strategic investments aimed at securing future supplies of energy and minerals. There are many aspects of this investor-state dynamism that present challenges to policy advisers and decision makers in resource-rich states. For example: What kind of company or pattern of companies is best suited to achieve a country’s policy on extractives and development generally? The choice is wide. Alongside long-established companies from the Organisation of Economic Co-operation and Development (OECD) countries, there are state-owned enterprises from Malaysia, the Middle East, and the Republic of Korea and new players from Brazil, China, India, and the Russian Federation, all making significant impacts. Significant diversity in industry ownership and financing structures has emerged from the resulting South-South pattern of investment; the use of resource-for-infrastructure deals is one example of the latter. Moreover, the growing number of so-called junior or mid-cap companies as investors means that a focus by policy makers and their advisers on the “supermajor” companies that long dominated the EI sector is now inappropriate. This diversity is also evident in the destinations of investment, the points along the exploration-to-extraction continuum and across energy and other mineral commodities (Barma, Kaiser, Le, and Vinuela 2012). A further element of complexity in investor-state relations is the international character of investment in the EI sectors. More than ever, there are opportunities for investors to structure their operations, on- and offshore, to take advantage of this context. As a result, national tax and regulatory authorities face challenges in regime design, monitoring, and enforcement. 3.2 COMMON FEATURES OF THE INDUSTRIES Long, risky, and costly exploration and development
Each of the EI sectors is characterized by long, risky, costly, and very capital-intensive development.2 For oil and gas, there is additionally a high cost at the exploration stage, with dry wells and resulting losses being common. A state that wishes to go it alone in the EI sector needs significant financial resources and an economy with sufficient diversity to allay concerns about EI sector investment risk (Boadway and Keen 2010). States that, more typically, choose to attract and rely on international investment, need to have in place a legal, contractual, and fiscal regime that investors can understand and trust. These states must also have a political track record that provides investors with reasonable assurances against
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adverse changes when a major discovery is made and/or exploitation is under way (see chapter 4). Conditions and assumptions that exist at the beginning of a project—at the time when laws are drafted and contracts awarded—are almost certain to change over the course of the project investment. Initial decisions are usually made when there is great uncertainty about the sector’s potential, based on what is known about the geology at the time of exploration. There is also uncertainty about the future economics, markets, risks, and politics that will affect the project. The incentive for a state to revisit the terms of the initial bargain struck is increased by the shift in bargaining power that occurs in the event of a commercial discovery and a substantial investment by the foreign investor. Sophisticated management and specialized technology
A second common feature is the dependence of the EI sectors on sophisticated management and specialized technology.3 This dependence affects the development of host-state institutional capacity. States developing their EI sector must have sufficient institutional capacity to adequately oversee sector operations and for adopting the competitive licensing, contractual, and fiscal regimes required to attract needed skills and technology (see chapter 5). The challenge here lies in finding ways of enabling a transfer of expertise and sourcing of business to local firms in order to ensure a long-term benefit to the domestic economy.
Asymmetric access to information
Partly due to the complex management skills and technology that characterize the EI sectors, governments are at an informational disadvantage vis-à-vis international investors and operators (Stiglitz 1989; Nutavoot 2004). The government is likely to be informed about its future fiscal intentions, but the private investor undertaking exploration and development will probably be better informed about technical and commercial aspects of a project. This has important implications for the design of license or contract award procedures, fiscal design, and fiscal administration as well as the engagement of outside technical assistance. It can also be the root of subsequent dissatisfaction by a government about the terms negotiated with investors by its predecessor(s) and trigger demands for a review of those terms. With increasing sources of competition in the EI sector, and the role of national resource companies, this is less of a
