Two weeks ago I shared with readers on the political economy of the natural resource paradox based on the book titled "Rents to Riches” - The Political Economy of Natural Resource–Led Development, which presents an analytical framework for evaluating a country’s political economy and institutional environment as it relates to natural resource management and offers some prescriptions across the natural resource management value chain.

The observations were that, in many developing countries, the extractive industries sector is inextricably linked to political, economic, societal, and institutional dynamics. Understanding the political economy surrounding natural resource management value chains is therefore essential if we are to transform this sector.

This week I want to share with readers the issues raised by the book on-the political economy of sector organisation and the award of contracts and licences- as this has a determining factor on the developmental trajectory of any country’s extractives sector.

The issue of who gets to mine what and where remains a highly contentious issue in the mining sector in many resource rich less developed countries. A lot of secrecy and lack of transparency leads to ubiquitous speculation of who owns what and non-accountability. It is factual that, at the end of it all, political contestation is really all about the desire by political elites to control access to and distribution of natural resource wealth. As a result, natural resource management in less developed resource rich countries has historically been characterised by lack of transparent governance and mired in opaque secret deals done by political elites usually to the detriment of citizens and the economy as a whole.

The organization of the natural resource sector in the distribution of extraction and production rights has huge consequences for how resource rents can be transformed into developmental riches. According to the book, it has been found that what contracting models a country selects between criteria-based licensing (increasing transparency and efficiency) and direct negotiation (increasing government discretion and flexibility) will determine the quantum of revenues which can be extracted, and this will also have a bearing on whether a government is able to meet its social developmental objectives or not. A country’s "rent-capture regime” is the cumulative result of such choices including exploration, extraction, and taxation regimes.

There are four key dimensions of the extractives sector organization identified, these being: (1) the legal and regulatory framework, (2) models of ownership in the extractive industries (3) the allocation of rights for exploration and production and (4) the capacity of government agencies tasked with regulating and monitoring the sector.

Legal and regulatory framework;

An enforceable, transparent, and comprehensive regulatory framework for natural resource sectors provides a stable and predictable policy environment and yet must be flexible enough to adapt to the exogenous price and production shocks. However, policy reversals or constant changes to laws and regulations tend to undermine the credibility of the regulatory framework and this increases perceived country risk by potential investors. Potential investors tend to be very sensitive about inconsistent policies, especially mineral sector tenure security. Customary or indigenous rights to subsoil assets need also to be recognised and taken account of to avoid conflict with local communities.

The quality and consistency of the legal, regulatory, and fiscal frameworks in a country will therefore always have a major influence on natural resource management across the value chain.

Models of ownership;

There are several ways in which the state can participate in minerals extraction. This can be achieved through complete ownership through state enterprises or part ownership through joint ventures with private investors. Ownership models are mainly determined by the attractiveness and stability of regulatory and fiscal regimes and the instruments used to allocate rights and licenses.

It has been found that where state-owned enterprises are the major operators in the natural resource sector, they tend to face the problem of insufficient reinvestment to sustain exploration activities, as well as a lack of technical capacity. There is also the tendency by state-owned enterprises in the extractives sector to use their resources and mobilization capacity to acquire political capital and thereby be in a position to prevent major reforms. High turnover in senior management, politicization of appointments, and political interference in management decisions are rife in state-owned companies while transparency and accountability remain a challenge.

Joint ventures between the state and private investors are also common, but in cases in which the executive has the discretionary power to remove the management, the credibility of state-owned companies to enter in long-term contracts and joint ventures with private partners is compromised. In addition, there is, at times, inadequate scrutiny of joint venture partners who can be imposed by a political elite without due process.

The options pursued at any one time will depend much on the political economy of each country and nature of governance.

Allocation of rights for exploration and production;

How rights for exploration and production are determined and allocated will determine the ability of governments to control the sector and maximise benefits.

A lack of transparency in procedures for allocating contracts, including secrecy, remains a major problem for the development of the sector that has consequences for all other links of the value chain and the government’s ability to transform resource rents into developmental riches. Unfortunately, this is rife in poor resource rich countries where the sector has been captured by a predatory class of political elites.

It has been found that most countries choose a system that operates somewhere in between, by either (1) direct negotiation between the state and interested producers through solicited or unsolicited channels, sometimes called "open door” systems, or (2) criteria-based licensing via open bidding rounds based or the first-come, first served principle.

However, contracts can also be awarded as the result of bilateral negotiations among heads of state or as a result of the direct intervention of political economic elites from other countries. In such cases, the resource- rich host country usually receives bilateral aid from the investor country or infrastructure to complement the projects in an exchange termed a "bundled resource-for-infrastructure deal.” Chinese government- backed investors are increasingly prevalent partners in such deals across Africa. This has helped to transform resource rents into infrastructure but, there is often the risk of the undervaluation of resource reserves and environmental mismanagement concerns to the detriment of the resource rich country.

Capacity of government agencies;

In countries with weak governance and institutional quality, mining ministries and parastatals seldom have adequate capacity to properly regulate and monitor exploration and production. Overlapping institutional mandates, and weak coordination among public officials constitute a major obstacle to the effective management and regulation. Overlapping institutional mandates often mean that no one agency is responsible for and can be held accountable for natural resource management.

Political interference throughout the natural resource management value chain is endemic in resource-dependent developing countries. Even in countries where an independent regulatory agency is clearly empowered on paper, its functions are often hampered by political interference. Key positions in sector agencies, including regulatory bodies, are filled with political appointees with little sector background and secret deals are common resulting in weak technical capacity to monitor and regulate the sector.

These problems of political interference and weak technical capacity are compounded by a lack of effective oversight from either the legislature or civil society organizations. This increases transaction costs for operators, and opportunities for administrative corruption and state capture.

Any country that wishes to transform its extractives industry from resource rents to resource riches needs to fully understand the natural resource management value chain and deal with the above issues.