NRCs have featured prominently in the development of petroleum and mining sectors throughout the world over the past 40 years. NRCs are now a typical feature on the petroleum landscape and increasingly visible in the mining sector as well. They are thought to play an important role in ensuring national control over EI sector development.

Enthusiasm for NRCs has waxed and waned, but they have proved a durable phenomenon, particularly in resource-rich developing states. There are signs that their popularity is reviving today, encouraged by the surge in commodity prices experienced over the past several years. Often referred to as ‘national champions,’ NRCs have been established with a wide range of both commercial and non-commercial objectives. Their performance in pursuing those objectives has provoked a debate,^[3]  and prompted responses aligned with what is now considered good practice. However, where NRCs have accepted remedial reform measures, there is good evidence of their achieving enhanced levels of performance.

Commercial Objectives.  In a small number of cases in the past, NRCs have been expected to and have been successful in emulating IRCs in terms of commercial efficiency and the generation of profits. These NRCs have been successful in operating as a counter-balance to the traditional influence of IRCs. In a limited number of cases, these NRCs have been able to replace IRCs completely.^[4]

Non-Commercial Objectives. The more common experience is that NRCs have tended to be the focal point for accomplishing a broad range of national, economic, social, and political objectives. This focus is particularly based on their access to funds and to a lesser extent on perceptions of their superior technical and managerial skills. Objectives coming under this heading are comprised of the following: (1) job creation; (2) development of local capacity; and (3) provision of social and physical infrastructure.

In addition to these roles, petroleum NRCs have also had a key role in income redistribution through the supply of products at subsidized prices. Other assigned functions for petroleum NRCs include, as noted above: (1) acting as the petroleum sector regulator, and (2) in the case of petroleum projects under PSAs, NRCs act as a fiscal or commercial agent selling the government’s share of petroleum on government’s behalf. 

Recently, a number of NRCs have also adopted a strategy of diversifying internationally into upstream investments abroad. Examples of companies pursuing this strategy are Petrobras in Brazil; the Chinese National Petroleum Corporation (CNPC) and Sinopec in China; Oil and Natural Gas Corporation Limited (ONGC) in India; Gazprom, LukOil, and Rosneft in Russia; and Petronas in Malaysia. For the Chinese and Indian companies, one of the drivers behind such expansion is to gain access to energy production that can meet the home state’s growing economic demands.^[5]

Issues Arising. There have been problems and controversy with respect to both the assigned functions and the NRCs’ performance in carrying out these functions. Meeting commercial objectives has proved difficult; in fact, with few exceptions, NRCs have scored poorly in this area.^[6]  This is attributable to a number of factors which primarily includes a lack of competition and weaknesses in capacity among them. Funding equity participation in the EI sector has also proved a problem for NRCs. In states where there are urgent competing priorities for the use of public funds, choices to not contribute NRC equity participation in EI sector projects can hold back performance and development of capacity.

By assigning non-commercial objectives to NRCs, most of which are seen as the proper province of government, these companies have the potential to not only undermine their own commercial effectiveness, but also the effectiveness of governmental macroeconomic management. In granting these non-commercial functions to NRCs, governments can unnecessarily complicate macroeconomic management and diminish transparency and accountability. NRC assumption of the role of sector regulator, while simultaneously pursuing commercial objectives, creates serious conflict of interest issues.^[7]

Along with the assignment of non-commercial objectives, the other main impediment to commercial performance relates to a lack of good governance. Primarily, this issue relates to the problem of NRCs becoming captured by a small number of privileged elites who then use the NRC for their own gain rather than for the national interest and poverty alleviation.^[8]  With access to significant financial flows, and exercising considerable influence over economic activity both inside and outside the resource sectors, the NRCs have been natural targets for control by elites interested in pursuing their own political and personal agendas. In so doing, these elites have an interest in promoting a lack of clarity with respect to NRC operations, in politicizing management, and in ensuring dependency of the NRCs on the elites for funding and other operational prerequisites.

Responses and Good Practice. The debate over NRC performance in the past has prompted a number of positive responses. Commercial performance has been enhanced by the introduction of competition (by partnering with IRCs) and by privatization in varying degrees (by partial listing on stock exchanges). Funding issues have been addressed by adopting flexible contractual formulas (such as carried interests or production sharing) with the private sector that defers or cancels funding obligations. Efficient modern EI sector tax systems can be relied on to generate revenues for the state comparable to those obtained through equity participation without risking public funds.

As reflected in a number of states, most reform recommendations include the transfer (with suitable transition arrangements) of non-commercial functions to government, leaving the NRC to focus primarily on commercial activities. Most states have avoided giving regulatory roles to NRCs in the mining sector; but in petroleum sector, it is quite common for NRCs to have considerable regulatory obligations in addition to its commercial functions. This is usually attributable to capacity issues or overriding political considerations.

However, if regulatory functions cannot be separated from the NRC, they can be ring-fenced within the NRC for operational and accounting purposes and reported in the national budget and accounts. Transfer of regulatory functions out of the NRC is high on all EI sector reform agendas, but internal ring-fencing may be preferable until credible capacity and assurances of good governance can be established in an external agency. Within the NRC, transparency is accepted as a critical ingredient to good governance and starts with properly prepared, externally audited, and public accounts. Serious commitment to NRC commercialization is also essential.

Mining NRCs. There have been a number of nationalizations of mining operations, which resulted in the establishment of state-owned mining companies. This occurred primarily in the 1960s, following the independence of many states. However, many mining NRCs, especially those in Africa and Asia, have fared poorly and have been subsequently privatized or closed. This is due to a variety of factors, including mismanagement, poor access to resources, a lack of cost discipline, political intervention, and corruption.

Today, a new set of issues are emerging related to Chinese NRCs becoming investors around the world and offering turnkey infrastructure and other investments as part of an overall mining investment package.^[9]

Legal Standing.  NRCs should be established as distinct legal entities under the state’s corporate laws; and not as a unit with a governmental department.  This legal separation assists in providing a clear profit motive and avoids productive enterprises being used for predominantly social or political purposes. Corporatization can also help avoid operational subsidies being subsumed in the budgets of government departments. It can also help incorporate fiscal discipline principles from the corporate world in terms of both capital raising and corporate decision-making. Beyond corporatization, a partial stock listing (where the state maintains majority control) can bring the added discipline of meeting stock market listing and reporting requirements.

Market Discipline.  The most efficient NRCs are those who have been subject to full market competition; that is, NRCs that gain no advantageous treatment from their own governments compared with privately owned companies. This means that NRCs should be subject to the same fiscal regimes, tax assessments, auditing procedures, and tax payments of a privately-held company. The NRC should apply for and obtain licenses in the same manner as other companies, and should be subject to the same licensing conditions as private companies with all regulatory activities being undertaken by government regulatory offices.

Like a private company, the NRC should be subject to strong market discipline.^[10] This means that the NRC should raise capital in the private marketplace and should set up and maintain a strong balance sheet with debt obligations that do not create any undue pressure or risk for the shareholder. Any debt obligations should be insignificant in terms of their impact on national accounts, sovereign debt, and debt service of the state.

Good Governance. Good governance of NRCs requires attention to the role of EI sector or financial ministries in exercising the shareholder role on behalf of the state. Commercially based shareholder roles can lead to companies that compete strongly in the international market place. Examples of companies with a strong commercially based shareholder role include: Codelco in Chile, Petronas in Malaysia, and Vale and Petrobras in Brazil. 

Likewise, a misguided or even corrupt shareholder role that is combined with inadequate or corrupt management and large non-commercial roles can lead to companies that are now producing only a small fraction of their peak production. Examples of companies in the mining sector that have experienced these types of problems in the past include:  Gecamines in the Democratic Republic of Congo (DRC), ZCCM Investment Holdings in Zambia, and Comibol in Bolivia.  Examples from the petroleum sector might include: the Nigerian National Petroleum Corporation (NNPC) in Nigeria and Pertamina in Indonesia, both of which have incurred huge financial losses in the past.

While the management of state-owned enterprises (SOEs) may make recommendations and proposals regarding annual budgets, investments, and raising debt and dividends; good practice is for an NRC to be required to have polices and decisions regarding such matters taken by its board of directors, giving due consideration to the owners’ interests, guidance, and instructions.

At the highest level, there are six main aspects related to a strong commercial shareholder role. They include the following:

• First, shareholding needs to be held in the name of one or more government officials (such as EI sector or finance ministries), who will appoint the board of directors who are the shareholders representatives governing the NRC. The directors should be selected and appointed on the basis that they are knowledgeable about the business  and that each has the time available to be informed about the company’s activities and ensure that the shareholder’s interest are well-served. The directors should be fully independent of management and management influence.
• Second, the appointment of management should be made on the basis of professional qualifications and experience, not according to political or family affiliations.
• Third, the board of directors should provide the management with a clearly stated mission related to resource development (including mineral or petroleum processing and marketing as appropriate).
• Fourth, the board of directors should ensure that the management focuses on its core business and does not expand its activities into other non-core business areas. In this regard, the board of directors should only approve company business and investment plans that are consistent with shareholder objectives. A very important aspect is the scope and focus of the core business and any ancillary business activities. Another important aspect is the employment policy of the company regarding workforce productivity and remuneration.
• Fifth, oversight of the sources and uses of funds with regard to the NRC should be done so as to raise commercial borrowing of needed debt, meeting the listing requirements of stock markets and the shareholder; that is, the management should not take decisions with regard to cash flow distribution, dividend, and retention for the company. Instead, this should be based on a management recommendation.  
• Sixth, the NRC, its managers, and directors should be excluded from any regulatory-type roles or activities.

State Equity. It is not uncommon for legislation to provide government with the right to take a minority equity holding in a private sector EI operation (see  Section 7.2 and Box 7.2 below). Such equity can be held directly in the name of the government or it can be held by a government entity that is established simply as vehicle to hold equity in other companies.

Minority equity participation can have the advantages of enabling a government to invest in a potentially profitable EI project, while avoiding the costs and risks associated with exploration or other preparatory work (which may not eventually result in a viable investment opportunity). It also gives the government access as a shareholder to information about the project and the private company which may not be otherwise available. Moreover, it gives government a share in the dividends of the company – although these are generally unpredictable and may take many years to appear, especially if the company is not very profitable or if all the profits should be re-invested.

There are also potential risks and disadvantages to minority equity participation. The government may have a limited decision-making role as a minority shareholder when all major decisions are taken by the majority shareholder. If the company plans a major new investment or expansion, which requires additional equity from its shareholders, the government may be faced with a dilemma of having to put in additional equity or see its ownership diluted.

Or, in the worst case, if the company is losing money, it may require additional shareholder funds to remain in business. The government may be required to put in new cash to keep the company operating. There can also be a potential or real conflict of interest if a regulator is also given a position as on the company’s board of director as one of the government shareholder representatives for the company. 

Equity Funding. There are two main ways to fund an equity stake:  paid-in capital or carried interest (see Chapter 7.2 and Box 7.2 below). A third but less common approach is to acquire the equity for free equity. Paid-in capital means that the government pays for its equity in cash so that it has the same standing as other shareholders. In this case, the government should make its decision as part of its overall process for determining both the uses and sources of its funds to help ensure that it makes rational decisions regarding any use of its funds for an equity investment.

Carried interests are frequently used for minority government equity participation in EI sector projects. The advantage for the government is that it does not have to provide cash. The disadvantage for the company, and the other shareholders, is that carried interests have the effect of diluting the equity base of the company which must then raise the cash to cover the government’s participation.^[11]   Thus, carried interests are essentially a loan from the company, or the majority shareholder, to the government.

There are instances where governments insist on a minority free equity in a new EI sector project. Free equity is tantamount to taxing the project, but is also a very different instrument from a tax. An equity holding gives a government the many rights and benefits but also the many obligations and risks of a shareholder. A tax requirement simply gives the government the right to collect a tax payment by the company and the obligation to assess and collect taxes according to the prevailing taxation rules.^[12]   A mandatory requirement for free equity runs the risk of creating a climate of resentment and distrust. This can result in the private shareholder(s) looking for ways to recoup their investment without using dividends to which all shareholders are entitled.^[13] 

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