Revenues from oil, gas and mining should spur economic growth and social development in developing countries. In practice, however, economies that are overly dependent on oil and mineral wealth have often encouraged authoritarian rather than democratic forms of governance, particularly in countries with weak legal or regulatory frameworks. Profits from natural resources allow ruling elites to consolidate power through patronage systems, while revenue mismanagement may fuel devastating spirals of corruption, conflict and poverty. Competition for control over natural resources has led to armed conflict in Nigeria, the Democratic Republic of the Congo, Liberia, and Sierra Leone, and to the suppression of political dissent and the violation of human rights in countries like Congo-Brazzaville and Chad.
The efforts of various local organizations and advocates to promote greater transparency in the management of their countries’ natural resource wealth have garnered increased international attention in recent years. A growing number of initiatives target oil and mining companies, governments and international financial institutions in their advocacy efforts.
Paradoxically, many countries with abundant mineral and oil deposits have seen less economic growth or human development than countries without such endowments. Some have experienced declines in the competitiveness of other economic sectors, macroeconomic vulnerability to fluctuations in world commodity prices or crippling indebtedness because of excessive government borrowing during ‘boom’ years. The economies of less developed mineral-rich countries are further disadvantaged by the need to sell raw materials that cannot be refined locally. Although 80 percent of the known global reserves of coltan are found in Africa, for example, few of the countries possessing the resource have the capacity to maximize their export earnings by refining the mineral, a key component in the manufacture of cellular telephones.
The complexity of multinational business negotiations and the time lapse before profits accrue can frustrate efforts by civic groups, host governments, the international community and corporations to promote transparency and accountability. Significant capital investments are often required to extract or develop natural resources like gold, diamonds, oil and gas and in many countries, only those with political power, a relatively small circle, have the authority to grant access to those resources.
Published literature on countries that have fallen prey to what is often called the “natural resource curse” points to multiple causal factors. These include: multinational corporations whose business practices have serious human rights, political, economic and environmental implications; the home governments of corporations who often fail to hold the international practices of their corporate citizens to acceptable standards; and export credit agencies that support the destructive behaviour of their clients.
Ultimate responsibility for the management of a country’s natural resource wealth, in the circumstance, lies with that country’s elected government. The principal means of ensuring sound management at all stages of natural resource exploitation from extraction to the collection and expenditure of revenues is through the adoption of practices that adhere to and reinforce agreed upon standards of accountability and transparency. Countries that have successfully used proceeds from the extractive industries for national development purposes, including Australia, Canada and Norway, have such practices in common.
Ideally, host governments negotiate the most beneficial contracts for the exploitation of mineral wealth, oversee corporate compliance with contracts and the nation’s laws, and manage revenues properly. Even in the absence of wilful corruption or influence-peddling, however, public officials often lack the expertise to accomplish these critical tasks, or the foresight to invest or save portions of the proceeds for the future. In many cases, the discovery of oil and other resources creates unrealistic expectations about future income, leading to increases in current expenditure, often on large and impractical projects.
For example, many newly wealthy mineral producing states have historically increased foreign imports, regardless of indigenous production ability, destroying local incentives to produce items that can be either imported at lower cost or whose prices may be lowered through state subsidies.
The nature of the resource often defines the set of challenges surrounding its management. For instance, oil sector revenues typically outstrip income from solid minerals. According to a 2015 International Monetary Fund (IMF) report, revenues from oil and gas account for 52.7 percent of total fiscal revenues in oil dependent economies, on average. The average income from the mining sector in economies dependent on solid minerals is only 12.7 percent. Mining sector receipts are smaller and less complex than those from the oil and gas industry, whose contracts typically involve confidentiality clauses, signature bonuses and production sharing agreements.
Questions over transparency in the management of revenues paid to local and regional governments are more often, though not exclusively, an issue in the solid minerals industry than it is in the oil and gas sector. Further, a broader range of operators and investors, including large transnational companies, medium to small scale local business and individual prospectors, is engaged in the mining industry than is the case in the oil and gas sector. State-owned companies control the mining sector in certain countries but lack the size and influence of similar bodies in oil and gas sectors. Finally, civil society groups and other activists monitoring the solid minerals industry are often more focused on the sector’s broader contribution to economic and social development than they are on the specific issues of revenue management.
In recent years, the efforts of various local organizations and individuals to promote greater transparency in the management of their countries’ natural resource wealth have garnered increased international attention. Presently, there are a variety of advocacy initiatives targeted towards oil companies, governments and international financial institutions. The Kimberly Process, a joint initiative of governments, civic groups and the private sector, aims to limit the unregulated sale of rough diamonds as a source of funding for conflict. The Publish What You Pay (PWYP) Coalition, a worldwide network of over 280 non- governmental organizations (NGOs), promotes mandatory disclosure of the payments made by oil, gas and mining companies to governments for the extraction of natural resources. The Extractive Industries Transparency Initiative, (EITI), developed by the United Kingdom’s Department for International Development (DFID) and the World Bank, encourages governments to sign onto a voluntary set of principles that include publication and verification of company payments and government revenues from oil, gas and mining. Transparency International’s Revenue Transparency Project aims to set and support the adoption of industry and government standards for revenue transparency, and to measure revenue transparency performance and diagnose areas for improvement.
However, governments face two principal challenges in determining the policy framework for the exploitation of oil and minerals in their countries. First, they must create a business climate that attracts private investment, a necessary precondition to the development of the extractive industries. Second, they must address relevant domestic policy issues, such as the environmental impact on communities affected by extraction activities, and ensure the equitable distribution of profits from the industry.
Policy or regulatory frameworks and laws governing the exploitation and management of natural resources are often spread across different pieces of legislation and other government instruments. In most cases, constitutions vest natural resources in the people but grant the government the authority to manage those resources on their behalf. In some cases, constitutions specify formulae for revenue sharing between national and state or provincial levels of government.
Mining or oil codes specify procedures and parameters for the granting of concessions and other rights of access, general conditions for exploitation, royalties, taxes, and other incentives specific to the extractive industries. Corporate tax structures and laws governing employment, the environment, and occupational health and safety also have implications for extractive industry management.
Through their law-making functions, legislators can support the passage of laws or other instruments that create an enabling environment for sustainable and accountable management of oil and minerals. Regrettably, legislators from a number of African countries described situations in which they were under pressure to move legislation forward quickly, often without amendment, because funding from international development partners depended on the passage of legislation. In other cases, executive branch officials argued that changes proposed by legislators would discourage foreign investment in the country’s mining sector. Confidentiality clauses are also often used to prevent public scrutiny of contract details.
Regulation and oversight of the extractive industries requires an understanding of complex technical and financial issues. Legislators themselves must engage in efforts to raise standards, make more effective use of the powers available to them and build the resource base necessary for them to fulfil their responsibilities. Through the ‘power of the purse,’ legislators can shape the allocation of revenues in ways that promote fiscal discipline and limit funding for high-profile projects that have little impact on citizens’ quality of life.