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Speeches & Transcripts

Energy Mineral Operations: Sustainability and FDI

June 3, 2014

Jan-Peter Olters, Country Manager for Kosovo Regional Environment Center and Baker Tilly Kosovo Conference Pristina, Kosovo

As Prepared for Delivery

Lignite - FDI and Sustainable Development

Natural resource wealth—it can be a blessing, or it can become a curse.

As economic history has shown, too many resource-rich countries have, unfortunately, ended up accursed, with the populations suffering—rather than benefiting—from abundant oil and mineral deposits stored under the surface of their territory.

Rather than destiny, the path that a country takes is political choice that can be influenced by multiple stakeholders in government and parliament, in industry and the population at large.

In Kosovo, the abundance of non-renewable natural resources is a reality—one that represents a key ingredient of, and significant risk to, Kosovo’s socio-economic development potential.

Kosovo is very rich in mineral deposits.

The 10.9 billion tons of proven, exploitable lignite reserves alone represent—at current consumption levels—more than 1,300 years of secure supply.

In addition, the country has abundant deposits of ferronickel, lead, zinc, magnetite, and other ores that—if developed—could make a major contribution to employment and exports.

For the most part, however, Kosovo’s potential has been largely left untapped.

And this has not remained unnoticed.

Kosovo’s unexploited resource abundance has raised commercial interests by quite a few potential investors, which have been approaching the Government with unsolicited proposals of natural resource-based investments that—on paper—promise large-scale investments with considerable benefits to citizens and the Government.

With a view on ensuring social welfare in a sustainable manner, which—in the case of extractives—tends spans over decades, if not centuries, it must be a government’s role to weigh carefully the potential benefits and risks of any investment, especially in the extractives, and even more so, if it concerns unsolicited proposals.

In any country, including Kosovo, a responsible minister—in the absence of a national consensus on, and a political commitment to, an overarching development strategy for the natural resources—would be overtaxed in making a rational decision on an investment plan and, especially, among competing investors’ proposals, typically involving some type of government co-contribution in terms of fiscal incentives and/or the taking over of known and/or unknown, current and/or future environmental liabilities.

How can one weigh the benefits and risks of a given investment proposal—and that relative to others—if overarching socio-economic development objectives are not well defined; how can one manage corresponding risks and social impacts?

Partly for this reason, the incoming Parliament and Government will have an opportunity to outline, over a medium- to long-term horizon, a strategy with accompanying policies that places related objectives into the context of the externalities that the country is willing to accept in return—thereby responding to the question of how Kosovo should benefit from its abundant reserves of lignite and other minerals?

Of the various demands on Kosovo’s lignite reserves, the only ones that, currently, are contained in a Government strategy are those related to the generation of electricity from Kosovo A (up until its decommissioning), Kosovo B, and the New Kosovo Power Plant (once it replaces the 50-year-old Kosovo A power plant).

From the perspective of the Government, managing the various demands on Kosovo’s natural resources has become considerably more difficult after the mining law has been amended last year, waiving competitive tender procedures not only to “ensure energy security” but also to allow for “considerable direct investments.”

At the World Bank, we believed that the earlier, more restrictive provisions, which were in line with international practice, had provided the Government with sufficient flexibility to react to potential crisis situations, whereas the revised stipulations have broadened the scope of potential sole-sourcing beyond the needs of reacting to a crisis situation.

Facilitating the permission of non-competitive private-sector investments in the extraction of energy minerals, whether for coal-fired power plants or for other purposes, will

  • reduce the transparency in the management of natural-resource extraction and revenues;
  • presuppose the ability to ensure due process in awarding concessions and licenses for extractive industry activities;
  • impact the functioning of the underlying price discovery mechanism (i.e., the need to establish that concessions were given at “fair” price), thereby risking the public’s perception of corruption that has motivated investment interests and/or the awards of concessions; and
  • affect the public perception of the reasonableness of the balance between the economic interests of, and the revenues earned by, private investors and the social and environmental costs borne by the government and the public at large.

Unsolicited proposals and non-competitive tendering procedures for power generation projects are even more delicate, not least because they affect a regulated market.

In such instances, Government will need to provide the justification and establish reasonableness of (i) any subsequent tariff increases; and/or (ii) the contingent liabilities that the government may accept for facilitating such investments.

Against this backdrop, there are two principal approaches to ensuring policymakers’ abilities to make a rational decision in favor or against a given investment proposal.

First, re-requiring competitive bidding processes to all investments except those prevent an energy crisis provides the public, investors, and policy-makers with assurances of an ultimately prudent, rational, and even-handed approach to the exploitation of Kosovo’s natural resources, balancing all stakeholders’ interests.

Second, if that route is not chosen, the country can fill the currently existing ambiguity with a broadly shared vision—ideally a broad consensus—for the development of, and the benefits from, its natural resource wealth.

To increase overall transparency and increase the likelihood that the population at large will benefit from corresponding investments, Kosovo could follow the examples of Albania and the United States in agreeing to develop its own extractive industries within the standards defined by the Extractive Industries Transparency Initiative (EITI), a global coalition of governments, companies and civil society working together to improve openness and accountable management of revenues from natural resources.

The guiding principle of EITI membership—strengthening transparency to enshrine governmental and corporate accountability—is the understanding that natural resources, such as oil, gas, metals, and minerals, belong to a country’s citizens, seeking to ensure—by avoiding the socio-environmental pitfalls present in this sector—that the extraction of these resources leads to economic growth and social development.

In such an environment, proposed private sector-financed investments would either be consistent with such a development framework or they would not.

If Kosovo succeeds in taking advantage of its natural resource wealth, in a careful, sustainable manner, with a view to balancing social welfare with, in particular, environmental costs, its natural resource wealth has every potential to be a blessing for the country and its citizens.

It is just important not to forget that, for a considerable number of countries, this very wealth has led to what has been termed the “resource curse”, referring to a phenomenon, in which countries with an abundance of natural resources of non-renewable resources (minerals and fuels) end up having less economic growth and worse development outcomes compared to countries with fewer natural resources.

Nobody would benefit from the latter outcome.