MAXIMISING THE POSITIVE SOCIOECONOMIC IMPACT OF HYDROCARBON EXTRACTION ON LOCAL REGIONAL DEVELOPMENT

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MAXIMISING THE POSITIVE SOCIO-ECONOMIC IMPACT OF
HYDROCARBON EXTRACTION ON LOCAL/ REGIONAL
DEVELOPMENT IN TRANSITION ECONOMIES

• Richard Auty
• Lancaster University

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OUTLINE

• 1. Why Mining Linkages Inflate Expectations of
  Local Impacts
• 2. Local Growth Impacts of Three Oil Projects
• 3. Key Constraints on Maximizing Beneficial Local
  Linkages
• 4. Policies to Promote Sustained Pro-Poor Local
  Development from Mining Beneficial
  Demonstration Effect on National Economy

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1. Why Mining Linkages Inflate Expectations of
Local Impacts

• 1. Literature suggests large capital-intensive
  mining investments create inflated expectations
  for local impacts because
• a. Unusually high of mining revenue leaks
  abroad to service foreign capital  tax
  dominates domestic impact
• b. Local linkage is further attenuated if the
  mine is (i) remote, (ii) has short life
  expectancy, (iii) is located in a start-up mine
  region, (iv) governance is deficient and (v) the
  mine operator neglects social issues
• 2. Thesis Although hydrocarbon projects leak an
  unusually high share of revenue abroad they can
  still
• a. Be a positive catalyst for sustained local
  growth
• b. Transmit a national demonstration effect of
  the advantages of efficient investment gt
  rent-seeking economy

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Table 1 Estimated domestic local economic impact
for four hydrocarbon projects
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2. LOCAL GROWTH IMPACTS OF THREE OIL PROVINCES

• 1. UK North Sea best practice template for FSU
  oil projects.
• a. UK suggests pessimism over local impacts is
  normal, but unfounded.
• b. There are lags, but in effectively
  functioning markets oil can revitalise declining
  peripheral economies like Aberdeen with light
  policy
• c. As oil declines, SME product geographical
  diversification sustains growth.
• d. FSU govs should eschew interventionist
  policies that risk capture
• 2. Atyrau emerging sustainable industrial
  agglomeration
• a. Despite high local PCI, oil benefits diffuse
  slowly to poorest
• b. Local community gets inadequate share of rent
  to meet SOC needs
• c. Pollution is substantial and inefficiently
  policed
• 3. Sangachal gets less local development than
  Atyrau and Sumgait (pollution sink unwisely
  neglected by Baku)

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Table 3 Comparative economic performance
Grampian region and UK
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Table 4 Population and PCGDP, principal economic
regions of Kazakhstan 1999
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Table 5 Kashagan, indicative returns with and
without flare gas re-injection
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Table 6 Some AIOC Linkages in Azerbaijan, 2004
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Table 7 Potential domestic multipliers for ACG
Phase 1
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Table 8 Goldman Sachs Energy Environmental and
Social Indices 2004, Selected MNCs
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3. THREE KEY CONSTRAINTS ON MAXIMIZATION OF
BENEFICIAL LOCAL LINKAGE

• 1.Deficient governance
• a. Deficient governance deters linked
  investment, risks capture of policies to force
  productive linkages (e.g. local content
  requirements) by rent seekers, loads costs onto
  local community and benefits on elite
•  2.Market Failure
• a. BP PSA early reform zone within which
  government company roles legally defined
  allows BP make target 17 return on capital
• b. Outside PSA investors seek 70 return to
  cover illegal imposts. Implies efficiency of
  capital in non-PSA economy 1/4 that of PSA.
  Deters sunk investment in competitive activity
•  3. Dependent social capital
• a. Mining concentrates fiscal linkage on centre,
  which consolidates dependent form of social
  capital that is a legacy of central planning
• b. Need to strengthen civic voice so local
  firms, society government can cohere to pursue
  legitimate community interests.

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Table 10 Some indices of institutional quality
2002 Selected countries
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Figure 1 Vicious Circles of Rent-Seeking
Behaviour
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4. POLICIES TO PROMOTE SUSTAINED PRO-POOR LOCAL
DEVELOPMENT FROM MINING NATIONAL DEMONSTRATION
EFFECT

• 1. Mining can play key role in support of dual
  track reform strategy to build (a) dynamic market
  economy (in ERZs) (b) pro-reform political
  coalition
• 2. Mining corporations, with government, should
  help set up a local stakeholder committee prior
  to the investment decision to first screen then
  secure net mining benefits
• 3. Promote new enterprise formation (at micro,
  SME large scales) during operation phase rather
  than continue to offset (thereby facilitate)
  government neglect of its social role

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Conclusions continued

• 4. Establish best practice early reform zones
  modelled on PSAs within which rent seeking
  imposts are limited
• 5. Strengthen fiscal transparency and also
  resilience of social capital at both national
  local level, working through NGOs
• 6. Continue efforts to ease constraints that
  deficient infrastructure, banking skills
  impose on local business expansion