Basic Concepts in the Extractives Industry

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of 'needs', in particular, the essential needs of the world's poor, to which overriding priority should be given; and • the idea of limitations imposed by the state of technology and social organisation on the environment's ability to meet present and future needs. Hence for sustainable development to be achieved, it is crucial to harmonise three core elements: economic growth, social inclusion and environmental protection. These elements are interconnected and all are crucial for the well-being of individuals and societies.

  • the concept of 'needs', in particular, the essential needs of the world's poor, to which overriding priority should be given; and
  • the idea of limitations imposed by the state of technology and social organisation on the environment's ability to meet present and future needs. Hence for sustainable development to be achieved, it is crucial to

Hence for sustainable development to be achieved, it is crucial to harmonise three core elements: economic growth, social inclusion and environmental protection. These elements are interconnected and all are crucial for the well-being of individuals and societies.

Pictorial representation on the Sustainable Development Goals (Post 2015 Agenda)

(Image courtesy of Our Common Future, Chapter 2: Towards Sustainable Development)

Sources
A/42/427. Our Common Future: Report of the World Commission on Environment and Development
United Nations Economic Commission for Europe (UNEC)

Sustainable Development Knowledge Platform

(Our Common Future, Chapter 2: Towards Sustainable Development

From A/42/427. Our Common Future: Report of the World Commission on Environment and Development http://www.un-documents.net/ocf-02.htm )

UNEC http://www.unece.org/oes/nutshell/2004-2005/focus_sustainable_development.html

https://sustainabledevelopment.un.org/

This exists when a project has the ongoing approval within the local community and other stakeholders, ongoing approval or broad social acceptance and, most frequently, as ongoing acceptance.

Sources
http://socialicense.com/definition.html
The Social License to Operate: SDGS

The notion of revenues generated by oil and mining operations refers chiefly to government payments, compensation, and community investments. Government payments are taxes and royalties as well as other payment schemes that may exist between mining companies and various levels of government.

Oil, gas and mineral revenues are special because they are finite, volatile and, if large enough, can negatively impact other industries. They also generate large economic rents and are location-specific, which can lead to conflict over their control. As a result, they may need to be managed and distributed differently from other types of government revenue.

i. Compensation refers to payments or other benefits (such as housing, in case of resettlement) provided by companies to affected communities to compensate for economic, social, environmental, or cultural damage directly caused by the mining operation.
ii. Community investment refers to voluntary actions or contributions by companies that are beyond the scope of their normal business operations and intended to benefit local communities in their area of operation.

(Revenue Management and Distribution, Natural Resource Governance Institute)

Transparency can be defined as openness in the management of public affairs. Public accountability means the obligations of persons/authorities entrusted with public resources to report on the management of such resources and be answerable to the public


Transparency is a fundamental tool to promote efficiency and accountability in converting natural resource wealth into long-term social and economic development.


For transparency to be effective, information disclosures must be relevant, accessible, timely, and accurate.


(Transparency Mechanisms and Movements, NRGI )

International Initiatives

Publish What You Pay (PWYP)

PWYP is a global coalition of civil organisations seeking transparency in the extractive industries. It has three major pillars of advocacy:

  • publish why you pay and how you extract,
  • publish what you pay, and
  • publish what you earn and how you spend

Extractive Industries Transparency Initiative (EITI)

EITI is a multi-stakeholder initiative that aims to promote openness and accountability in the management of natural resources throughout the decision-making chain.


Each country that implements the EITI has a multi-stakeholder board that publishes a report reconciling information from government and extractive companies throughout the decision-making chain.


Open Government Partnership

The OGP is a multilateral initiative that aims to secure concrete commitments from governments to promote transparency, empower citizens, fight corruption and harness new technologies to strengthen governance. Kenya is part of the OGP.

Natural Resource Charter

The Natural Resource Charter is a set of principles, including policy options and practical advice, for governments, societies and the international community on how to best manage resource wealth.


The second precept calls for transparency of information throughout the decision-making chain to be a foundation of resource management.

Accounting standards

Accounting standards create requirements for companies to disclose information if they are to be in compliance with certain business standards. For example, the International Financial Reporting Standards (IFRS) sets the requirements for accounting practices, and therefore disclosure requirements, in many countries.

Good governance entails conducting of public affairs and managing public resources effectively in order to guarantee the realisation of human rights and social welfare. The following are the principles of good governance:

  • Participation: Participation could be either direct or through legitimate intermediate institutions or representatives. It is important to point out that representative democracy does not necessarily mean that the concerns of the most vulnerable in society would be taken into consideration in decision making. Participation needs to be informed and organised. This means freedom of association and expression on the one hand and an organised civil society on the other hand.

 

  • Rule of law Good governance requires fair legal frameworks that are enforced impartially. It also requires full protection of human rights, particularly those of minorities.

 

  • Transparency: Transparency means that decisions taken and their enforcement is done in a manner that follows rules and regulations. It also means that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement

 

  • Responsiveness: Good governance requires that institutions and processes try to serve all stakeholders within a reasonable timeframe.

 

  • Consensus oriented There are several actors and as many viewpoints in a given society. Good governance requires mediation of the different interests in society to reach a broad consensus in society on what is in the best interest of the whole community and how this can be achieved.

 

  • Equity and inclusiveness: A society's well-being depends on ensuring that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society.

 

  • Effectiveness and efficiency: Good governance means that processes and institutions produce results that meet the needs of society while making the best use of resources at their disposal.

 

  • Accountability: Accountability is a key requirement of good governance. Not only governmental institutions but also the private sector and civil society organisations must be accountable to the public and to their institutional stakeholders. Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to an organisation or institution. In general, an organisation or an institution is accountable to those who will be affected by its decisions or actions

Source:  United Nations Economic and Social Commission for Asia and Pacific: What is Good Governance?

Image depicting the eight principles of good governance

(Image courtesy of Extractives Baraza 2017)

This means that the power of the government comes from the people. Ultimately, the government is elected by the citizens of Kenya, to whom they are responsible.

A "sovereign" is a ruler. The people of Kenya, as citizens, are the rulers of Kenya. The people they elect to rule them make up the government, but that government must always answer to the people.

Devolution is the process that involves the transfer of functions, resources, power and responsibilities from the central government to county governments or other decentralised organs in order to promote participatory democracy and sustainable development for the benefit of all citizens. In essence, decentralisation is a process of delegating sovereign power from a central authority to different levels of government. Kenya's devolution model has several distinct features.
The most prominent are:

  • Level of government – The sovereign power of people is exercised at two levels that are, at the national and county levels. The two levels of government are - interdependent and shall conduct mutual relations on the basis of consultations and cooperation.

 

  • Revenue distribution – For every financial year, an equitable share of the revenue raised nationally that is allocated to county governments shall be not less than 15% of all the revenue collected by the national government. The basis shall be the most recent audited accounts of revenue received as approved by the National Assembly

 

  • Decision making organs - the Constitution places national political power in the hands of the national executive, and parliament and at the county level, the 47 county assemblies and county executive committees.

The "resource curse" refers to the negative growth and development outcomes associated with minerals and petroleum-led development. In its narrowest sense, it is the inverse relationship between high levels of natural resource dependence and growth rates.


It 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.

Manifestations of the Resource Curse:

Image depicting the four manifestations of the resource curse

(Image courtesy of Extractives Baraza 2017)


Oil-led dependence

This is a country's 'development' based on its overwhelming dependence on revenues gleaned from the export (and not the internal consumption) of petroleum. This dependence generally is measured by the ratio of oil and gas exports to gross domestic product; in countries that live from petroleum rents, this figure ranges from a low of 4.9 percent (in Cameroon, a dependent country running out of oil) to a high of 86 percent (in Equatorial Guinea, one of the newest oil producers). Dependence is also reflected in export profiles, with oil independent countries generally making up from 60 to 95 percent of a country's total exports. Oil-dependent countries can be found in all geographic regions of the world, although they are most commonly associated with the Middle East and, more recently, Africa.


Dutch Disease

This phenomenon occurs when resource booms cause real exchange rates to rise and labour and capital to migrate to the booming sector. This results in higher costs and reduced competitiveness for domestically produced goods and services, effectively "crowding out" previously productive sectors.

Nigerian Disease

This is characterised by resource revenues being wasted by governments who lack the institutional capacity to use these windfall gains efficiently, therefore what features prominently here is corruption and rent seeking behaviours (both defined below).

Rent seeking behaviour

The term "rent" in the extractives context refers to unearned income or profits "reaped by those who did not sow." According to economists, rents are earnings in excess of all relevant costs, including the market rate of return on invested assets. They are the equivalent of what most non-economists consider to be monopoly profits. "Rent-Seeking" refers to efforts, both legal and illegal, to acquire access to or control over opportunities for earning rents. In oil-dependent countries, rent-seeking refers to widespread behaviour, in both the public and private sector, aimed at capturing oil money through unproductive means.

Reference: NRGI Reader- Resource Curse

Corruption may broadly be defined as the misuse e of public power or resources to enrich or give an unfair advantage to individuals. In Kenya, despite constitutional, political and market reforms, several business surveys reveal that corruption is still widespread and that companies frequently encounter demands for bribes and informal payments to 'get things done', extractive ones included. The public procurement sector also suffers widespread corruption - the use of 'agents' to facilitate business operations and transactions is widespread and poses a risk for companies, particularly at the market entry and business start-up stage, which will eventually be borne by Kenyans.


Common forms of corruption:

  • A business or individual pays a bribe to a government official in order to be given a government contract or licence
  • The use of government-owned resources, such as motor vehicles, for private purposes
  • A government official takes advantage of his or her position to favour a family member or business associate for a job or tender contract.

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