Saturday, March 05, 2011
In the coming decade, extraction of oil, gas, and mineral ores will constitute by far the most important economic opportunity in Africa’s history. Africa is the last frontier for resource discovery, having long been relatively neglected by mining and other resource-extraction companies, owing to the continent’s difficult political conditions. But rising commodity prices are overcoming past reluctance, and prospecting is generating a multitude of new discoveries.
Given that resource extraction per square kilometer in Africa is about 20 percent of the Organization for Economic Cooperation and Development 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.
Some recent sales of prospecting rights in Africa have been spectacularly deficient in terms of satisfying conditions for transparency and competition. In Guinea, for example, rights that appear to have been awarded without significant benefit to the public treasury were swiftly re-sold for several billion dollars.
Second, a substantial share of the revenues from natural resources 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 the natural assets also belong.
Unfortunately, these rights are often violated. Cameroon, for example, has depleted much of its oil, using the revenues from oil production overwhelmingly for consumption. As a result, the country’s current level of consumption will be unsustainable when the oil runs out.
Finally, revenues should be open to public scrutiny and their efficient use, both in terms of investment and consumption, must be ensured by institutional mechanisms that impose clear accountability on public officials.
But revenue and expenditure transparency alone are not enough to ensure the proper use of natural resources. The many decisions that are required to ensure success must be gotten right not just once but repeatedly, even 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. They see themselves as the victims of environmental damage, while domestic elites and foreign companies are presumed to be the primary
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.
Foreign companies manage nearly all resource extraction in Africa, because they alone have the necessary technical skills to carry out such an activity. This implies an important role for the jurisdictions in which these companies are registered, for they have the power to set the rules by which the extractive industries operate. Many of these companies are based in Europe, so a good deal of power rests ultimately with the European Parliament.
Between them, European and American rules can require many resource-extraction companies to be transparent. However, there remain many companies that fall 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 countries. Globally, the second largest such company is Vale, based in Brazil, and the Chinese are now responsible for the single largest presence in Africa, although China already has some revenue transparency legislation on its books, given the disclosure requirements of theHong Kong financial market.
What is now needed is global enforcement of transparency standards. The appropriate forum for such collective governmental action is the G-20, whose next meeting is to be hosted and chaired by France.
Global oversight of resource extraction is a perfect economic-development issue for the G-20, not least because the theatrical pledges of providing aid to poor countries that were the stuff of G-8 meetings have now been recognized as empty rhetoric. 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.