Durable extractive contracts operate in a sound investment and business climate and should be underpinned by a fair, transparent and clear legal and regulatory framework and enforced in a non-discriminatory manner.
30. A sound investment and business climate is critical for successful investment in the extractive industry. The development of mineral, oil and gas resources requires heavy upfront investments before production and is characterised by long lead times, high risk and uncertainty (see Principle III). The extractive sector is characterised by long payback periods where initial investments are recouped after many years of production. Securing a fair rate of return commensurate with the risk borne by the investor occurs over a long time horizon whilst being subject to volatility in prevailing market conditions.
31. When evaluating the investment potential in a host country, investors will consider whether a reliable legal framework is in place, which allows investors to ascertain obligations (fiscal, environmental, social and others) that affect the ability to determine the project’s possible economic outcome. Transparency of the legal framework provides an important safeguard for foreign investors and should help ensure effective use of the resources for public benefit. This includes the establishment of laws, regulations and contracts that give accounting and reporting procedures to provide reliable and consistent, coherent information to the public on resource revenue receipts and other obligations, and provide for the publication of signed extractive contracts.
32. Governments can help reduce both uncertainty and risk by having institutions that uphold the rule of law, with transparency and integrity, and by providing fair, transparent and clear regulations, without unnecessary high costs of compliance. As recognised by the OECD Policy Framework for Investment, “well-crafted regulations can improve the investment climate by creating an efficient framework and ensuring high standards of rule of law. Good regulation does not necessarily mean less regulation. Rather, it suggests that administrative burdens should be streamlined where necessary and that the objectives of regulations should be transparent and their effectiveness regularly monitored and evaluated”.
33. Governments need to provide assurance on contract enforcement and property rights, and the fairness, predictability, impartiality and efficiency of the dispute resolution process, so that investors have confidence that their investment will not be unlawfully expropriated or otherwise impaired. Red tape, bureaucratic burdens and excessive complexity and other constraints such as some of those identified in the World Bank’s reports on ease of doing business raise business costs and can also lead to corruption. Administration transparency, integrity, coherence and consistency are critical to attract quality investment and ensure the continuity of extractive projects. Government should ensure the clarity of administrative procedures, including by effectively co-ordinating activities among different ministries and agencies as well as between the central and local governments.