RG: At the Forum you outlined some interesting recommendations set out by your ‘Equity in Extractives’ report. The first was that ‘the G8 summit should serve as a launch pad for a rules-based global system both for transparency and taxation to be developed with the G20’. The 2013 G8 and G20 have now come and gone. To what extent were your recommendations met? What do you think should be the next step in promoting transparency among governments and corporations operating in Africa?
CK-R: When we started writing the 2013 Africa Progress Report on oil, gas and mining just over one year ago, we quickly saw that many of Africa’s problems stem from a global system that is profoundly unbalanced and unfair. Tax and transparency stand out as major issues. And while policy-making is generally a long, messy, and complicated process, we have been very encouraged by this year’s progress. Tax justice has finally become an issue that unites the world. From Manchester to Mali, people feel cheated by a global tax system that has failed to keep pace with the realities of globalisation.
Illicit financial flows, mostly linked to tax evasion, cost Africa nearly six per cent of its GDP every year. Abusive tax avoidance by multinational companies also costs the continent billions. As Kofi Annan, the chair of the Africa Progress Panel, has repeatedly said: Legal or not, extreme tax avoidance has become immoral, unconscionable and unacceptable.
We were pleased to see G8 and G20 progress towards tax justice, promising automatic exchanges of tax information around the world and support for efforts to make African tax collectors more effective. We are not starry-eyed about this: tax justice will take years, if not decades, to achieve. And we can expect setbacks along the way. But we are delighted that tax justice issues are now firmly on the global political agenda.
The only way Africa’s mineral wealth is going to translate into widespread prosperity is if we have transparency. People have to be able to find out, easily, where all the money goes. This helps prevent corruption, because it allows citizens and civil-society groups to hold governments to account. And, as we said in our 2013 Africa Progress Report, transparency is a necessary, if not sufficient, condition for this. Corruption is complex and international. We would like to see discussions of it reframed to include not just those who accept illicit payments, but also those who make such payments and the tools they both use to hide the transactions. Both the G8 and G20 summits saw progress in this respect, promising action to clamp down on anonymous shell companies, which are often used to hide corrupt payments. More recently the British prime minister, David Cameron, announced that the planned registries of companies’ beneficial ownership will be made public, a major step in the struggle against illicit financial flows. We have also been delighted to see African governments take action to manage better their reserves of oil, gas and minerals. Guinea, Liberia and Sierra Leone now make mining contracts publicly available. And Ghana is strengthening accountability in the management of petroleum revenues. More and more companies, too, are looking beyond short-term profits towards long-term investment partnerships.
Rich countries are enforcing corporate transparency. Six G8 countries have said they will join the Extractive Industries Transparency Initiative (EITI). The United States is moving – albeit unevenly – towards full implementation of the groundbreaking Dodd-Frank Act. And the European Union looks set to demand higher disclosure standards from its extractive companies, too.
In the immediate future, we see three specific goals. First, G8 and G20 leaders must build on progress made in 2013. The gap between what is legal and what is fair must be narrowed. Multinational companies must pay fair taxes to African governments. African governments must be involved in discussions to reform the global tax system. Second, the G8 and the G20 must challenge secret or opaque business practices, which can be used to disguise bribery and tax-dodging. The G8 and the G20 must commit to registries of beneficial ownership that are public and cover both companies and trusts. This will make it easier for governments to collect the taxes they are owed. The British government’s pressure on its overseas territories and Crown dependencies is encouraging. The US government should likewise investigate how some states, such as Delaware, act as tax havens.
Third, the G8 and the G20 must give African countries more support to build and manage their fiscal systems, including increasing tax revenues, and improving national planning processes. All countries struggle to prevent their fiscal base from being eroded – in part by companies that shift profits to low-tax jurisdictions – but Africa struggles more than most.
As the veil of secrecy around international financial flows is lifted, a shared agenda is emerging, in which different parties have overlapping interests and similar goals. But much more remains to be done. Leaders across the globe – in government, industry and civil society – must take action now to increase financial transparency.
RG: Another interesting point you made was that emerging markets such as China and Brazil are now big investors in Africa. It therefore matters a lot whether their governments and companies do business in Africa transparently and honestly. Please could you elaborate? Do you see a separate set of challenges here?
CK-R: For African countries to translate the economic potential of their natural resources into sustainable development, managing their engagement with emerging economies, such as China and Brazil, will be crucial.
The 2013 Africa Progress Report outlines that economic growth in China has been the game-changer in global commodity markets. China has one of the world’s largest mining industries, but its rapid and resource-intensive growth, coupled with the poor quality of its ores, means that it increasingly depends on imports. Since the end of the 1990s, consumption of refined metals in China has climbed by 15 per cent a year on average, driven by demand for materials in construction, infrastructure and manufacturing. The country’s share of global demand for copper, aluminium and zinc has more than doubled; for iron ore, nickel and lead it has tripled.
Chinese demand for resources has been transmitted to Africa both directly and indirectly. Companies from China have established operations in Africa, investing a lot of money to secure supplies of oil and minerals. And the knowledge that China is growing fast and will continue to want to buy lots of natural resources has prompted other investors to pile into Africa. To take one example, it is China’s demand for iron ore that has fueled the scramble among global mining firms to secure a stake in the rich untapped deposits of Guinea, Liberia and Sierra Leone. Such investment is helping to integrate Africa into international markets. China’s growth may slow down, but most projections point to sustained expansion. The Organisation for Economic Cooperation and Development (OECD) estimates that overall demand for metals will grow at 5 per cent a year through to 2030. Scenarios for the energy sector follow the wider pattern. The International Energy Agency predicts that global demand for energy will increase by over one-third to 2035, with emerging markets accounting for almost the entire increase. African exporters of coal, oil and natural gas can expect buoyant markets. While demand is strong and rising, supply faces some marked constraints. Mature mining economies such as Chile and South Africa are struggling to maintain current output.
Our report also emphasises that China’s national champions continue to occupy a central role – but private and provincial-government investors are also getting involved. China’s energy business is dominated by three state-owned companies, all of which have been increasing their investments in Africa. One recent example is the US$2.6 billion purchase by Sinopec of a 20 per cent stake in a Nigerian offshore oil field.ii
Both state-owned and private companies are involved in mining. Instead of seeking to acquire assets or projects outright, Chinese companies are increasingly entering into joint ventures or even accepting minority stakes. In some cases, Chinese resource-consuming companies ask for supply agreements in return for investment.
The financial arrangements involving Chinese investment are often highly complex. Concessional loans linked to investment agreements are provided through the China Development Bank and the Export-Import Bank of China (Exim Bank).iii In some cases, investment is linked indirectly to aid programmes that are rolled into the overall package. Exim Bank loans to Africa are estimated at US$67 billion between 2000 and 2010, with the China Development Bank providing US$7 billion.iv
Loans linked to infrastructure projects figure prominently. In 2012 Ghana signed a US$1 billion loan with the China Development Bank, the largest loan in the country’s history, to finance the construction of a pipeline and a plant to process gas for power generation. Under the terms of the project Ghana will export 13,000 barrels of oil to China a day.v
Chinese investment remains a source of controversy. Critics see the blending of aid and loans as a violation of the OECD’s aid principles. Some concerns are overstated. The aid-for-trade provisions are often less onerous than is claimed. African governments have welcomed the combination of aid, infrastructure investment and project finance. But some problems have to be recognised. Chinese companies do not fully participate in the EITI – and most have highly opaque reporting systems. This can reinforce the governance problems that open the door to corruption.
China’s stock exchanges, most notably in Hong Kong and Shanghai, also need to be brought into a more transparent multilateral regime. There are some encouraging signs that more stringent disclosure rules are being adopted.
RG: You said that one of the most powerful forces for change was public scrutiny by ordinary citizens. However, as you know, not all citizens have equal clout; people from rich countries tend to have a louder megaphone. How can poor people from poor countries make their voices heard?
CK-R: Public scrutiny by citizens across the globe will continue to be a crucial force for change. African civil society groups have a critical role to play in keeping politicians and companies honest and demanding that commercial arrangements between their countries and multinational corporations are fair and mutually beneficial.
Transparency and accountability are the twin pillars of good governance. Transparency equips citizens with information; it lets them see how much wealth their country’s natural resources generate, how it is managed and who benefits. It enables people to monitor the activities of governments and concession holders. It fosters open debate and thereby helps build consensus. Accountability is about creating structures through which governments become answerable for their actions. Taken together, transparency and accountability are the foundation for trust in government and effective management of natural resources – and that foundation needs to be strengthened.
Effective taxation lies at the heart of the social contract between citizens and the state. It is a powerful instrument to reduce inequality, stimulate growth and enhance human development – for all countries. As the international community clamps down on tax avoidance and tax evasion, it will rightly demand more transparency about how tax revenue is used. So will countries’ own citizens.
Identifying principles and designing policies for good governance is vital, but not enough. The real force for change is the exposure of policymakers to the force of public opinion.
In Nigeria, the reforming finance minister Ngozi Okonjo-Iweala has done a great deal to improve the quality of policymaking. She believes that the single most important reform she has helped bring about in Nigeria is greater budget openness. Asked to provide advice to Ghana on managing the oil sector, she said: ‘If I can provide any sisterly advice on this; it is that you should be uncompromising on issues of transparency and accountability in that sector.’
Accountability has two dimensions. The first is openness – giving all citizens access to clear, comprehensive information on government business, including dealings with natural-resource companies. The second dimension is voice, or having the power to use information through political and legal processes to influence decisions.
Citizens need many types of information – and in a form that is accessible and understandable. Unfortunately, much of the region’s resource wealth is hidden from public view. ‘Transparency’ has become such a buzzword among development experts that there is a danger of its importance being overlooked. But keeping citizens in the dark about oil or mineral deals makes it easier for powerful people to steal, misallocate or waste public money.
When governments are more transparent, their countries are not only less prone to corruption; they are also more likely to enjoy higher levels of human development, stronger fiscal discipline and long-term economic growth.x Moreover, greater transparency is affordable, unlikely to do harm and an important goal in its own right. The bad news is that most resource-rich countries in Africa score poorly on most indices of transparency.xi With Africa’s natural-resource revenues set to rise still further, far more has to be done to unlock the transformative power of transparency.
The prospects for greater transparency in the mineral-rich parts of Africa offer plenty of cause for pessimism. In general, the higher the share of a country’s GDP that comes from natural resources, the less information is made available to its citizens.xii Yet change is possible. Resource-rich countries with regular elections and institutionalised political competition tend to be less opaque.xiii An active civil society and the media can also tip the balance in favour of greater transparency, as can international initiatives.xiv Ultimately, transparency depends on political dynamics and power relationships within society.
RG: You mentioned that Africa offers rich opportunities for making money-in recent years it has grown faster than any other continent. The profit motive is an important driver of progress. It spurs entrepreneurs to create new products, or to make old ones better or cheaper. It creates jobs and makes whole societies richer. What constraints do you think it appropriate to place on profit-seeking private corporations? How do you measure which ones are justified and which ones are not? Please give examples.
CK-R: The global commodities boom has brought an incredible variety of foreign investors to Africa. That is good – large foreign investments, as well as new technologies and expertise, are essential so that Africa can modernise, industrialise and reduce poverty. Many companies now recognise the economic, as well as the ethical, case for strengthening linkages to local firms and engaging with local communities. And many new investors are the honest, long-term business partners the continent really needs. They know that sustainable investment needs a stable country and a ‘social licence to operate’. When it comes to exploiting Africa’s huge reserves of oil, gas and minerals, however, the investment picture is much murkier.
Africa’s natural resource wealth has driven rapid economic growth, but in many countries the true owners of that wealth – Africa’s citizens – have failed to see any long-term benefits, because of poor governance, shady deals, low tax revenue, and a lack of local inputs and investments. Alarmingly, the stark inequality you see in places like Angola (a country that has had a huge oil boom) is actually growing worse.
For example, in Luanda, the Angolan capital, multimillion-dollar properties are dotted along a winding seafront road, the Marginal – one of the most expensive addresses in the world. Only a few streets back, however, you find barefoot children hawking on the streets. This inequality, combined with high unemployment, rapid population growth and increasing popular demand for political accountability, could be a combustible mix.
Lack of transparency comes at a price – for governments, investors and citizens – as the example of Guinea shows. In 2008 the then government stripped Rio Tinto of half its rights to mine the enormous iron ore deposits at Simandou, and sold them to another company for vastly less than they were worth. Two years later the company that got the rights sold 50 per cent of them to the Brazilian company Vale for $2.5 billion at an estimated profit of over 3,000 per cent over two years – equivalent to 2.4 times Guinea’s entire national budget in 2011.
Improvements in state governance alone, however, will not ensure success. Multinational companies must also improve their behaviour. Some foreign investors have shown that it is possible to make a healthy profit while also adhering to the highest international standards of social and environmental protection, but sadly not all choose to do so. Our report analysed five deals, for example, in the Democratic Republic of Congo (DRC). All five deals were opaque, with the government selling mining rights at rock-bottom prices to intermediaries who then resold them for huge profits to bona fide mining companies. The intermediaries did very well out of these deals, the proceeds of which were diverted into shell companies in offshore tax havens. Congo did not. Because national assets were seriously undervalued, these five deals cost the country and its citizens $1.4 billion, equivalent to twice the annual health and education budgets combined. The DRC has some of the world’s worst malnutrition figures, the sixth-highest child mortality rate, and over seven million children out of school. In contrast, some multinationals continue to impress with their commitment to transparency. Rio Tinto, for example, publishes details about its payments to governments, together with other tax and net earnings details. Since 2007 Norway’s Statoil has also been reporting payments made to governments. Other multinationals and commodity traders need to join them in doing what is right without waiting for governments to pass laws. Enlightened companies realise that transparent corporate governance builds reputations, reduces political risk, and may ultimately win more extractive contracts, too.
Kofi Annan put it well: ‘Building trust is harder than changing policies – yet it is the ultimate condition for successful policy reform. Mutually beneficial agreements are the only ones that will stand the test of time.’
i Africa Progress Panel Report 2013: Equity in Extractives - Stewarding Africa’s natural resources for all (Africa Progress Panel: Geneva). Available at (http://www.africaprogresspanel.org/publications/policy-papers/africa-progress-report-2013/)
iii iii Deborah Brautigam, ‘Aid ‘with Chinese Characteristics’: Chinese Foreign Aid and Development Finance meet the OECD-DAC Aid Regime’, Journal of International Development (2011).
iii Sarah Baynton-Glen, ‘Beyond trade – China-Africa investment trends’, Standard Chartered (22 February 2012), available at: http://www.standardchartered.com/en/resources/global-en/pdf/Research/Beyond_trade_China-Africa_investment_trends.pdf.
vii vii Deborah Brautigam, ‘Aid ‘with Chinese Characteristics’: Chinese Foreign Aid and Development Finance meet the OECD-DAC Aid Regime’, Journal of International Development (2011).
vii Sarah Baynton-Glen, ‘Beyond trade – China-Africa investment trends’, Standard Chartered (22 February 2012), available at: http://www.standardchartered.com/en/resources/global-en/pdf/Research/Beyond_trade_China-Africa_investment_trends.pdf.
x Bellver and Kaufmann 2005
xi Renzio, Gillies and Heuty 2013
xii Gillies and Heuty 2011
xiii Ross 2011; Wehner and de Renzio 2013
xiv Khagram, Fung and de Renzio 2013