Clare Short’s speech from our Beyond extractive sector transparency
2 April, 2014
On Wednesday 26 March, Clare Short, Chair of the Extractive Industries Transparency Initiative (EITI), made a keynote speech at our conference dinner. You can read a copy of her speech below.
Beyond extractive sector transparency: driving prosperity and stability through good governance
Wednesday 26 – Friday 28 March, 2014 | WP1268
“We have been talking about the potential of extractives in the developing world, the potential to help hundreds of millions of poor people, and the role of improved governance in achieving these aims. Academic and economic studies show that there still is a resource curse, in other words there is less improvement in peoples’ lives when they live in countries with resources when compared to people living in comparable countries which don’t have resources.
I’m going to give you a potted history of the EITI, because it encapsulates some of the problems. It’s very easy to talk about ‘improved governance’, but what does this mean in practice and what are the challenges?
What happened in the 1990s eventually led to the formation of EITI. There was a resources boom, predominately because of developments in China, but also in Brazil, India and so on. Enormous development drove demand for minerals and oils, therefore prices went up and there was a lot of investment. Some of the countries who received this investment had always been active in extractives, whilst others hadn’t traditionally been involved in either oil or mining. Extraction of off-shore oil required particularly significant investment.
So the general trends were; as demand increased the price of natural resources also increased, more countries started producing natural resources, and there was greater investment. As a result of all of this, companies made bigger profits, eg Glencore. This led to mounting criticism of the companies, especially in countries where citizens did not seem to be getting much or any benefit from the increased wealth that was being generated in their country.
In Angola there was enormous investment which led to big profits. In fact the elites in Angola became very wealthy. Organisations like Global Witness made critical reports blaming the companies for the lack of benefits for ordinary Angolan citizens, but the local elites weren’t mentioned because it was fashionable to just blame the big multinationals. What happened in Zimbabwe is an example of vested interests between companies and elites, which led deals which made a lot of money but which did not benefit Zimbabweans.
Publish What You Pay was formed and it also blamed the problems on the extractives companies. This led to pressure to make the companies report on their revenues, profits, and what they pay to Governments. The concept was that transparency would lead to companies being held to account.
Some of the better companies felt they were being portrayed unfairly. A previous CEO of British Petroleum (BP) published what BP paid the Angolan government. Unfortunately as a result, the Angolan government threatened to withdraw all of BP’s operating licenses.
I was in government at this time, in the Department for International Development. It was quite clear from BP’s experience that governments, companies and campaigning civil society needed to come together to explore their shared interests in being more open and transparent about payments. However Governments, civil society and companies have different motives. They all benefit from transparency, but in different ways. Governments like transparency because it provides a stable environment which attracts investment. Companies like transparency because it mitigates criticism, especially as the history of the sector is pure opacity where nobody knew what was going on. Civil society likes transparency because it is the best way to benefit local citizens.
In 2003 a Statement of Principles was published, and a few years later a first wave of Sub Saharan countries joined the EITI. The reason why these countries were the first can probably be traced back to the rebuilding of Europe which led to a commodities boom. The World Bank also put pressure on some of the poorer countries to join. However South Africa resented the North telling the South what to do, particularly as at that time developed Northern countries were not members of EITI themselves. Norway joined because the EITI Secretariat is in Oslo, even though they felt confident that they were transparent anyway.
EITI membership has now grown to 44 countries and it is an interesting combination of Sub Saharan African countries and OECD countries. Mongolia, Indonesia, Peru, Mexico and Columbia are all hoping to join.
Australia is an interesting case study. Despite being a well organised country with strong governance systems there was a debate about whether mining companies are paying enough to the Australian Government.
Demand for natural resources produced by Australia was driven by China. This demand led to the price of resources increasing. Other sectors were hurt, in particular agriculture and tourism. As a result questions were asked about whether the mining companies were paying enough, and a demand for increased transparency. The mining companies themselves wanted Australia to join EITI because they wanted their payments to be made public. Australia is currently planning to pilot the EITI with some hand selected parties.
The US has a drive towards greater transparency, in particular the Open Government Partnership being driven by the Obama presidency.
Whilst the UK was Chair of the G8 there was a lot of concern about whether Starbucks and Amazon are paying enough tax in the UK. Part of the reason for this is discontent came from the austerity measures being implemented in the UK. The issue is multinationals use of’ transfer pricing.’ Britain has decided to tackle transfer pricing, which is interesting because it has been used in the mining and oil sectors in poor countries for a very long time. Even if there is an agreement to pay on our profits, the significant cost of facilitates tends to be deducted taxable profits. Britain, Germany, Italy and France said they were joining the EITI.
In its first phase the EITI requirements were a challenge to the extractives sectors which had always been hidden and secretive, but transparency is now the new normality. However looking at what a company pays to the government leaves out key information. There are other important questions such as what does the contract say, is it fair, how are licenses issued and can they be sold on?
EITI member governments employ expensive auditors who produce the figures which are sent to the EITI Secretariat in Oslo. Transparency won’t turn into accountability unless the people who live in the relevant countries can access the reports and find them useful and interesting. EITI reports don’t necessarily tell people what they want to know. For example miners in Zambia want to know about the tax arrangements and production figures, which would allow them to do the relevant calculations themselves. The World Bank says it is possible to evade tax on copper as it transits from Zambia to South Africa, simply by unofficially adding extra quantity to consignments.
For these reasons, phase two of EITI is developing into a demand for a wider level of reporting of the whole chain. At the same time, it would be counterproductive for people to drown in data which isn’t meaningful. We don’t want a situation where only investment analysts can use the information. Somebody has to translate the figures to make them intelligible and therefore useful for debates and campaigning.
When people are talking about budgets they want to know current figures, but EITI figure can be dates. There are also question marks about the reliability of the figures. Effort is being made to make the figures more reliable and more comparable, by using International Monetary Fund (IMF) systems. EITI is about to make a big advance by requiring that at least the summary figures are produced in accordance with the IMF approach.
Some people believe that the EITI needs to expand, for example to cover environmental reporting, but it doesn’t have the necessary expertise. What the EITI can do is to link up with other reporting systems which already deal with these issues.
This is a difficult sector to manage, prices go up and down, the Australian example is given above. At the time of Zambian independence copper prices were high, but then they came down in the 1980s which led to a real crisis for the country. Zambia suffered a lot from transfer pricing.
There are tensions within EITI. At a recent meeting there was a debate about whether EITI membership means a country is perfect, or means that a country has agreed to start the journey towards transparency?
At the moment Ethiopia doesn’t have a lot of extractives, although it does have some gold. However there is an expectation that there will be new finds in the Rift Valley. A lot of Northern NGOs want to exclude Ethiopia from the EITI because of human rights considerations. Although Ethiopia is an authoritarian country, in my view it has been targeted by Northern based NGOs. If EITI membership is a sign of being a very good country in every way then all of its members will need to be expelled except Norway!
Although the old slogans about bad companies, elites and corruption still have relevance, in reality it is a more complicated picture. This is a difficult sector to manage. Prices go up and down, and as a consequence parts of the economy are squeezed. Managing this process well for the benefit of the local people isn’t easy. More information about licensing, contracts, and State Owned Enterprises is part of the answer, but this information needs to be contextualised before it is provided to the people and to the Parliament. This includes information about what resources are worth, when they will be exhausted, what are they spent on, what investments are being made for the future, and what will happen when all the resources are gone? This broader picture will help inform a proper debate, supported by resource rich countries learning from each other about what is fair deal/ contract, what is appropriate tax holidays, etc.
Ultimately a company’s job is to earn returns for its shareholders and this is what the stock exchange demands. If companies are trying their best in the countries in which they operate then this is a very new approach. The better companies know this is the way they should behave, but the history of the sector involves a lot of unfair contracts, and lots of examples of governments taking money for themselves and not using it to help their people.
The drive towards mandatory disclosure, through Dodd-Frank and the EU Directives, mean it is difficult to say how relevant EITI will be in five or ten years’ time.
Dodd-Frank is an amendment to US legislation primarily intended to regulate the banks after the financial crisis. All US listed oil and mining companies will be required to publish on a country-by-country and project-by- project basis. The Securities and Exchange Commission (SEC) have responsibility for the implementing regulations. The oil companies objected to these regulations and took legal action. In its defence, the SEC said it had developed the regulations having looked at the evidence, and that Congress hadn’t allowed the SEC any discretion to grant exemptions, including an exemption if information is already in the public domain.
One view is that the case has established that no country in the world has a prohibition against reporting. The EU Directive is finalised and it doesn’t include any flexibility as regards exemptions. Many Chinese companies will have to comply with the Directive because they are listed in Europe.
The EITI has to become less about sending reports to Oslo, and more about how information can be leveraged in order to generate real systemic reform. Transparency needs to grow into accountability. However we shouldn’t be too pessimistic. We’ve made big progress. Transparency is now the norm in what used to be the most opaque sector after the defence industries.”