. As the State Secretary of the Norwegian
Ministry of Finance, Tom Vamraak, noted:
It is important for the Norwegian government to encourage and ensure transparency about
the management of sovereign wealth funds, including objectives, governance framework,
investments and risk management. The IFSWF has not met our expectations as an organisa-
tion with sufficiently strong progress in the implementation of these principles. Therefore,
we decided to discontinue our membership in the organisation in 2016 (IFSWF 2018: 46).

But the Norwegian case is even more interesting because the Norwegian authori-
ties have been unwilling to grant legal autonomy to the GPFG: they want to ensure that
the Norwegian people, through their parliament, can still influence how that money
is being invested. In short, Norway does not believe that financial technocrats, who
feign political neutrality in making investment decisions, are best suited to decide
how to invest the Norwegian people’s money. They want to channel this technical
expertise within set parameters that are explicitly political. The Norwegian author-
ities maintain strong political guidelines on how the GPFG can spend its money,
including a unique “Council on Ethics”, and it is this ability to respond to political
pressure that is arguably one important reason why the Norwegian SWF has been so
successful (Moses 2020).
After all, if you want your government to invest its money in a way that is politi-
cally and ethically accountable, you cannot simply shoot for the highest returns. You
need to place political and ethical constraints on how that money should, or should
not, be used. At the very least, this should be part of the political discussion when
launching a SWF.

2.2 Type of Fund

The second important difference separating our cases is the decision of political
authorities about whether the fund should be used as a large savings or spending
account—either for future generations or for current needs (such as infrastructure,
health and pensions)—or whether it should be used as an active buffer fund. It is
often difficult to distinguish between the two roles, as a savings fund can be created
646 J. W. Moses et al.

in ways that also buffer the economy from the volatility of the extractive industries’
production and price levels. It is only when we look closer at the particular rules of
how deposits are made to the fund, and how withdrawals can be taken, that we can
begin to see the true nature of the funds being compared.
As a general rule, it has not been very easy to see how states manage their SWFs.
Some states use laws to declare whether the SWF should be designed as a savings or
buffer fund. But other cases are less clear or explicit. Our effort to distinguish between
these two main types of SWFs is shown in Table 2. The ranking there is informal
and based on the information provided by the individual case studies included in this
anthology.
Here, it is possible to see how the case studies have explained the need for a
fund in terms of savings or stabilisation. A majority of the SWFs in our sample
were designed as savings funds. Among these, only one was specifically designed
as a stabilisation fund (Nigeria), and the Nigerian chapter (Chapter “Public Wealth
Management and Distribution in the Extractive Industry in Nigeria”) suggests that
this is not a particularly effective fund, given the differences between federal and state
officials as to how to divide the monies.2 Four cases (Trinidad and Tobago, Guyana,
Russia and Norway) use their funds as both savings and stabilisation accounts. In the
Guyana case (Chapter “The Experiences of Managing the Heritage and Stabilisation
Fund in Trinidad and Tobago and the Sovereign Wealth Fund Guyana”), we saw that
this (duplicate objective) has created some tension and discussion about whether
there should be, in fact, two different funds.
To really understand the role that these funds can play, however, we need to follow
the money more closely: How are they funded (the nature of the deposits going into
the fund) and how are they spent (withdrawals)?

2.3 Deposits

For our purposes, one of the most important questions concerns that the source of (and
the route by which) the people’s money gets deposited in the SWF. As we have made
clear, we are interested in countries that are using SWFs as part of their strategies
for managing the wealth generated from the extractives industries. This is why, for
example, we look at the Russian National Welfare Fund and not the Russian Direct
Investment Fund. But beyond this common attribute, what patterns are revealed in
our cases?
Our cases receive their deposits from a variety of different extractives indus-
tries, and some even draw further than that. As we can see in Table 2, some funds
are directly linked to revenues generated by the petroleum sector (in, e.g. Alaska,
Alberta and Norway), and others reflect the case’s reliance on the mining sector (e.g.

2 As we learned in the Russian case from the Chapter “Russian Sovereign Wealth Fund”, Russia
also had a dedicated stabilisation fund (established in 2004), but it was superseded by the National
Welfare Fund in 2008.
Conclusion 647

Western Australia), or a broader mix of natural resource rents (Guyana and Northwest
Territories in Canada) and even hydroelectric power (Quebec Generations Fund).
More importantly, from a management perspective, is how these revenues make
their way into the fund. This matters. If the government has the freedom to choose how
much of its natural resource revenues are placed in the fund, it will prove tempting
to spend the revenues of the resource directly, rather than place them in the fund.
In a little less than half of our cases, the funds are filled with a sort of budgetary
surplus: when the funding comes from the residual once the actual earnings prove
to be larger than the budgeted earnings (see, e.g. Nigeria; Trinidad and Tobago; and
Australia’s Future Fund). Other states require that a certain share of revenues from
the sector (e.g. a percentage of royalty, or signing bonus) goes directly into the fund,
without going through the government budget. The Brazilian case is a particularly
good example of this, because we can see (Chapter “The Social Fund: A Brazilian
Sovereign Wealth Fund”) an explicit accounting of where the money comes from:
a share of the signing bonus, a share of royalties, income from the sale of oil/gas,
returns on prior investments and money diverted from other funds.
If the fund is based on a budgetary surplus, as it is in 6 of our 16 cases, it basically
functions as a savings account for the government. That savings account can be
accessed by the government, but it will be difficult to use it as a buffer against the
general economy: as the full force of the business cycle (production levels and price
swings) will then flow through the government budget. For these (savings-based)
funds to function as a buffer, we need to consider where the investments are being
made. Among our cases, we can clearly see two different strategies being employed.
In the Alaskan case, we see a willingness to invest in the “Lower 48” economies as a
buffer for the Alaskan economy; in that, the returns on these investments are unlikely
to be correlated with the fortunes of the Alaskan oil and gas industry. For Alaska
(Chapter “Alaska’s Petroleum Industry, Institutions and Sovereign Wealth Fund”),
the buffer protection is aimed at the business cycle. Norway uses a very different
strategy, the result of enjoying a sovereign currency of its own: it invests the money
offshore (and is explicitly forbidden from investing in Norway) in an effort to avoid
appreciation pressures (Dutch Disease). In contrast to Alaska, Norway (Chapter
“Norway’s Sovereign Wealth Fund”) is buffering its economy from the appreciation
effect of an overheated economy.

2.4 Withdrawals

Finally, it is interesting to compare how the money is being used. In a majority of

our cases, the governments have more-or-less free access to their respective funds,
and this access has—at times—proven costly. This problem was seen in both the
Alaskan and Albertan cases, where money was siphoned off to pay down the deficit
or to invest in some rather dubious assets (such as a golf course). In other cases,
there are explicit requirements on how the money should be spent: e.g. on infrastruc-
ture (Nigerian Infrastructure Fund, BC Prosperity Fund); on education (e.g. Brazil);
648 J. W. Moses et al.

on pensions (Russian National Welfare Fund, Australian Future Fund); debt reduc-
tion (BC Prosperity Fund; Russian National Welfare Fund); as a supplement to the
national budget (Norway); or not until some future point in time (e.g. NWT Heritage
Fund; Western Australia Future Fund).
To get an idea of how this money is used in our different cases, Fig. 1 provides
a rough outline. As should be evident, states can employ strategies on both the left-
and right-hand side of the figure.
Of those cases that use a SWF as an alternative vehicle for state spending, we can
distinguish between two main types. In a very few cases, the money is distributed
directly to the people, by way of a citizen dividend (in Alaska, the Permanent Fund
Dividend; in Alberta, earlier, “Ralph Bucks”). In most of the other cases, the govern-
ment spends the money on specific (e.g. infrastructure) or general needs. These cases
populate the left-hand side of Fig. 1.
Other cases think of their SWF as an investment vehicle: as a means to increase
future value for the country. These cases find themselves on the right-hand side of
Fig. 1. Here, the money accumulates, rather than being spent. The largest fund in our
sample is the one that is perhaps tapped the least: the Norwegian GPFG. Here, only
3–4% of the returns on investments are repatriated back into the national economy
through the government budget. This allows the fund to grow quite large.
The main difference between states that think of their SWF as an investment
vehicle lies between those that want to encourage domestic economic growth and
those that do not. The first group has to proceed very carefully, as they will need to
consider the political ramifications of their investment decisions. For example: why
should the government support one type of commercial activity over another (i.e.
can it pick winners?); and should it invest enough to be able to control the activities
associated with that investment (i.e. secure a controlling share). The remaining cases
move their investments outside the domestic economy—either as a buffer to the local
business cycles (as we saw in the Alaskan case) or as a buffer to Dutch Disease (e.g.
the Norwegian case). In any case, there are no straightforward answers to what the
best choice is as it depends on a case-by-case analysis of needs and aspirations within
each country and society.

3 Local Content Policies

Our second selection of cases deals with how these states employ (or do not employ)
so-called local content policies (LCPs). In this section, even more than the first, we
find very different understandings of what constitutes local content, whether LCPs
are needed, and even what they should be used for. This variance reflects the very
different contexts in which our states find themselves: national or subnational; liberal
or more interventionist; developing or developed…. For example, in the Alaskan
contribution in Chapter “Alaska’s Tug of War on Land Rights”, the discussion of
local content policy revolves around land-use rights. In that case, one could make
 Conclusion

SWFs

Spend Save/Invest

Ci zen Domes cally "Abroad"

Government
Dividend

Alaska Counter-
Specified Local development Duth Disease
General needs cycical
avoidance
budgetary buffer
needs
Alberta
etc. Educa on Pensions Infrastructure Norway Alaska

Alberta
Brazil Russia Nigeria

Fig. 1 SWF strategies employed

649
650 J. W. Moses et al.

the argument that LCP comes in the form of its citizen dividend, where petroleum-
based revenues are distributed directly to the local population in the form of an annual
cheque. In other countries (e.g. Nigeria, Indonesia and Norway), local content policy
is a multi-layered strategy for developing local competencies with the assistance of
powerful multinational firms. In the Chapter “Local Content and Extractive Industry
in Brazil”, we see that Brazil’s local content is focused on technology, goods and
services.
From this bounty of experience, we learn that states are looking for different things
when trying to develop local competencies. Some states hope to use the extractives
sectors to boost employment, or the skills of local workers; others hope to develop
a local mining equipment, technology and services sector that can help service and
supply the more international extractives industries; still others hope to maximise
the government take, by ensuring that companies establish a legal foothold in the
country (and with it a claim on tax revenues). More ambitious states want to do all
this, and more!
Despite the variety of ways of capturing what is meant by local content, we can
distinguish three main tools by which states secure their local content policy: the
use of National Oil, Gas and Mining Companies (NOGMCs); the use of targeted
legislation; and the use of licensing or contract terms to ensure that international
companies will help develop local competencies.
The use of NOGMCs is, perhaps, the most evident tool for building local content.
The main reason that states choose to create a NOGMC is to ensure that a larger
share of the government take remains with the state. When the NOGMC is allowed
to develop operational competencies, it becomes an institution that can develop local
expertise, hire local subcontractors and (eventually) become an international actor,
competitive abroad. In addition, some states have adopted legislation—either broadly
(e.g. in the Chapter “Local Content Policies for Regional Economic Development in
Western Australia”, we see that legislation in Western Australia is aimed at encour-
aging local economic development in general, but not aimed at the extractives sector
in particular) or with a focus on the extractives industry in particular, to support and
prioritise local value creation and participation (e.g. Nigeria, Norway and Indonesia).
Finally, a number of countries include local content requirements of one sort or
another, as part of their contract agreements—so that the allocation of a licence will
depend upon an explicit promise to support local content. The variation in tools
employed, by the different cases, is mapped in Table 4.
From this variance, the most evident cleavage lies between those states that are
using one form of local content policy or another and those cases that do not seem
particularly interested in encouraging local content development. The reasons for
the latter can be many, including (presumably) free-market ideological reasons (e.g.
Alaska, Western Australia and to an extent Canada) or out of a desire for more
international contact (e.g. Iran and Russia). In this latter regard, Iran appears to be an
extreme outlier. Iran is different from all the other cases due to its international (polit-
ical) isolation. In addition, Iran and Russia face similar challenges with sanctions,
which might prevent the presence of international companies and foreign technolo-
gies. For this reason, the discussion about local content in the Iranian and Russian
Conclusion 651

Table 4 Local content instruments

Country NOMC Legislation Contract
Nigeria Nigerian National Yes, especially Oil and Included in Model
Petroleum Gas Industry Local Service Contracts and
Corporation (NNPC) Content Development used to distribute
Act (2010) Marginal Fields
contracts
Kenya National Oil No overarching policy, Vague commitments
Corporation of Kenya but supportive made in Model PSA
regulatory frameworks
Indonesia Pertamina Yes, several relevant Gross-split
laws and regulations arrangements consider
local content provision
when determining
profit sharing
Brazil Yes, especially Yes, especially the Local content clause in
Petrobras; less so with National Programme contracts
Vale do Rio Doce for Oil and Natural Gas
Compane (VALE) Industry Mobilisation
(PROMINP)
Iran National Iranian Oil Unclear Buy-back contracts,
Company (NIOC) pre 2014; Iranian
Petroleum Contract
(IPC)
Trinidad and Tobago Petrotrin Yes, but outdated Model PSA provides
for LC
Guyana N/A Yes, but outdated N/A
Russian Federation Roseneft and Gasprom None Licences only for legal
Russian entities
Alaska None None None
Canada N/A None None
Western Australia N/A None Included in some State
Agreements
Norway Statoil/Equinor Technological Extensive
agreements and
regulatory regime

cases (see the Chapters “Local Content Requirements in Iran” and “Local Content
Within Extractive Resources Industry in the Russian Federation”, respectively) is
somewhat reversed as they encourage foreign technology in order to enhance their
existing technology and increase their production whereas most of the other chap-
ters (to varying degrees) tend to recognise the need to build up (or deepen) local
competencies in the face of more powerful international market actors.
In addition, we would like to highlight the importance of strategic planning and
careful consideration before setting targets and goals for LCPs. What is doable to be
implemented today? What are the goals for the short-, mid- and long-term targets?
652 J. W. Moses et al.

Consideration needs to be given to how a country can transition in a reasonable

progression from the current reality towards the ultimate goals. If a country does not
conduct a thoughtful and detailed consideration before establishing such policies,
it could face serious challenges from a lack of compliance for unrealistic targets.
This lack of compliance could lead to potentially huge fines, which might provide
an “unfriendly” environment that ultimately could deter future investors and lead to
greater corruption.
Alternatively, if nothing is going to be done locally, foreign companies will domi-
nate this domain as has happened in the past. Balance is needed, and a critical
assessment is required to understand each case. In Brazil and Nigeria (Chapters
“Local Content and Extractive Industry in Brazil” and “Local Content in the Extrac-
tive Resource Industry in Nigeria”, respectively), the main concerns centre on tech-
nology, goods and services rather than human resources, so that jobs given there
may exclude many qualified Brazilians and Nigerians within the extractives sector.
At the same time, however, Brazil and Nigeria highlight the negative outcomes of
setting unrealistic targets of LCPs. These LCPs can bring about higher costs to the
industry, delay investments and fail to improve local content standards—quite the
opposite of what the governments had anticipated. In Alaska, no LCP was needed
to develop local competency (see Chapter “Alaska’s Tug of War on Land Rights”).
Guyana (Chapter “The Development and Implementation of Local Content in the
Extractive Industries in Trinidad and Tobago and Guyana”), on the other hand, might
be more concerned with developing their national competencies for goods, services
and technology, as well as their human resources. In short, the nature of LCPs reflects
the context within which they are implemented as needs and priorities will differ. In
Norway, LCPs came to an end with the EU regulations they agreed to when joining
the European Economic Area. So, the Norwegian case (Chapter “Norwegian Local
Content Policy”) poses a relevant question: Should LCPs have an expiration date?
Is it fair to expect local companies and industries to be able to compete on an equal
footing at some point?
Another key factor for LCPs is the approach that any country might take with
regards to the compliance of their LCPs. Unfortunately, the common practice tends
to be the “comply toolbox” mentality versus a “punishment” approach, which by and
large is followed by most countries. In many cases, countries focus on pure compli-
ance on the given terms imposing sanctions and penalties for any breach; but they do
not provide any real benefit for companies that try to exceed such terms. However,
there are a few countries that recognise they should take a different approach with
direct incentives to increase local content compliance. Indonesia is one of the few
examples that recently changed its legal system and provides direct and fiscal incen-
tives to increase local content performance (see Chapter “Local Content Policy
in Indonesia Oil and Gas Industry”). The higher local content performance that a
contract has, the higher the profit split might be. Therefore, LCPs are not just a good
“marketing” initiative or a means of “reducing costs” or ticking off the “compli-
ance check box”; in this case, companies might get an additional financial benefit to
increase local content performance.
Conclusion 653

4 Corporate Social Responsibility

The third and final collection of chapters considers the way that our cases deal with
issues of corporate social responsibility (CSR). As with the local content section, we
find a remarkable variety of approaches in the case studies. To try and create some
order out of this variety, we consider two ways of characterising the sundry chapters
in the CSR section.
The first characterisation concerns the sort of commitment states are willing to
make to support CSR activities. Figure 2 presents a continuum of attitudes, stretching
from relative indifference or inaction about CSR (e.g. Iran, Alaska and Australia),
to states that wish to encourage it by developing explicit strategies (e.g. Canada,
Guyana and Trinidad and Tobago), to those states—at the top of the figure—who
go so far as to introduce legislation and regulations that require firms to behave in a
particular manner, in addition to maximising shareholder value (e.g. Norway, Nigeria
and Indonesia).
The second characterisation concerns the direction in which this commitment is
aimed. In other words, are the case studies looking at the motives of foreign firms
active in the case context, or are they interested in case-based firms, as they act abroad?
Following Gourevitch (1978), loosely, we might say that the first group is employing
an outside-in approach, whereas the latter group uses an inside-out approach. For
the vast majority of the cases in our study, the approach is outside-in: the focus is on
recognising how the impetus for CSR often comes from multinational corporations
and is foreign to the domestic context (e.g. Trinidad and Tobago, Guyana, Australia).
Other outside-in approaches look at how governments are actively trying to encourage
IOGMCs to behave in a more responsible manner when extracting local resources
(e.g. Nigeria, Indonesia and to a lesser extent Brazil).
Russia is an interesting outlier; in that, one can see remnants of earlier Soviet
attitudes influencing Russian firms and the way they are willing to take on larger,
community interests, even when it incurs financial costs. Curiously, this sort of path
dependency seems to erode with the international successes of the companies in

Laws
Nigeria, Indonesia, Norway

Strategies Trinidad and Tobago, Guyana, Canada

Kenya, Brazil, Russia

Inaction Iran, Alaska, Australia

Fig. 2 CSR strategies

654 J. W. Moses et al.

question, as seen in the example of Roseneft, who welcomed non-commercial obli-

gations when it was a smaller, weaker company, but increasingly shuns them as it
has grown more powerful.
A similar pattern can be seen in what is arguably the most unique case in our SWF
sample: Norway. Here, the government is concerned that Norwegian firms will shun
their corporate social responsibility as they go abroad in search of new economic
rewards. The Norwegian chapter is very different from the others; in that, its focus
is on ensuring that Norwegian companies, when working abroad, take with them the
sort of CSR attitude that is already legally and culturally engrained in Norway. Unlike
all the other cases (with the possible exception of Canada), the Norwegian chapter
looked at how Norwegian multinational firms are behaving beyond Norway—rather
than looking at how IOGMCs are expected to behave in Norway.

4.1 Sustainable Development and Extractives

In the current context of Agenda 2030, the foregrounding of the role of the private
sector in progressing the Sustainable Development Goals, the threat of global climate
disruption (Intergovernmental Panel on Climate Change 2018) and the commitment
of nations (including the extractives sectors in many nations) to the Paris Agreement,
it is surprising that sustainability in mining continues to be a contentious and some-
what vexed issue (Rajaram et al. 2005; Horowitz 2006; Aaron 2012; Spencer 2018).
In the proposal for this anthology, contributors were invited to reflect on the state’s
management of extractives resources wealth as a key component of the sustainable
development of a nation and how the extractives resources sector can support sustain-
able development of local industry and communities throughout the lifespan of their
projects using local content policies and corporate social responsibility activities.
We asked contributors to consider some of the challenges and contradictions their
chapters unearth relating to the use of state wealth management and distribution,
local content policies and CSR practices for sustainable development. Interestingly,
most contributors shied away from explicitly engaging with sustainable development
as an outcome of these three tools.
We do not think that this is necessarily reflective of a lack of concern for the
relationship between sustainable development and the extractives sectors in most of
the jurisdictions covered in this book. But rather, it may be illustrative that several
contributors’ manifest focus was on the role, management and governance of extrac-
tives resources wealth and less explicit focus was on the context of rising social and
environmental stakes and global calls for sustainable development. Nevertheless, this
book provides a stage for the exploration of how the relationship between sustainable
development and the extractives industries may be achieved via state wealth funds,
local content policies and CSR practices. The value of such an anthology is that it
brings together the diverse experiences and challenges encountered in different parts
of the world that might inform equitable and sustainable development, particularly
Conclusion 655

for the communities directly adjacent to extractives operations but more broadly for
the wider society and environment.

5 Conclusion

Each of these points of variation makes it difficult to generalise across cases and
challenges us to recognise the complexity of the task at hand. This is the most
important lesson one takes home after reading the cases in this anthology. This is
especially true with respect to the contributions in the LCP and CSR sections, where
case authors demonstrate a remarkable variety of approaches, attitudes and views in
how they approach the subject matter. Frankly, local content policies and corporate
social responsibility mean very different things in our many different contexts. The
section on sovereign wealth funds demonstrates a little more common ground; in
that, SWFs were used in every case, save two (Indonesia and Kenya). SWFs are used
in different ways and responsible to different types of needs and actors, but most of
our resource-wealthy states have found it worthwhile to start a SWF.
Perhaps the one commonality we find across the three sections is that each has
a dominant outlier: a single state that behaves very different from the others in
that section. These outliers might help us to generalise; in that, they can be seen as
providing an exception to the rule in each section. As already mentioned, Indonesia is
unique among the cases under consideration in the SWF section in its unwillingness
to start a SWF (see the Chapter “Overview of Extractive Resources Management
in Indonesia”). Kenya has been considering SWF legislation for some time but has
yet to adopt it. This resistance makes us realise how quickly and widely the SWF
fad has spread in recent decades, prompting us to wonder if it is not time to ask
about what this pattern says about the nature of the relationship between democracy,
technocratic authority and government transparency.
In the LCP section, Iran (the Chapter “Local Content Requirements in Iran”)
followed by Russia (the Chapter “Local Content Within Extractive Resources
Industry in the Russian Federation”) were the clear outliers. Every other case implic-
itly or explicitly recognised the need to protect local interests from powerful external
and multinational factors and used different strategies to protect those local inter-
ests. This trend seems to reflect a familar theme in the extractives sector: where
it is common to discover an imbalance of power between underdeveloped political
institutions and powerful multinational corporate interests. Given Iran’s international
isolation, its perspective on these matters is very different: it seems more aware of
the limits to autarky and is actively seeking more international influences to help it
become more efficient. Iran’s outlier position makes us realise how important it is
to strike a balance between domestic and international influences, so that the people
in each state can ensure that their resources are being managed in the most efficient
and just manner. But it also reminds us of the serious and draconian implications that
any nation can suffer from international and/or certain unilateral sanctions.
656 J. W. Moses et al.

Finally, in the CSR section, the Norwegian contribution in the Chapter “CSR in
the Norwegian Context” was remarkably different from the others; in that, the case
study was concerned about the behaviour of Norwegian firms abroad, rather than
foreign firms acting in Norway. Here, it would seem that a long history of strong
legislative and political traditions has been useful in ensuring that foreign firms in
Norway will obey strong CSR norms. The challenge has been to get Norwegian
firms to continue acting in a socially responsible manner when competing in less
transparent and more corrupt contexts elsewhere. This seems to suggest that there is
a great amount of work still to be done in the international arena, and in particular
across the extractives sectors, to ensure that all firms are held to the highest ethical
and social standards.
These comparative examples from around the world provide real-world exam-
ples and insights into the ways in which policy, administrative and technical instru-
ments can be harnessed to ethically and responsibly manage the revenue from
extracting natural resources. Such structures are intended to provide governments and
communities with the means to redress poverty and inequality through sustainable
development.

References

Aaron, K. (2012). New Corporate social responsibility models for oil companies in Nigeria’s Delta
region: What challenges for sustainability? Progress in Development Studies, 12(4), 259–273.
BP. (2019). BP Statistical Review of World Energy 2019. Online at https://www.bp.com/en/global/
corporate/energy-economics/statistical-review-of-world-energy.html. Accessed January 5, 2020.
CBC. (2018). N.W.T. Heritage Fund not keeping up with inflation, gov’t borrows money to feed
it. CBC News. July 5. https://www.cbc.ca/news/canada/north/nwt-heritage-fund-inflation-1.473
4937. Accessed January 14, 2020.
EIA. (2017). Rankings: Total Energy Production, 2017 (trillion Btu). Online at https://www.eia.
gov/state/rankings/?sid=AK#series/101. Accessed January 13, 2020.
Finances Quebec. (2019). The Generations Fund. November update. Online at http://www.budget.
finances.gouv.qc.ca/fondsdesgenerations/index_en.asp. Accessed January 14, 2020.
Gourevitch, P. A. (1978). The second image reversed: The international sources of domestic politics.
International Organization, 32(4), 881–912.
GWA [Government of Western Australia]. (2018). Western Australian mineral and petroleum statis-
tics digest 2017–18. Perth, WA: Department of Mines, Industry Regulation and Safety, Govern-
ment of Western Australia. Online at www.dmp.wa.gov.au/Documents/About-Us-Careers/Stats_
Digest_2017-18.pdf. Retrieved April 3, 2019.
Horowitz, L. (2006). Mining and sustainable development. Journal of Cleaner Production, 14(3–4),
307–308.
IFSWF. (2018). The origin of Santiago Principles. Experiences from the past; guidance
for the future. https://www.ifswf.org/sites/default/files/IFSWF_Santiago_Principles_book.pdf.
Accessed November 11, 2019.
IFSWF. (2020). Our Members. Online at https://ifswf.org/our-members. Accessed January 9, 2020.
InfoRoyalties. (2020). Royalties + Participações Especiais em valores reais, corrigidos pelo IGP-
DI. A partir de Agência Nacional do Petróleo e Fundação Getúlio Vargas. http://inforoyalties.
ucam-campos.br/informativo.php. Accessed March 23, 2020.
Conclusion 657

Intergovernmental Panel on Climate Change. (2018). Global warming of 1.5 °C. An IPCC Special
Report on the impacts of global warming of 1.5 °C above pre-industrial levels and related global
greenhouse gas emission pathways, in the context of strengthening the global response to the
threat of climate change, sustainable development, and efforts to eradicate poverty. Geneva,
Switzerland: IPCC.
IWGSWF [International working Group of Sovereign Wealth Funds]. (2008, October). Sovereign
Wealth Funds. Generally accepted principles and practices. ‘Santiago Principles’. https://www.
ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf. Accessed January 13, 2020.
Moses, J. W. (2020). A Sovereign Wealth Fund: Norway’s Government Pension Fund, Global.
Forthcoming book chapter in E. Okpanachi & R. Tremblay (Eds.), The political economy of
natural resource funds. Palgrave Macmillan.
Rajaram, V., Dutta, S., & Parameswaran, K. (2005). Sustainable mining practices: A global
perspective (London: Taylor & Francis Group).
RDIF. (2020). Overview. Online at https://rdif.ru/Eng_About/. Accessed January 14, 2020.
Spencer, R. (2018). Corporate social responsibility as sustainable development: A critical anthro-
pology of development perspective. In M. Brueckner, R. Spencer, & M. Paull (Eds.), Disciplining
the undisciplined: Perspectives on responsible citizenship, corporate social responsibility and
sustainability, pp. 73–88 (UK: Springer).
SWFI. (2019). Top 88 Largest Sovereign Wealth Fund Rankings by Total Assets. Online at https://
www.swfinstitute.org/fund-rankings/sovereign-wealth-fund. Accessed January, 14 2020.
World Bank. (2019a). Natural gas rents (% of GDP). Online at https://data.worldbank.org/indica
tor/NY.GDP.NGAS.RT.ZS. Accessed on December 20, 2019.
World Bank. (2019b). Oil rents (% of GDP). Online at https://data.worldbank.org/indicator/NY.
GDP.PETR.RT.ZS. Accessed on 20 December 2019.
World Bank. (2020a). Total natural resources rents (%of GDP). World Development Indicators.
Data Bank. Online at https://databank.worldbank.org/reports.aspx?source=2&type=metadata&
series=NY.GDP.TOTL.RT.ZS#. Accessed January 13, 2020.
World Bank. (2020b). Fuel exports (% of merchandise exports). Databank. Online
at https://databank.worldbank.org/reports.aspx?source=2&series=TX.VAL.FUEL.ZS.UN&cou
ntry=#. Accessed January 14, 2020.
Author Index

A H
Abdolalizadeh, Zoha, 113, 327, 511 Hojjati, Niloo, 215
Anggoro, Yudo, 73, 483
Araújo de, Israel Lacerda, 309
I
Iyiola-Omisore, Ibukun, 439
B
Bauer, Andrew, 183
Beygi, Elham, 511
J
Brueckner, Martin, 601
Jaluakbar, Wisnu, 73
Jordison, Shantel S., 215
C
Carson, Siri Granum, 621
Costa da, Hirdan Katarina Medeiro, 309 K
Costa, Hirdan Katarina de Medeiros, 499 Kariuki, Caroline Wanjiru, 55
Cupertino, Silvia Andrea, 499 Kirillova, Olga S., 359
Konrad, Marcia Regina, 499
Kumalasari, Elisabeth D., 293
D
Daitch, Sarah, 183
M
Matambanadzo, Fadzai, 231
E Mavuti, Kate Wanza, 55
Ekhator, Eghosa O., 439 Medeiros Costa de, Hirdan Katarina, 99
Elias-Roberts, Alicia, 127, 343, 527 Mezaya, Rivana, 73, 483
Moses, Jonathon W., 1, 249, 423, 635
Mutsotso, Angela Khanali, 459
F Muyonga, Sarah Nduku, 281
Fraser, Jocelyn, 579

N
G Nilsen, Heidi Rapp, 621
Globa, Svetlana B., 147 Nwapi, Chilenye, 29, 265, 385
© The Editor(s) (if applicable) and The Author(s), under exclusive license 659
to Springer Nature Switzerland AG 2021
E. G. Pereira et al. (eds.), Sovereign Wealth Funds, Local Content
Policies and CSR, CSR, Sustainability, Ethics & Governance,
https://doi.org/10.1007/978-3-030-56092-8
660 Author Index

O Rampaul-Cheddie, Indira, 127

Osiolo, Helen Hoka, 55 Reynolds, Douglas B., 167, 371, 567
Overland, Indra, 545

S
P Silva e, Isabela Morbach Machado, 99
Pereira, Eduardo G., 1, 231, 635 Spencer, Rochelle, 1, 231, 635
Poussenkova, Nina, 545
Prasetio, Eko A., 293
Pringgabayu, Dematria, 483
Pritasari, Adita, 483 W
White, Simon, 411

R
Rahayu, Wulan Asti, 73 X
Ramdlany, Dany Muhammad Athory, 483 Xavier, Andre, 579