Transparency Standards in African Resource Development

From Paul Collier, author of The Plundered Planet:

In the coming decade, extraction of oil, gas, and mineral ores will constitute by far the most important economic opportunity in Africa’s history. . . .

Given that resource extraction per square kilometer in Africa is about 20% of the OECD average, the total volume of extraction could easily grow fivefold. High prices and future discoveries will generate money flows so vast that, if properly managed, they could transform desperately poor parts of Africa into regions of prosperity. Certainly, income from resource extraction will dwarf all other financial flows there.

But, too often in Africa’s history, money that should have financed productive investment has been looted or squandered. The challenge now is to prevent the continent’s sad history of exploitation from repeating itself during the coming era of massive resource extraction.

Whether natural resources are plundered or harnessed for development depends upon several factors. The first task is to capture for society as a whole enough of the value of the extracted resources. This, in turn, requires a proper procedure, based on transparent competition, for the initial sale of prospecting rights, as well as a well-designed tax system to collect revenues from subsequent corporate profits. . . .

Second, a substantial share of the revenues should be invested in assets rather than used to boost consumption. To do otherwise is to infringe upon the rights of members of future generations, to whom natural assets also belong. . . .

Finally, revenues should be open to public scrutiny and their efficient use, both for investment and consumption, must be ensured by institutional mechanisms that impose clear accountability on public
Second, a substantial share of the revenues should be invested in assets rather than used to boost consumption. To do otherwise is to infringe upon the rights of members of future generations, to whom natural assets also belong.

But revenue and expenditure transparency alone is not enough to ensure good use of natural resources. The many decisions required to ensure success must be gotten right not just once but repeatedly, though, without such transparency, the risks of corruption and misallocation obviously are much higher.

Transparency would also foster trust between companies and local communities. So far, communities in the vicinity of extraction operations have often been hostile to the process, seeing themselves as the victims of environmental damage, while domestic elites and foreign companies are presumed to be the primary beneficiaries.

Such hostility has made the local operations of extractive industries problematic and costly: witness Royal Dutch Shell’s experience in the Niger Delta. Attacks on installations have often escalated to the point that overall supplies are significantly reduced and less secure. So, without transparency of revenues and their beneficial use, resource-extraction companies inevitably become the targets of local suspicion. . . .

Between them, European and American rules can require many resource-extraction companies to be transparent, but there remain many companies that come under other jurisdictions. Within the OECD, the main financial center for smaller resource-extraction companies is Toronto, yet the Canadian parliament recently failed narrowly to pass an equivalent requirement for these companies. There are also 360 Australian resource-extraction companies – currently operating in Africa.

In any case, the major new players in resource extraction are not in the OECD. Globally, the second largest such company is Vale, based in Brazil, and the Chinese are now the single largest presence in Africa, although China already has some revenue transparency legislation on its books, given the disclosure requirements of the Hong Kong financial market.

What is now needed is global enforcement of transparency standards. . . . If the G-20 is to be effective as a development instrument, it should begin to tackle the single most important financial flow that Africa and other low-income regions will attract in this new decade. 

February 25, 2011