Washington D.C. – It is a sad and perverse paradox of today’s global economy that some of the very wealthiest developing countries are also the very poorest. Countries possessing an abundance of diamonds, gold, oil, gas and exotic minerals can barely feed, clothe, let alone educate, the bulk of their populations which suffer among the highest infant mortality rates and shortest average life span in the world. War and civil strife, not peace, are the norm in many of these resource- rich but troubled areas.
Poor governance is the explanation we give for this condition – a catch-all term for misguided public policies, lack of capacity and corruption. It is clear that many of the governance problems stem from the sheer complexity of navigating the web of tax regimes, contracts, market fluctuations and uncertainties of exploration and development that characterize the extractive resources industry. The newly rich countries can feel as overwhelmed as the plumber who wakes up one morning to learn he won $15 million at the lottery. But as Peter Woicke noted there is also evidence that resource wealth may erode governance. In the resource rich countries, money and its misappropriation often loom large in the governance picture.
The link between governance and prosperity is now widely recognized, but it is worth noting that only recently has the international official community treated bad governance and corruption as an economic issue and an obstacle to development and poverty reduction. When I joined the IMF executive board in late l993, these topics were not on the table at all, for example. Bilateral donors and multilateral lenders now take a very proactive approach to rooting out governance problems rather than turning a blind eye or worse, aiding and abetting.
The ethos of good governance and transparency has also taken hold in developing countries. The New Economic Partnership for African Development emphasizes honest and transparent government, and there is genuine progress in many countries. But countries highly dependent on petroleum and other resource exports continue to present a special challenge.
This two-day conference signals that the IFIs are trying to systematically address the “linked complex” of issues that must be addressed to ensure proper management of resources and revenues.
The governance problem in these countries is not primarily corrupt payments, but corrupt use of legitimate payments of fees, royalties and taxes and profit-sharing by the companies extracting the resources. The question is how to stop these flows being misappropriated by the recipient governments.
The multilateral institutions can help these governments to structure the revenue flows and design budget systems to encourage proper management, as is being discussed at this conference. But good design can take you only so far. The will to spend the money properly must also be there.
Experience tells us that reforms only take hold when driven by domestic forces. In the end, good government comes from within. The challenge for the outside world is to offer not just good systems design, but also strong incentives for internal reform. Financing and conditionality work up to a point. But in the resource rich developing countries their impact is blunted. The private flows trump official aid.
We must use other tools. We know that transparency works, that public disclosure, be it of human right abuses or a president’s Swiss bank accounts, can change political dynamics. Full transparency of the revenue flows from petroleum production and similar activities could have a salutary effect on governance in the resource rich countries. If the revenue flow is known to everyone, then the expenditure flow can be tracked more easily and mismanagement or diversion for illicit purposes will be much harder.
A campaign led by Global Witness, George Soros, and a host of NGOs from around the world has launched an appeal to the oil, gas and mining companies to Publish What You Pay – to disclose publicly all the fees, royalties, taxes, loans, profit-sharing and other payments to governments for extracting resources on their territories.
Clearly, oil and mining companies do not control how their payments are spent or misspent, but it is in their enlightened self-interest to help ensure that the money they invest benefits the broad populace and not just a corrupt few. Civil strife that swirls around corrupt regimes increases the cost of doing business. When government services fail, companies may be asked to step in the breach. Fair or not, oil and mining companies are beginning to be blamed for the conditions of deprivation in many countries where they are the dominant industry and primary source of revenue. The sentiment is growing that if they are good corporate citizens in this age of globalization, the resource companies that play such a central role in these economies must do more to improve conditions.
In theory, publication could be done voluntarily, on an individual company or industry-wide basis. Newmont Mining has done so in Indonesia, taking out an ad in newspapers, to positive effect. Its relationship with the local community changed for the better. Local activists stopped demanding that the company substitute for the public sector in providing social services and turned their attention to the local government and what they were doing with the money they were getting from Newmont. On the other hand, when BP-Amoco announced an intention to go public in Angola, the state oil-company threatened to terminate its concessions. The voluntary approach is also problematic because coverage could be uneven, leaving large payment flows undisclosed.
The Publish What You Pay campaign therefore calls for a regulatory approach. We want the G-8 countries, which are not only home to many of the worlds major oil, gas and mining companies but also to the most important stock exchanges in the world, to require extractive industries to publish what they pay as a condition for listing on their exchanges. This would ensure maximum coverage of payments, a level playing field for all the major companies so no one would enjoy a competitive advantage, and protection for the companies against retaliation by the resource-rich countries.
I should like to stress that this is not an anti-business initiative. If implemented, this measure would be an important advance in the fight against corruption in the developing world, particularly in Africa and Central Asia, where state revenues from oil production are set to rise dramatically over the coming decade. It would empower citizens of the countries most impacted to hold their governments accountable for the use of those revenues. It would contribute to political stability by reducing civil conflict motivated by desire to control state assets for power and personal gain. It would be good for business and shareholders since it will create an environment in which business can prosper. And it would be neither cumbersome nor expensive for companies to comply.
Among the potential users of the information are local and international watchdog organizations that can help civil society hold governments accountable, such as, for instance Caspian Revenue Watch, an organization that monitors revenues from the expected increase in oil production in the region. And will press governments in Central Asia to use the fund appropriately.
There are some positive signs that the PWYP campaign is making headway. Transparency, including for corporate payments, was an important topic at the Johannesburg Summit for Sustainable Development. The UK government has taken a strong lead on this issue. Gordon Brown told the Commonwealth finance ministers meeting last month, “The recent proposal from George Soros and Global Witness to increase transparency in extractive industries is an excellent example of how private sector companies can positively contribute to development and poverty reduction…” Prime Minister Blair promised at Johannesburg to work with governments, businesses and NGOs to ensure that all payments by companies are published openly. The UNDP and IFC have added their voices. The G-8 have taken a positive step in their Africa partnership, declaring that they will be working “to ensure better accountability and greater transparency with respect to those involved in the import or export of Africa’s natural resources from areas of conflict.” We hope the U.S. government, which is which regulates the most important capital market in the world will also endorse Publish What You Pay. This would be consistent with its policy of linking aid to reform and the campaigns against money laundering and for financial transparency in the fight against terrorism.
The commitment of leading countries to transparency must take concrete forms to be meaningful.
The attitudes of industry will be critical. There have been signs of support from the mining sector. At Johannesburg, the chairman and CEOs of Rio Tinto plc, BHP Billiton plc, and Anglo American plc issued a joint statement saying they welcomed the inititative on transparency of payments of the British PM and promised to work for a satisfactory framework for reporting “in the interests of integrity and sustainable development.” Internationally, there has been some support from the petroleum industry, with some companies showing a real commitment to transparency. The U.S. industry has not yet sent a clear signal that they believe private corporations have a role to play alongside governments in advancing transparency in this way. We hope the private sector will come to strongly support this important initiative.
Publish What You Pay is no panacea, but it would be a strong complement to the other approaches being discussed here today. Over time, proper management of the vast wealth of the resource- rich poor countries will contribute to peace and security, social justice, a better business climate and a better life for the people living in those countries. I urge all of you and the organizations you represent to support Publish What You Pay. Thank you.