Taking the steps to turn the tables

After several years of headlong expansion, big oil and mining companies are pulling up abruptly. Soaring commodity prices, which during the past year have broken records in markets from crude oil to copper, have slumped across the board since July 2008. Together with the impact of the credit crunch on project financing, this drop has forced scores of extractive companies to cut back on new investments and scale down production at many existing operations.

Clearly, everyone in the business world is concerned about what they will be allowed to spend in the next year or so. While many corporate executives are rightly worried about their budgets for this and next year, there are many good reasons right now for continuing efficient responsible business initiatives.

In fact, smart companies know that well-thought-out programs can be worth the investment given that, and let’s be honest, Corporate Social Responsibility (CSR) is relatively inexpensive compared to advertising spending, or paying staff more money.

Companies focused intently on cutting costs may be tempted to treat management of socio-political and sustainability issues as a luxury which they can live without while projects are on hold.

Clearly, legal requirements in this area need to be met to comply with environmental regulations for mothballed facilities, for example, but is there any sense in going beyond this? Is there any sense in investing in community projects or stakeholder engagement programs while other investments are frozen?

In fact, while waste should be cut back in this area and elsewhere, perhaps, strategically protecting key relationships during this period actually may be more important to companies’ long-term success than any short term cash savings.

Research based on Critical Resourcess License Secure methodology, which rates the health of the “socio-political license to operate” of resource projects, suggests that frequentely it is a foreign companys handling of social and political concerns during a delay to a project that shapes the way the business is seen and treated by its hosts in the future.

At such times, well-focused sustainable development programs and other relationship-building activities — which typically cost a small fraction of overall capital expenditure for a project — may be a worthwhile investment.

Doing the right stakeholder engagement work is equivalent to buying an option to reopen projects, or at least lower the risk of future backlash.

While economic conditions (and international financial institutions) in the 1980s and 1990s encouraged some countries to re-open their industries to foreign investment, particularly in the mining sector, this rarely meant that resentment had disappeared. As prices rose from 2002-8, resource nationalism again emerged as countries took advantage of their renewed wealth and bargaining power to extract better terms from investors.

Companies may see current conditions as welcome relief from such pressures. Host governments are today not in a position to demand higher taxes and royalties; indeed, for many the priority now is simply to persuade foreign firms to stay. But at some point markets will recover and prices will pick up, and the way companies treat their hosts in the interim will not be forgotten.

National governments in particular may view sceptically offers from “those that deserted us in our time of need.”

In this way, a sensitive but strategically designed approach to stakeholder relations can help extractive companies soften the impact of project delays on the way they are viewed in resource-rich countries. Maintaining sufficient levels of contact with host governments and communities, and responding wherever possible to their needs during periods of project delay is a critical element of this.

By the same token, when renegotiating the commercial terms of projects with governments in the light of commodity price falls, companies may do well to pay at least some attention to public and political perceptions of what constitutes a ‘fair deal’ for the host country.

Firms that focus solely on extracting short-term concessions may end up with agreements that prove politically unstable over the long term.

Put another way, a little strategic effort on their part to demonstrate consideration for stakeholders’ interests may pay off when the tables turn again, as they surely will.