Transparency in Extractive Industry

Rachael McCallum

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Transparency in extractive industry is crucial to poverty reduction. EU Observer.

The international development agenda is largely all encompassing, but perhaps one area it still needs to more directly address is the largely untapped potential of extractive industry profits being used as a means to reduce poverty. Indeed, revenues from natural resources such as oil should and could spur economic and social development in many developing countries. 

However, in many resource-rich countries, the lack of accountability and transparency in the management of the revenues from extractive industry exacerbates socio-economic problems, corruption and conflict. The term "resource curse" is used to describe continents such as Africa, where natural resource rich countries appear to have experienced set-backs in development and governance. In some countries, it has also fuelled human rights abuses and increased political, social and economics insecurity. 

Some countries rich in oil, gas and minerals have under-performed relative to other countries without natural wealth. This close correlation between countries rich in natural resources and countries with high poverty highlights the need for a greater degree of transparency in natural resources payments. It is estimated that Africa´s natural resource were worth 246 billion US dollars in exports in 2009, six times greater than the money it received from overseas aid, however, little of this value remained in Africa. This figure is undoubtedly set to multiply in the coming decade as we look to Africa's oil reserves as an alternative to Middle Eastern oil, making transparency in extractive industries more important than ever.

The money from commodity resources often stays in the hands of corrupt politicians, or a select few individuals rather than being spent on a country’s development. Having greater transparency in resource revenues could mean that whilst corruption will not be completely eradicated, it could be drastically reduced. Increasing transparency and knowledge of revenues will empower citizens and institutions to hold governments accountable. It also meant that the mismanagement or diversion of revenues from sustainable development purposes will become much more difficult, which will no doubt benefit developing and transition economies, particularly in term of attracting foreign direct investment. 

Whilst, the argument has been made that in increasing transparency in extractive industries could harm developing countries by reducing the incentive for companies, this does not have to be the case. Responsible companies stand to benefit from a more level playing field, a more predictable business environment and hopefully better prospects for energy security. 

The Extractive Industries Transparency Initiative (EITI) was announced by then UK Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg, September 2002. Its aim is to increase transparency over payments by companies to governments and government-linked entities, as well as transparency over revenues by those host country governments. It has been almost a decade since this announcement, and whilst it has been a long time coming, step towards legally binding legislation has happened.

The Cardin-Lugar Transparency Provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires oil, gas, and mining companies registered with the U.S. Securities and Exchange Commission (SEC) to publish how much they each pay to foreign countries and the U.S. government.

The EU has also made strides in transparency in extractive industries, with the European Commission publishing proposals for a new EU-wide law that will oblige European oil, gas, mining, and forestry companies to publish what they pay to governments around the world. By proposing to oblige extractive and forestry companies listed in the EU, and even large unlisted companies, to publish information on their payments to foreign governments, the European Commission would have taken a couple of steps further than the US, and its Dodd-Frank Wall Street legislation.

For transparency in extractive industries to be successful, it needs to be a multi-stakeholder initiative; it needs to involve the countries hosting extractive industries as well as the countries where the companies are based such as the US, the EU and China. State-owned companies and small, private companies, as well as the multinationals, will all need to be involved to ensure a level playing field. 

This new legislation being introduced will allow for closer examination as to whether or not developing countries are receiving a fair deal for the exploitation of its resources, and the fact that it calls for transparency on a country by country and project by project basis is very encouraging. The secrecy surrounding payments to governments has often led to large scale corruption, violence and civil war in resource rich countries.  Country by country reporting can help empower citizens to hold their government to account. The transparent initiative needs to be universally applied in the hopes that it can have a positive impact on corruption in extractive industries, reducing natural resources exploitation and the resulting set backs in economic and political development, good governance and human rights. These consequences of murky natural resources extractive worldwide can be considered as one of the worst humanitarian crises in the world, and is one which can be helped.