Share This
Finance and Development: December 2000 Cover Image

Search Finance & Development

Advanced Search

About F&D


Back Issues

Write Us

Copyright Information

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile

Finance & Development
A quarterly magazine of the IMF
December 2000, Volume 37, Number 4

How Oil, Gas, and Mining Projects Can Contribute to Development
Kathryn McPhail

Oil, gas, and mining projects could be a boon for developing host countries, yet their environmental and social costs often outweigh their benefits. Partnerships between project developers, governments, and local communities are crucial for projects to have a lasting development impact.

Many developing countries, rich in natural resources, have welcomed private investment in their oil, gas, and mining industries. Although projects in the extractive industries can have a serious environmental impact and be socially disruptive as well—particularly if people must be resettled to make way for them—they can make a significant contribution to the economic development of host countries if their adverse consequences are minimized through careful planning. Because they generate sizable revenues, create jobs and business opportunities, and often bring new roads and access to water and power to the isolated rural areas in which they are typically located, they have the potential to stimulate economic growth, reduce poverty, and raise living standards. In addition, host countries benefit from being exposed to best international practices in project planning and implementation and forced to build up their administrative and institutional capacity.

Frequently, however, national governments reap the most benefit from these projects, while social and environmental costs tend to be borne by local communities. A recent World Bank study of two oil and gas projects and two mining projects in Colombia, Papua New Guinea, and Venezuela (see box) reveals that the communities affected by these projects believe that the environmental and social costs have been heavy, while expected benefits have either failed to materialize or not been distributed in an equitable manner. These findings are particularly striking because these three countries have laws requiring that a percentage of revenues from natural-resource-based projects be allocated to regional and local development initiatives. The project developers not only carriedout extensive social and environmental studies in an effort to mitigate negative impacts and maximize benefits but also provided large amounts of funding for social programs.

The importance of partnership

The missing ingredient in these four projects—and in many others like them—is partnership. For projects to contribute to the development of host countries, governments, private companies, and local communities or the nongovernmental organizations (NGOs) that represent them must be committed to working together as partners. Although each has different responsibilities, the partners must have mutually agreed objectives, shared responsibility for outcomes, clear accountability, and reciprocal obligations.

Projects studied by the World Bank

In 1998, the World Bank published "Integrating Social Concerns into Private Sector Decisionmaking: A Review of Corporate Practices in the Mining, Oil, and Gas Sectors" (Discussion Paper No. 384), a report by Kathryn McPhail and Aidan Davy based on a review of the literature and a survey of corporate project developers and nongovernmental organizations. To field-test the findings of the report, four privately financed projects were evaluated on the basis of extensive discussions with government, corporate, and community representatives:
  • Operations of British Petroleum Exploration Colombia (BPXC) in Casanare, Colombia. The largest oil field in the Western Hemisphere, situated in an area of extreme conflict between guerillas, paramilitaries, and the army. Project infrastructure costs are $6 billion. Revenues began flowing in 1997.
  • Chevron Niugini's Kutubu operation in the Kikori River Basin in Papua New Guinea. The country's first oil field is located in a culturally and biologically diverse ecosystem. Project infrastructure costs are $1 billion. Revenue stream began in 1992.
  • Rio Tinto's Lihir gold project. This is the largest gold mine in Papua New Guinea. The indigenous Lihirian population numbers 8,000. Project infrastructure costs are $0.74 billion. Revenues began in 1997.
  • Placer Dome's large-scale gold/copper project in Las Cristinas, Venezuela. The local population consists of indigenous tribal groups and economic migrants. Project feasibility studies are ongoing.

The role of government is to provide an appropriate policy framework; clearly delineate the division of responsibilities between the public and private sectors; determine how project revenues are to be used; monitor and evaluate projects; deliver education, health care, and other social services; provide security for projects; and develop mechanisms for financing rural infrastructure and planning upstream projects. Project developers must give attention to social concerns, acknowledge all stakeholders, identify risks and opportunities, assess impacts, provide for public involvement in project design and implementation, and develop mechanisms for resolving conflicts and evaluating project effectiveness. NGOs can provide valuable input and should work side by side with government officials and project developers while remaining accountable to the communities they represent. Given the growing worldwide trend toward localization, as communities demand more of a voice in their own governance, and a history of perceived broken promises and resentment toward government, community participation is critical. It should not be limited to those in a project's immediate vicinity or to a small special-interest group but should be as broad as possible. For example, because of Colombian law, revenues from the BPXC project in Colombia flow only to the 3 oil-producing municipalities in Casanare Department, although the other 16 municipalities say they are experiencing increased immigration and violence as a result of the project.

Developing mutually agreed objectives. Although all four projects involved strategic planning, Chevron Niugini's Kutubu operation was the only one in which objectives were agreed upon by all of the parties (the government, the developer, and the World Wildlife Fund (WWF)). The project is located in the 2.3-million-hectare Kikori River Basin, an ecosystem that is home to indigenous peoples representing 13 language groupings and an intact primary forest. In 1992, the WWF, with input from Chevron Niugini, local communities, and gov-ernment agencies, designed the Integrated Conservation and Development Project, whose objective was to mitigate environmental and social impacts in the project area.

In Venezuela, the 3.5-million-hectare Imataca reserve, the site of Placer Dome's greenfield gold and copper project, includes conservation areas, formal and informal mining interests, indigenous peoples, and forests. However, the government drew up a plan without involving other interested parties. As a result, Placer Dome was unable to clarify such critical issues as land access and treatment of the claims of illegal miners and has been forced to develop its own plan for the miners. Environmentalists, arguing that the government's plan is unconstitutional and its forestry policy outdated, have initiated a lawsuit, and the government's plan has still not been agreed.

Shared responsibility for outcomes. In BPXC's oil project in Colombia, the company, local communities, and local government shared responsibility for mitigating social impacts. BPXC personnel worked directly with affected communities to diagnose their development needs. Once priorities were established, the communities, with BPXC support, prepared plans for individual development projects, specifying objectives, material requirements, and costs. Projects were submitted to the appropriate municipal authorities for approval, because BPXC's involvement was generally contingent on the availability of counterpart funding. This approach was effective because development projects were driven by the demands of the communities that would benefit from them, and the latter's direct involvement in planning and managing projects fostered a sense of ownership.

Papua New Guinea, where distribution of benefits derived from natural resources is negotiated on a case-by-case basis, introduced a "development forum" in 1998, whose primary responsibilities are to disseminate information on the nature, scope, and impacts of mineral projects and to determine how project benefits will be shared by stakeholders. Papua New Guinea's mining laws grant ownership of subsurface minerals to the government, but project developers must apply for access to landowners, who have a clearly defined right to negotiate a package with the government and the company. However, the communities' responsibilities with respect to using project revenues to foster local development are not clearly defined, and the government's lack of transparency and accountability in connection with the stewardship of revenues has eroded its credibility.

Because the resources available for investment in social and community development initiatives are limited, it is important to measure the effectiveness of such initiatives. BPXC, together with local communities, reviewed 50 subprojects, including schools, health clinics, water supply, and sanitation, to assess whether they had met stated objectives and been completed on time. Although BPXC's review revealed some problems, such as the municipal government's inability to deliver on its commitments, most of the subprojects had been successful, largely because of the participatory way in which they were designed, financed, and implemented. Chevron's reviews of its community affairs team led to changes in its approach, but its efforts have been hampered by weak provincial capacity and commitment as well as by Chevron Niugini's own inability to develop programs and projects in the health and education sectors.

Clear accountability. Allocating responsibility for delivery and funding of social services often gives rise to conflict. And, although social services are traditionally the responsibility of governments, communities in remote areas may expect project developers to provide them to compensate for the impacts of projects. In the case of BPXC, for example, a local NGO hired to evaluate five development subprojects found that local communities believed that BPXC should invest in communities to mitigate the adverse impacts of its oil field.

In Kutubu, although large sums of money flowed from Chevron to the provincial government to support investments in infrastructure and services, there is little to show for it because the provincial government failed to carry out its responsibilities. Chevron has been acting as a surrogate for the government, providing health and education services at the local level, but is unable to provide these services at the provincial level.

Countries with weak governance may need to call on NGOs, World Bank Group for help

National governance
Local governance

Weak High NGO involvement and high World Bank Group involvement High NGO involvement and limited World Bank Group involvement
Strong Limited NGO involvement and high World Bank Group involvement Limited NGO involvement and limited World Bank Group involvement

The World Bank's evaluations of the four projects demonstrate that there were few mechanisms for holding governments and communities accountable, and the failure of the projects to deliver anticipated improvements in infrastructure and administrative capacity is all too evident. Visits to several education and health facilities and local government offices reveal a depressing picture of minimal investment (other than by Chevron Niugini) and low morale or motivation among public servants. The principal reasons the projects have not contributed more to development are a shortage of local capacity for planning and management and governments' mishandling of project revenues. Funds are being squandered, and tensions are mounting.

Reciprocal obligations. When governments and private sector companies agree to cofinance social initiatives, it is important that governments follow through on commitments, which often involve financing the recurring costs of staff or supplies. If governments renege on their commitments, they may unwittingly provoke conflicts between companies and local communities; the latter often do not distinguish between commitments made by governments and those made by private companies and may seek to settle grievances by disrupting projects. Moreover, if governments leave the provision of social services to their corporate partners, it will cease when projects are completed.

In Venezuela, the discussions between Placer Dome and small miners were initially adversarial but became more collegial over time, and regular meetings between the company and the small miners association have provided an effective forum for resolving conflicts. (Placer Dome is still working on improving its relationships with local communities, which feel that only the miners are getting any benefit from the project.) Although Placer eventually succeeded in working out an agreement that allowed the miners to work part of its concession, it was hampered at first by a lack of government support. A clause in the shareholder agreement between Placer and its joint-venture partner, a state-owned enterprise, required Placer to keep Las Cristinas "free from independent miners and other trespassers." Moreover, the government applied similar environmental standards and permit requirements to both the large- and small-scale mining projects, making it difficult for the small miners association to set up an autonomous and viable enterprise.

One of the services that governments should provide is security but, in Colombia, the security provided to protect BPXC's operations, which are in an area full of dangerous armed groups, has exacerbated a volatile and violent situation. Guerilla groups that oppose BPXC's operations, which they view as supportive of the government, extort funds from BPXC and its contractors by kidnapping personnel, while paramilitary groups have massacred small farmers sympathetic to the guerillas. Colombia's army, ostensibly in the area to protect BPXC, is warring with the guerillas and the paramilitaries and has been accused of human rights violations. BPXC has also been forced to develop its own security measures, creating a siege mentality that has made it difficult for the company to establish good relations with local communities.

Keeping up with change

The rapid construction of projects and sudden huge cash flows into noncash economies have transformed life in many communities. Casanare, a remote area, was not designated a department by the Colombian government until 1991, four years after BPXC had begun to explore for oil there. The capacity of the Casanare government for planning, managing finances, and maintaining law and order was weak, and the education levels of the people in the area were lower than the national average. Yet within 10 years, Casanare's oil-related royalty income would exceed that of any other department in Colombia—$100 million annually—leading to large-scale immigration from other parts of the country. The population of the project area has doubled since the early 1980s, leading to increased prostitution, drunkenness, competition for land, and environmental degradation. The injection of cash into the local economy and the emergence of contractors competing for work have fueled corruption and extortion, causing civil conflicts to escalate.

A robust monitoring system is therefore needed—not only to ascertain the success of mitigation plans but also to ensure that plans remain relevant as conditions change. Monitoring programs should focus on results (for example, the number of local jobs created because of business opportunities related to the project) and not on inputs (for example, the amount of money allocated to business development).

In the Lihir project, both the company and the government wisely designed monitoring programs up front. An environmental management plan and paper on mitigating the likely social impact of the project were both completed in 1992. However, monitoring has been hampered by equipment failures, vandalism, and professional differences of opinion.

Senior officials in both the project developers and the governments must be strongly committed to mitigation and monitoring programs and must earmark financial and human resources for them right from the start, even before projects start to turn a profit. Monitoring responsibilities should be clearly allocated between the government, the company, and civil society. And, if mitigation plans are found to be falling short of their objectives, they must be redesigned by experts who can interpret findings and determine what changes are needed. The active and sustained involvement of local communities is also necessary, to ensure that programs meet local needs and build a sense of ownership.

Improving the odds of success

To ensure that developing countries reap the maximum benefit from oil, gas, and mining projects while protecting the natural environment and minimizing social problems, the players must learn to work together, even if their agendas seem initially to conflict. Specific actions that will enable host countries to take full advantage of the development opportunities offered by these projects include

  • strengthening national policy frameworks and government's capacity to deliver the services for which it is responsible, such as health care, education, and security;
  • identifying biological and cultural sensitivities to facilitate project planning and selection of the best alternatives for mitigating negative impacts;
  • negotiating equitable concession agreements with private sector companies;
  • strengthening policies and procedures for public consultation and promoting transparency in project planning and implementation; and
  • building capacity at the local level to absorb incremental revenues for development purposes.

Many governments in the developing world lack the capacity to carry out these responsibilities, however. Countries with weak governance at the local or national level may need to turn to the World Bank or other multilateral development institutions as well as to NGOs for assistance (see table). Project developers themselves could benefit from the involvement of international organizations, which carry out institutional and country assessments that would be helpful for risk analysis.

Although there is little agreement as yet on what constitutes sustainable development, there is agreement that, for projects to benefit host countries, they must, first, be profitable. Second, safeguards must be adopted to minimize damage to the environment and local communities and to ensure that human rights are protected. (Attempts by governments and private companies to gain access to mineral-rich land have given rise to many complaints about human rights violations.) Third, projects must build not only physical capital but also social and natural capital, particularly since oil, gas, and mining projects deplete resources and are not, in themselves, sustainable over the long term. And, fourth, project benefits must be equitably shared, not only between the public and private sectors but also between local communities and national governments.

Kathryn McPhail is Principal Specialist in the International Finance Corporation's Technical and Environment Department.