Natural Resources and Violent Conflict - WaterWiki.net

292 john brayThe overriding concern for would-be extractive-industry investorsremains security of tenure and the extent to which this might be threatenedby political unrest, legal uncertainties, changes in governmentpolicy, or expropriation. The extractive industries share with downstreamenergy companies the problem of the “obsolescing bargain.” 2Companies from these industries are obliged to make major capitalinvestments before they can expect to reap any profit. These investmentsamount to a kind of “hostage.” Once the companies have paid formulti-million-dollar fixed assets, they cannot lightly withdraw fromthe host country.Security of tenure is essential because of the long time period—oftenwell over a decade—between initial investment and payback. Thelong time frame, large capital investment, and typically high politicalrisks mean that the companies feel justified in seeking high rates ofreturn.Paradoxically, these same high rates can raise political risks, ratherthan alleviate them, because they lead to charges that the companyis “profiteering.” Outright expropriation, the classic political risk ofthe 1960s and 1970s, is now unusual. However, companies may faceforms of “creeping expropriation.” In Russia there have been caseswhere local joint venture partners have unilaterally sold extra companyshares to local purchasers, thus diluting the foreign partners’percentage stake without their knowledge. Elsewhere—for example,Papua New Guinea in the early 1990s—host governments have forcedcompanies to renegotiate royalty agreements once mines came intoprofitable production.Meanwhile, nationalism still manifests itself in government reluctanceto lift restrictive regulations limiting foreign ownership. Despitemore than a decade of debate—and a recent change of policy by PresidentGloria Macapagal-Arroyo—the Philippines has yet to reach consensuson foreign participation in the mining sector. A case challenging100 percent foreign ownership of mines is still lying unresolved in theSupreme Court in Manila.Uncertainties over security of tenure are all the greater in postsocialisttransition or developing economies that are still in the processof developing the economic, legal, and fiscal regimes needed to attractprivate investment initiatives. Both in the former Soviet Union and inmuch of Africa, lack of confidence in the viability and transparencyof legal reforms continues to discourage investors in major, long-terminfrastructure projects.Ultimately, security of tenure may depend less on legal formalitiesand more on intangible qualities of trust. Major energy and miningprojects have little chance of long-term survival unless they are seen as