Bernie Sheahan, who heads IFC’s investments in resources and infrastructure, sees big resource projects in complex regions as key to industry growth.
Industry growth will resume, with major projects in challenging environments
“The downturn in the mining sector has clearly had a big effect on the level of investment in emerging markets. This has translated into fewer opportunities for IFC. In the medium term however there will be a resumption of growth. It may not be as big as the previous upcycle and much will depend on developments in China, but unless someone invents a way of building things without iron, steel and copper I would imagine there will be continued demand for going underground.
New discoveries will increasingly be in politically, socially and environmentally complex geographies. Africa will continue to attract a growing share of industry interest. Whether iron ore in Guinea or coal in Mozambique, the big mining projects of the future will largely be in challenging environments.
Hydrocarbons have been more resilient than mining – gas in fact has been completely immune to the downcycle. The US shale boom and new technological innovations have revolutionised the gas market. There has been significant investment up and down the value chain and a growth in requests for IFC to become involved. This has opened up new opportunities for developing countries to monetize their gas resources. We have seen an enormous increase in African nations making hydrocarbons discoveries in the last 4-5 years. As with mining, we will continue to see the sector move to new geographies.”
License-to-operate performance of companies: getting better, but still “all over the place”
“Over the last ten years, many resource companies have significantly improved their awareness and capacity to manage social and environmental risks. Broadly speaking however, performance on ‘license to operate’ issues remains all over the place. It would not take long to assemble a lengthy list of companies facing major problems in this area.
Pressure for improved performance has intensified and will continue to do so – particularly as the industry moves further into challenging geographies. When faced with weaker government capacity to regulate, more sensitive social and environmental contexts, and more connected civil society there will be growing scrutiny of companies. In response they are searching for ways to add more value to the local economy.
Developing country governments are increasingly realising the potential for shared infrastructure developments linked to extractive projects. Dynamics around East Africa’s offshore gas fields or the large iron ore mines in West Africa and Latin America demonstrate that there are growing demands on companies to provide broader socio-economic benefits to host countries.”
The key industry challenge is sustaining internal capacity on sustainability
“Building – and maintaining – internal capacity to manage social and political risks is a major challenge for all extractive companies. The sustainability space is changing rapidly. It is one thing for a company to acquire expertise in the first place but something entirely different to keep up to speed or to apply that knowledge to specific country contexts.
A lot of upstream extractive work – particularly in emerging markets – is done by smaller players who often lack the scale to acquire sufficient capacity on social and environmental issues or to construct resilient relationships with the host country. Larger companies may have that specialised expertise but often make it the first victim of cost-cutting during downturns. We have to be careful not to mortgage long-term asset value because of low commodity prices today. We can all name projects that are stalled or undeveloped because sustainability — and frankly trust building — investments were not made up front.”
The IFC brings a long-term horizon, which is critical to managing socio-political risk
“IFC was created to support investment in challenging emerging markets. IFC has significantly longer-term horizons than the typical commercial lender. The risks of each investment are closely scrutinised and a lot of time is spent ensuring the structure of contracts and relationships with host countries are sustainable over time. This is particularly crucial in the face of growing resource nationalism in many developing countries.
IFC investment is not only important as a source of capital but can also provide vital assurance for smaller players looking to IPO or to attract larger partners. Having IFC on board signals that the company has taken the time to look at the balance of interests with the host country, that social and environmental risks are being mitigated and that corporate governance is acceptable.”
No exit from fossil fuels planned “any time soon” – but lower carbon investments growing
“Divestment from fossil fuels is not on the cards anytime soon. The majority of IFC members are not ready for such a move. Consumers don’t seem to be either. The primary objective for many governments is still simply to expand access to electricity to their populations. Renewables can play an important role in this but are often not enough. Reliable power supplies are vital for economic development and fossil fuels play a critical role in this. That being said, IFC has a policy towards less carbon intensive energy strategies. The share of renewables in IFC’s power investments is now between 60-70%.”
NGOs bring a healthy alternative view and challenge on resource projects
“NGO criticism of IFC investments is not fundamentally a bad thing. NGOs play a vital role in scrutinising the management of risks in countries where regulatory capacity is weak and local citizens may lack voice. IFC has built a lot of capacity to help companies operate sustainably. This does not however mean that every observer will agree that IFC’s environmental and social standards are sufficient in every setting. This is not unique to developing country contexts. In the US or Europe it would be equally unlikely to find a situation where no alternative views on resource development exist. But an informed and healthy dialogue is in everyone’s best interest.”