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Return to core business: are we neglecting business competencies in the pursuit of poverty reduction?

Date
Time (GMT +01) 12:00 13:30

Speakers:
Eibhlis Hood, BP
Dr Michael Warner, Overseas Development Institute
Chair:
Tim Cullen, TCA Consultants

1. Tim Cullen - Director of consultancy firm in Oxford, specialising in governance and sustainability issues; with 21 years at the World Bank, six of those as the chief spokesman, and three as a senior advisor to Mark Malloch Brown.

2. To frame the discussion, it was noted that on the one hand Corporate Social Responsibility (CSR) purists argue the moral imperative for companies to engage in social issues, and that the potential for increased profitability and reduced risk is secondary; whilst on the other hand there are those who believe CSR distorts the market by deflecting business from its primary role of profit generation. Referenced was David Henderson, former chief economist at OECD, who has claimed that the 'fad' for CSR is doing real harm: privatising public policy and hence removing governments from their core responsibilities

3. Michael Warner opened by describing how the landscape of CSR had changed since the World Summit on Sustainable Development. The summit clearly positioned the corporate sector as a vehicle in the delivery of poverty reduction targets in the developing world. The question now was no longer 'whether' multi-national corporations should be involved, but 'how'. To illustrate, Kofi Annan (FT, 2nd Sept): "The corporate sector need not wait for governments to take decisions...we realise that only by mobilising the corporate sector can we make significant progress"; Margaret Beckett (Independent, 27th Aug): "We need to ensure that Johannesburg generates a step-change in how we tackle these problems [of global poverty]".

4. Businesses can think about how they might deliver such a step-change in at least three ways. First, the current imprint of business on society in low-income countries is often sub-optimal. Dividends are often not re-invested in the country or region; tax distribution is poor, and even if it reaches the principal region of operations it may not then benefit the most poor; products and services can often be priced out of the range of the poor; direct employment (and related employee benefits) usually goes to the educated elite; and the barriers to entry into supply chains are high. Acknowledged are efforts to address some of these constraints; notably the Ethical Trading Initiative, research at ODI on FDI incentives and wage impacts, and examples of pro-poor products from Unilever and Standard Bank. However, it is of interest that the most recent methodology for assessing the development impact (ERR) of investment projects published by the International Finance Corporation recognises that "the impact of the project specifically on the poor is not directly addressed in the assessment methodology"

5. Secondly, in the context of CSR, the social performance of many companies is likewise sub-optimal, with a lack of understanding that in low-income countries the CSR model has to be modified. For example, at present, and to generalise: charitable gifts and foundations bring only limited benefits to the poor in of scale; environmental and social impact assessment and management approaches focus mainly on the avoidance and mitigation of 'negative' impacts; and voluntary community development projects tend to act as 'islands of excellence', directed at those communities most adversely affected as a form of compensation, and uncoordinated with provincial and national strategies for poverty reduction.
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6. A third approach, and one which would strengthen both the first two, is the realignment of more of the core business competencies and resources of the business with national and provincial development priorities. Such competencies include: production technology, employee health, operational infrastructure (power, water, roads, telecommunications), borrowing capacity, distribution networks, project/contract management, market research and marketing, product R&D, human resource development, financing and accounting expertise, administration and legal expertise and HSE management. The business-case for this 'core competencies' approach falls into three parts. The approach draws down on the existing cost base, rather than introducing new fixed costs and so should be more cost effective and less risky that some current social investment approaches which require the building of in-house community development capacity, or outsourcing to consultants or NGOs. Further, aligning competencies with provincial and national development priorities offers a greater chance of gaining strategic business benefits such as capital (infrastructure) cost savings or market access, as well as increasing the prospects of finding public sector partners with whom to share the cost burden and risks, and who might assume responsibilities overtime allowing the company to reduce its liabilities in the longer-term.

7. Two examples of a core competencies approach were given. (1) A gold mining company in Venezuela contributed its resources originally intended for developing on-site employee health facilities to a District-wide programme of health care, leading to a 400% leverage of additional resources and higher quality and more sustainable health care provision for a population of 12,000 including potential mine workers. (2) A coal mining project in India, where the costs of constructing operational road infrastructure was shared with the District Government in alignment with public policy for improving the road network. In addition, the costs and liabilities of long-term maintenance were transferred to government through a vehicle use toll, leading to a new income stream for the District Authorities and employment opportunities for local communities along with faster access to schools, a health centre and local markets.

8. To embed a core competencies approach requires bringing these resources along-side the conventional business imprint on society and the social compliance and voluntary social projects aspects of CSR, to embrace a 'whole of business model'. The aim is then to develop a business management tool that enables managers to select the 'most optimal' social performance strategy based on balancing a strong business case with maximum development impact.

9. Eibhlis Hood began by directly answering the question posed in the topic - are we neglecting business competencies in the pursuit of poverty reduction with a "tentative yes". Tentative because in the competitive business environment in which BP works, the financial markets are looking for short-term results, quarter by quarter, and our resources are stretched to the maximum. So BP has to be careful about what it gets involved in and why. The link between business objectives and development objectives has to be transparent.

7. BP doesn't have the competencies or the remit from its shareholders to be something like a development agency. Yet the company cannot ignore the consequences of poverty that affects its businesses around the globe. Consequences that cause social exclusion, lack of choice, freedoms and rights and, core to our business, the lack of access to affordable energy. The ultimate consequence of all of these things can be conflict - the most destructive and desperate way of getting your interests recognised. Many of the areas in which BP work are zones of conflict.

8. For companies such as BP, the causes of poverty are not well understood, and that's where we need to partner with others to address these issues. Business has a lot of good qualities to share. They are good at delivering business results; are organised and efficient, performance-driven; clearly accountable against goals and targets and are always aware of the competition "nipping at our heels". They deliver complex projects in technologically difficult circumstances on-time and on-budget; have access to IT, finance, engineering, technology, human resources; and have networks and connections that stretch across the globe. The challenge is to find ways to extend this value to the poor.

9. Business and the pursuit of poverty eradication are not mutually exclusive. BP has to search for and exploit the overlaps between the need to maintain a commitment to financial markets in terms of business performance, and to society in terms of creating responsible and sustainable opportunities for reducing poverty. There is a need to find the right projects and the right partners.

10. BP's business creates benefits for society right now - employment, investment, taxes. It also provides a product that is at the core of development - energy. Energy provides heating, lighting, power for industry and so on. The Johannesburg conference highlighted the fact that two billion people were without adequate access to energy services. There must be a business opportunity for a global energy company here. By signing up to the EU Energy Initiative for Poverty Eradication and sustainable development, as well as the Global Village Energy partnership, BP has committed to exploring these areas. BP needs to be innovative about how it engineers business opportunities in low-income countries, for example, partnering with others to alleviate poverty by improving access to energy.

11. To give an example. BP has been working in Brazil - where 20 million people don't have access to energy. BP is working with the Brazilian government to bring clean energy to a remote part of North East Brazil. By providing solar systems to over 1,800 schools in the region - providing power for heating, lighting and refrigeration - the Prodene project. Part of the project has involved training local business to install and maintain the equipment - a transfer of skills that has been avidly taken up by local people who are creating further new applications. This is an ongoing successful partnership between business and government; and this is a business deal for BP, not philanthropy, but one that also provided benefits for society. A win-win situation.

12. And what of the bigger issues affecting upstream oil and gas projects? BP has tried to understand the impacts of its business on society through social and environmental impact assessments and ongoing dialogue with communities. We are learning how to deal with social risks and how to mitigate them, and have learnt to turn risk into opportunity. Simple things like digging additional drainage ditches for farmers when we're laying a pipeline is one small example of this.

13. Oil and gas projects require vast amounts of capital to be invested over relatively short spaces of time in order to create revenues that may last for more than thirty years. The up-stream part of our business (oil exploration and production) is a long-term game, so working in low-income countries poses significant risk to shareholder value. BP is transitioning from a portfolio of mainly OECD-based assets to one biased towards the developing world. By 2007, about 70% of our upstream investment will be in developing countries. To be successful in this longer game we need to understand the socio-economic issues that operate in these environments. We need to understand the causes of poverty so we can leverage our investments to benefit a greater number of people.

14. Another example: China's energy needs are currently largely met by coal, a dependency that's caused extensive environmental damage. The speedy introduction of cleaner fuels to the Chinese economy provides BP with a business opportunity. At the same time BP has worked with the Chinese government to share knowledge on environmental issues, leading to the introduction of a new curriculum subject in schools. This project reaches about a million children a year, which we hope will progressively improve the environment in China in more diverse ways than just cleaner fuels. It also builds a link between BP and the Chinese government which we hope will contribute to further business deals.

15. These are examples of how BP goes further than its own business interests, sharing its competencies in order to improve the underlying environmental and socio-economic conditions in a country. These examples point the way forward, but we have a long way to go. The lesson learnt from working with BPD (Business Partners for Development) gave us valuable insights into partnerships and how to manage them to the best effect. The outcomes from the Johannesburg World Summit underlined the importance of partnerships, but now BP needs to become more adept at choosing partners to work with over the long term - partners with complementary competencies to our own and with whom we can work for a long time, because these issues will not be solved quickly.

16. Finally, this points to a core issue that we'll have to address in BP - the dilemma of the long-term nature of some of these initiatives compared to the short-term focus of the company as it stands today. But that's a whole new topic.

17. Discussion - A number of points were raised:

a. With regard to working with local NGOs and building their capacity, does BP enable access to independent information on its investments and how they came about? This is in the context of land acquisition for the LNG Tangguh Project prior to BP's involvement.

b. What does BP do in cases where the local population clearly do not want the investment on their land? Eibhlis Hood - where practicable BP use technology to work around these issues.

c. Important to recognise energy as a driver for reducing poverty. There is an intellectual vacuum on how to deal with a lack of electrical power. In terms of poverty reduction, small enterprises are very important.

d. The core competencies approach seems to be asking companies to do more, and yet BP is saying that the private sector could not do it alone. Michael Warner - The origins of this core competencies idea comes from the BPD programme where we found that when partners sat around the table, the one party that didn't know what they were bringing, apart from cash, was the company. The approach is therefore not about companies doing more, but about more intelligently linking the core competencies of companies with those of the public sector, communities and NGOs to jointly deliver poverty reduction strategies at the national, regional and local level.

e. Where is the business case for companies such as BP in deploying more of their core business competencies in pursuit of poverty reduction? Eibhlis Hood - In the case of Colombia, the business case for BP is in trying to create a viable economy within the region of operations for when the oil eventually runs out. It is about trying to diversify the economy because the huge dependency on oil in the region is unsustainable. Michael Warner - Increasingly the World Bank and others are working with developing country governments to help shape the performance criteria of investments in the future. Looking down the road in five or ten years, it is likely that developing country governments will say that they want to see 'social' performance criteria embedded in investment agreements. These criteria are going to come from PRSPs, regional development plans etc. So, in the future, companies are going to have to deliver, in part, against poverty targets in order to win their next concession.

f. "I think you've have got to get real". Business is in business to make sure shareholders get a financial return. Unless there are incentives for this type of social responsibility there is nothing in it for business.

g. Shell representative - "I have worked in countries where local youths have demonstrated because they wanted a job and couldn't get one. They can shut down your production. That is the business case for doing things like this".

h. Tim Cullen - a conclusion of the BPD programme was that a lot of companies working in extraction or water found that their costs were actually lower because they were involved with partners from civil society.

i. There is a need to move the onus back to nation states and the multi-lateral system to ensure that incentives are in place that encourage companies to assist in poverty reduction.

j. All these comments lead us in the same direction: we need to understand better how these partnerships (between business, government and civil society) can work and what constitutes good practice. I think the BPD model is a very good one, and I'd be interested to know whether BP has any others.

k. CSR should use more of a core competencies approach because businesses are struggling to find efficient ways of integrating CSR into their core business. Businesses need to look more at the opportunities inherent in CSR rather than just compliance.

18. Michael Warner - the new programme at ODI is about being more 'selective' in designing social strategies and about identifying where there is a business-case for deploying core competencies. We do not need more case studies to demonstrate this. There are 130 partnership examples from the World Business Council for Sustainable Development. We have another ten from the BPD programme. There is a lot on the table about how you do this. What I think is missing now is the means to scale it all up.

19. Eibhlis Hood - It is the issue of scaling-up that is facing BP at the moment. We are good at doing things with the local communities, but how do we bring this to scale so as to have a far larger impact?

20. Tim Cullen - The way to get companies interested is to show them that CSR is profitable. The approach outlined today is a sound framework. Once you've drawn them in, they discover that they can actually do much more.

Jon Fowler and Michael Warner, ODI
25th October, 2002

Description

This event discussed the fact that on the one hand Corporate Social Responsibility (CSR) purists argue the moral imperative for companies to engage in social issues, and that the potential for increased profitability and reduced risk is secondary; whilst on the other hand there are those who believe CSR distorts the market by deflecting business from its primary role of profit generation.