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In the coming decade the extraction of oil, gas, and mineral ores will
constitute the most important economic opportunity in Africa’s
history by far. Africa is the last frontier for the discovery of
resources, having been relatively neglected by mining and other
resource extraction companies for a long time, owing to difficult
political conditions. However, rising commodity prices are
overcoming reluctance and prospecting is generating a multitude of
new discoveries.
Given that resource extraction per square kilometre in Africa is about
20pc of the Organisation for Economic Cooperation and Development
(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.
Too often in Africa’s history money that should have financed
productive investment has been looted or squandered. The challenge
is to prevent the continent’s sad history of exploitation from
repeating during the coming era of massive resource extraction.
Whether natural resources are plundered or harnessed for development
depends on several factors. The first task is to capture enough of
the value of the extracted resources for society as a whole. This
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 transparency and competition. In
Guinea, rights that appear to have been awarded without significant
benefit to the public treasury were swiftly resold for several
billion euros.
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 future generations to whom natural assets also belong.
Unfortunately, these rights are often violated.
Cameroon has depleted much of its oil, using the revenues mainly for
consumption. As a result, its current level of consumption will be
unsustainable when the oil runs out.
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
officials.
However, revenues and expenditure transparency alone is not enough to
ensure the good use of natural resources. The many decisions
required to ensure success must be gotten right not just once but
repeatedly. Without such transparency, the risks of corruption and
misallocation are obviously much higher.
Transparency would also foster trust between companies and local
communities. To date, 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. Without transparency in the beneficial use of revenues,
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. 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 ultimately rests with the European
Parliament.
Between them, European and American rules can require many resource
extraction companies to be transparent, but there remain many
companies that fall under other jurisdictions.
Within the OECD, the main financial centre for smaller resource
extraction companies is Toronto; however, the Canadian parliament
recently failed to pass an equivalent requirement for these
companies. There are also 360 Australian resource extraction
companies operating in Africa.
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 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 needed now 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 aid to poor countries that were the stuff of G-8 meetings
have now been recognised as empty rhetoric. If the G-20 is to be
effective as a development instrument, it should begin addressing
the single most important financial flow that Africa and other
low-income regions will attract this decade. |
