By Catherine Easton, Natalya Lozovaya, and Peter Veit (Posted: June 13, 2013)
(Original article posted on WRI Insights on June 13, 2013: http://insights.wri.org/news/2013/06/ending-resource-curse-c…)
Canada’s Prime Minister, Stephen Harper, took a significant step toward promoting transparency and reducing global poverty. He announced yesterday that Canada will implement mandatory reporting requirements for Canadian extractive companies operating both in-country and abroad.
This mandate will require Canadian extractive companies to publicly disclose the payments they make to foreign governments in exchange for permission to operate on their soil. This development will help promote transparency in the mining sector and, if implemented effectively, could help combat the “resource curse.”
Fighting the Resource Curse through Access to Information
Tackling the “resource curse” is a challenge of global proportions. The term applies to situations where, despite a country’s mineral or oil wealth, poverty is exacerbated in part by weak or corrupt institutions, government mismanagement of revenues, and a failure to re-invest into projects that benefit the public—such as infrastructure, education, and healthcare. Often, citizens of resource curse countries aren’t able to hold their governments accountable for this abuse of power because they lack information about their country’s revenues and expenditures. (See italicized description below).
The new Africa Progress Report 2013 (http://www.africaprogresspanel.org/en/publications/africa-pr…) and an issue brief from the Africa Biodiversity Collaborative Group (http://frameweb.org/adl/en-US/10521/file/1577/B.1%20Financia…) — which WRI experts contributed to—reveal the mining industry’s progress and shortfalls in curbing the resource curse. Companies’ mining operations typically take place in multiple host countries, and contracts and payments to these host countries are not usually disclosed publicly. However, if companies made information about these payments available, civil society and investors could monitor whether or not these public revenues are re-invested into projects that actually benefit the public. With access to information—which Canada’s new mandate will help provide—these actors have the ability to reduce corruption and alleviate poverty by holding governments and companies accountable for their spending.
Canada’s Action Is Globally Significant
Canada is the world’s leading mining country. Almost 1,700 mining companies are listed on and regulated by the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV), placing a large share of the global mining sector under Canada’s regulation.
Of approximately 10,000 mineral projectsundertaken by TSX and TSXV-listed companies, almost half are located outside of Canada. The graphic below illustrates the global reach of Canadian mining companies, with operations in both developed countries like the United States, and developing countries such as Tanzania, Mali, DRC and Burkina Faso. Therefore, implementing a national disclosure policy would have a big impact in making the global mining sector more transparent and accountable.
Canada Joins a Global Movement
Canada now joins a global movement in improving transparency in the extractives industry. Mining, oil, and gas companies across the world are increasingly recognizing that disclosing financial information can help ensure that natural resource revenues are re-invested to reduce poverty and benefit citizens. For example, 76 extractive resource companies have joined the Extractive Industries Transparency Initiative (EITI), a coalition of governments, companies, and civil society committed to a global standard for transparency in oil, gas, and mining. The EITI standard calls for companies to publish what they pay to host governments, and, conversely, for host governments to disclose the amount of money they receive from companies.
Several countries are also developing national legislation to address transparency in the extractives sector. In August of 2012, the U.S. Securities and Exchange Commission (SEC) adopted rules for the implementation of Section 1504of the 2010 U.S. Wall Street Reform and Consumer Protection Act. This law calls for extractive companies filing annual reports with the SEC to disclose payments to host governments. The legislation has a wide reach, as it applies to both U.S. and foreign-based companies.
While these rules are currently being challenged by the American Petroleum Institute and other business groups, if upheld in court, approximately 200 mining companies will be required to disclose their host country payments to the SEC. (An additional 350 oil and gas companies will also be required to disclose their host country payments to the SEC.) Similar legislation is currently being debated in the U.K., E.U., and other nations. Canada will now join their ranks.
Some host countries are also changing their laws to provide for more access to government-held information. More than 80 countries around the world have enacted comprehensive Freedom of Information Acts (FOIAs) to help ensure citizens’ right to accessible information. Moreover, some national natural resource laws specifically recognize the need for publicly traded companies to disclose financial information on payments to host governments in their reporting to financial regulators. For example, Uganda’s Petroleum (Exploration, Development and Production) Bill of 2012 contains a confidentiality clause, but clarifies that it will not prevent disclosure of company information if required by its home government, or as required by any law.
Although the announcement from Prime Minister Harper is welcome news, much work still lies ahead—namely, in formalizing a policy that generates real impact. Since September 2012, the Resource Revenue Transparency Working Group has been developing a framework for mandatory reporting for Canadian extractive companies. A draft of this framework will be released by the end of the week. The working group will then work closely with the Government of Canada as it begins consultations with provinces and territories, First Nations and aboriginal groups, and industry and civil society organizations. Finalizing the formal disclosure policy could take several years. If the resulting policy is strong, effective and consistent with other countries’ initiatives, Canada can help ensure public access to extractive sector revenue without imposing undue burdens on extractive companies. And through this, the country could play a key role in breaking the global resource curse.
Solving the Resource Curse
Aside from government mismanagement of resources and weak, ineffectual, unstable, or corrupt institutions, the “resource curse” can also be attributed to other causes. These include a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy); and/or volatility of revenues from the natural resource sector due to exposure to global commodity market swings. Access to financial information alone will not eradicate the resource curse, but it is an essential pre-condition.