17 January 2015

Managing of Oil, Gas and Mining Resources for Development

JAN 13, 2015

In 2013, global mining revenues were roughly $731 billion, or about five and a half times total annual official development assistance (ODA). Much of this activity is taking place in the developing world. For example, 51 of 54 African countries have ongoing or planned oil and gas exploration operations and a little over one quarter of Africans live in a country where natural resources accounts for 80 percent of all exports. Many of these countries citizens are often the world’s poorest and its governments are the least politically stable; according to discussions from the recent Annual Democracy Forum in Botswana in November, roughly 40 percent of conflicts that threaten stability in developing countries are directly linked to inequitable resource exploitation.

Building transparent and accountable institutions in these countries will be critical in unlocking resources for local-driven development and directing extractive revenues into productive investments in infrastructure, business enabling environment, and human capital. As the global demand for energy and raw materials continues to grow over the next several decades, sustainable development in resource-rich countries will depend on their ability to leverage the extractive industry to jumpstart development rather than simply the primary source of revenue. Given that the mismanagement of natural resource wealth breaks the social contract between citizens as taxpayers and governments as providers of public services, effective management of these resources can help bridge this gap and strengthen public confidence in the government’s ability to provide accountable and transparent governance. Donors and resource-rich developing countries must therefore act in concert to ensure that these demands are met and that developing countries progress.
Donors, companies, and resource-rich developing countries have been actively involved in these efforts through multi-sector, multi-donor efforts. One such example is theExtractive Industry Transparency Initiative (EITI). To encourage transparency, extractive companies operating in an EITI participant country report royalties, taxes and fees paid to federal and subnational governments, the government separately reports all extractive revenues it received. The data is then published in an accessible and understandable manner, including any reporting gaps, to provide credible extractive resource revenue information which civil society can use to hold governments accountable for their disposition and use. Since its establishment in 2003, EITI has expanded to include 46 participant nations including the United States, Norway, and Canada, and other developed countries have expressed interest in joining what began as a developing country initiative.

The goal of the EITI process is to make available information that prompts broader reform efforts. However, EITI has proven more effective in countries with strong civil society and an interest in transparent extractive payments; countries with weak institutions have a tendency to do the bare minimum to gain EITI acceptance. Of the 46 countries that are members or seeking to become members, 29 are currently compliant. To add, many developing country EITI members continue to struggle with a number of issues including balancing existing contracts while maintaining commercial confidentiality and reconciling global standards with local laws. The initiative is imperfect, but its ability to create secure operating environments for companies, trust among various stakeholders, including local communities, and more avenues for private sector led development have created a starting point for reform in many countries. For example, Sierra Leone went from suspension to compliant in one year by agreeing to EITI reporting requirements. Companies are more willing to make long-term investments in predictable, stable, and transparent environments. An EITI stamp of approval helps countries attract companies that make significant contributions to domestic tax bases, but also offer indirect benefits through their operation including job creation, capacity built through local supply chains, and local philanthropy. 

Attracting compliant companies is only part of the answer. To be sure, companies will only provide these “government services” temporarily as part of a social license to operate in developing countries. Donors who have successfully managed their resource wealth, including Canada, Australia, and Norway, thus have a role to play in helping build institutional capacity to negotiate, attract, and retain foreign investments in the extractive sector. Governments like Canada whose extractive sector made up 11 percent of GDP and 47 percent of exports in 2009 are well-poised to lead these efforts. Over 70 percent of Canadian assets from the mining sector are located abroad with $150 billion dollars invested in over 100 countries, primarily in Francophone Africa. Given its networks and leverage with companies, donors such as Canada can transmit best practices, new technology, set up sovereign wealth funds to ensure long term macroeconomic sustainability, and provide training.

For developing countries, transparent and accountable frameworks that manage profits from the extractive sector will have positive spillover effects for other development priorities including infrastructure, and human capacity. For example, Ghana was the first African country to halveextreme poverty in large part by leveraging its oil wealth with support from the Organization for Economic Cooperation and Development (OECD), the Norwegian Oil for Development Program, and other key institutions were able to direct revenues to other priories such as education and health. Today, Ghana is one of the fastest growing economies and Africa and is on the road to diversifying its economy while using its energy resources as a building block.

The resources in oil, gas, and mining are increasingly important sources of wealth for developing countries. One of the central challenges over the next 30 years will be wise and clean management of these resources in developing countries—using them to diversify a country’s economy, paying for infrastructure, education, health, and security. The resources are multiples of all foreign aid in the world. What is needed is a mix of accountable and well run government, political will and technical assistance and some money to help deliver that assistance. Clearly, foreign aid along with the hard won experience in Canada, Australia and Norway are increasingly needed in developing countries. This opportunity is especially clear for these donors given their natural advantages and its mining investments. Using foreign aid dollars and leveraging donor expertise within the extractive industry is dead center at one of the greatest challenges to development over the next several decades.

Daniel F. Runde is director of the Project on Prosperity and Development and holds the Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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