“A nation behaves well if it treats the natural resources as assets which it must turn over to the next generation increased, and not impaired, in value,” Theodore Roosevelt, America’s 26th president, remarked in 1910. Coming from America’s “Conservation President”—who signed legislation establishing the first five U.S. national parks, as well as the Antiquities Act—this is often cited as an example of a forward-looking leader institutionalizing sustainability and stewardship of the environment.
Though no one can lay claim to the ideas behind conservation, the impulse to institutionalize it has taken hold in the last century. In the past few decades, legislation and other legal tools have boosted options for conserving and developing natural resources, and public-private partnerships (PPPs) may prove to be a particularly effective solution.
Leveraging the model
Traditionally, the PPP model has been applied to the delivery of public infrastructure or public services—including highways and bridges, hospitals, schools, and even correctional facilities—on behalf of a public authority. The model has demonstrated time and again that it is adaptable and sufficiently flexible to accommodate varying structures, depending on the specifics of any given project. For natural resources, similar models have been successfully applied to the development of renewable energy facilities (particularly hydro, solar, or wind energy production). This works by adapting principles similar to traditional PPP projects and combining these with various existing legal and contractual structures such as concessions, offtake agreements, and development or project agreements.
The issue becomes more complex when considering non-renewable natural resources, such as minerals and petroleum, which are by their very nature finite. These natural resources have traditionally been exploited as concessions; the government will grant a developer the right (generally on an exclusive basis) to exploit a specific resource in a given area. The developer will finance the project and develop, extract, and sell the resource, paying back to the government concession fees often based on the amount and/or value of the resources extracted.
Concession vs. PPP
But the differences between a natural resource concession and a PPP can be significant. First, in the case of a natural resource concession, government typically operates at arm’s length from the concessionaire, as government’s role is typically limited to that of regulator. Second, the concessionaire recovers its investment only from the sale in its own name of the resource extracted, with little or no contribution from government. In addition, depending on the legislative environment in place, concessions may not offer a sufficient framework within which to effectively address broader issues such as sustainable development and environmental protection. Finally, the main public benefit associated with concession projects is the royalty fees and taxes returned to government in exchange for exploiting the resource, together with local employment opportunities.
However, it is possible to structure such projects in a manner more similar to a PPP to permit government a more active role by imposing additional obligations on the concessionaire. Examples include the carrying out of functions on behalf of governmental authorities, including responsibility for primary education and healthcare, the supply of clean water, training opportunities for the local population, or the construction of infrastructure not directly related to the natural resource being exploited, such as schools, hospitals, roads, and electricity distribution networks. These elements would add to the public benefit obtained through the natural resource concession.
There is nothing in the PPP model to prevent a government from establishing a payment structure that would seek to encourage or discourage certain operator activities or behaviors. For example, where traditional forestry concessions typically grant forestry companies cutting rights over a defined territory, in developed countries the concessionaire may be required by law to replant harvested areas. One can imagine structuring a PPP in a developing country which combines the granting of long-term cutting rights to a private operator with stewardship responsibilities, including reforestation but also (why not?) ecotourism and fauna preservation. In a mining operation, governments could consider increases or decreases in royalties payable to it upon the achievement or not of certain predetermined benchmarks by the operator, similar to the deduction regimes contemplated in traditional PPP projects. As always, the structuring of any such mechanisms would likely require great care, given the number of variables involved and the need to properly balance any additional obligations imposed on the operator with the need to ensure the project remains commercially viable and financeable.
Among PPPs’ key innovations are monitoring mechanisms developed to ensure that project budgets and timelines are respected and that the operator complies with its obligations pursuant to the applicable contractual framework during the lifetime of the project. Many developing countries lack the capacity or the resources to follow up on the monitoring of a project, and this can lead to the government failing to recover obligations owed to it or becoming liable for additional payments. In the context of a natural resource project, a PPP-styled monitoring mechanism could be incorporated to address these concerns. To address the issue of capacity within government to effectively monitor, the operator could be required to support government in the establishment and operation of monitoring agencies through capacity building.
PPP flexes its muscle
One of the key advantages of a PPP is the flexibility provided to government to develop and impose operator obligations applicable to any given project. When combined with a conducive payment mechanism and effective monitoring, PPPs can maximize the sustainable local economic development potential of the project and otherwise encourage desired results in a flexible manner. A PPP may also enable governments to achieve social benefits while reducing financial losses (legal or otherwise) associated with operating a civil service by enabling money generated by a project to be spent directly by the operator on the desired public infrastructure and services, rather than being routed through government ministries.
Given the mixed history of the use of natural resource royalties by some countries, PPPs may provide a method for achieving social, economic, and other development aims in a more direct and efficient manner, enabling countries to heed Roosevelt’s call to behave well.