Tuesday, May 26, 2015

GLOBAL WITNESS: The scramble for Africa’s oil, gas and minerals

GLOBAL WITNESS: Investigates the role of  natural resources in funding conflict and  corruption around the world.

Global Witness is a UK-based non-governmental
organisation which investigates the role of
natural resources in funding conflict and
corruption around the world.
References to ‘Global Witness’ in this report
are to Global Witness Limited, a company limited
by guarantee and incorporated in England
(Company No. 2871809).
Global Witness
6th Floor
Buchanan House
30 Holborn
London EC1N 2HS
ISBN 978-0-9570101-1-6
© Global Witness 2012
Supported in part by funding from Cordaid,
Novib Oxfam, and The Revenue Watch Institute

The scramble for Africa’s oil, gas and minerals.......2

What is at stake? .................6

Angola......... 10
Nigeria............. 20
Democratic Republic of Congo.......... 28


Preventing corruption in the award of Oil, Gas and Mining Licences......... 32

The intensifying competition for commercial access to the world’s remaining deposits of oil, gas and
minerals brings with it a serious risk of exacerbating corruption and violent conflict. Such corruption
can prop up autocratic governments that keep their people in poverty while enriching elites and the international companies that are willing to do business with them. The first step towards tackling the problem is to shine the light of public scrutiny on the complex and often opaque relationship between
extractive companies and states.

There is growing international awareness of the need for greater transparency in the extractive industries as a vital first step towards tackling the “Resource Curse”. The Extractive Industries Transparency Initiative (EITI), a global association of governments, companies, investors and civil society groups (including Global Witness), has more than 30 countries implementing its rules (soon to be joined by the United States), of which 11 are Compliant.

The EITI aims to strengthen governance by improving transparency in the natural resource sector. Under the EITI, Compliant countries and companies operating within these Compliant countries are required to disclose all material payments or revenues paid (in the case of companies) and received (in the case of countries).

The aim is that through this reporting, citizens and civil society are able to track that money and holdtheir governments to account for its management.  The EITI approach of promoting public reportingof revenue flows is being reinforced by legislation like Section 1504 of the US Dodd-Frank Wall street Reform and Consumer Protection Act (Dodd-Frank Act) 1, which requires companies to report on tax payments made in each country. The European Commission has recently proposed similar rules in the European Union. These efforts are a welcome and necessary first step towards ensuring that all oil, gas and mining companies pay what they ought to and governments manage revenues as they should.

For the first time in some countries, they have taken information of vital public importance and brought it out of the shadows of state secrecy, and into the public domain.  However, the risk of corruption lies not only in the flow of revenues from contracts and licenses’, but also right at the start, when extractive companies are granted access to these licenses’ and contracts. Too often private ‘shell’ companies with opaque ownership structures are awarded lucrative concessions, with little information available as to who the beneficial owners of the company are, how much (if anything) the company has paid for the license, and what the country has gained in return. If these companies do not have the technical capacity or financial resources to develop the asset themselves, they may end up being carried by international and national operators. Alternatively, they may squat on lucrative concessions by acquiring them from government before ‘flipping’ them quickly to other investors who actually have the capacity to develop the license.

It is our view that joint ventures with such shell companies, while not necessarily breaching anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA) 2, could be indirectly sustaining a system in which resource revenues are being siphoned off by corrupt elites.

Whilst foreign investors may be fully compliant with the local and international laws, in effect, they are paying huge fees to elites in order to access the local market. Angola and Nigeria are archetypal  examples of countries which have been afflicted by the Resource Curse. They are two of the largest oil producing countries in Africa; exporting between them over four million barrels of oil per day. 3 Their citizens, however, remain amongst the poorest in the world, with approximately 70 per cent of Angolans and 80 per cent of Nigerians living on less than two US dollars a day.  4 This report reveals an alarming degree of opacity and scope for deviation from due process in what, in both countries, have been presented to the world as open and competitive oil allocation processes. As this report shows, the apparent overlap between political and business elite in the two countries has undermined public confidence in the license bidding process and created suspicion over its legitimacy. The very existence of this suspicion, whether or not it is founded, is harmful. Political institutions and the sustainability of investments into industry are both endangered, which is counterproductive for development.

Our research reveals two major problems in the government allocation of oil contracts:
• Governments are not making clear the rationale for choosing particular companies in the bidding process and, in certain cases, they appear to allow companies special or preferential access to oil licences, leading to doubts about the integrity of the process.
Governments are awarding oil licences to companies whose beneficial owners remain undisclosed. In certain cases, there are grounds for suspicion that some of the companies may be owned or controlled by government officials or their private-sector proxies.

This report also includes a short case study from the Democratic Republic of Congo (DRC), where the issues surrounding access to mineral licences remain very live and real. In this case, the state mining companies sold off stakes in four mineral concessions in secret to companies which were based in offshore tax havens and therefore did not have to disclose their ownership. There are also serious concerns that the sales prices agreed were much lower than most reported commercial estimates. If citizens do not know why particular companies have been awarded natural resource licences, it leads to suspicions of wrongdoing, especially in countries like Nigeria, Angola and the DRC with track records of natural resource-related corruption. The last part of this report recommends a number of measures that governments could adopt to make the allocation of oil and other natural resource licences more open and identify who benefits. These measures should be mainstreamed into the EITI and into national laws and regulations. It also presents a ‘Citizens’ Checklist’ for the allocation of resource concessions. It is based on the investigative findings of the report and extensive discussion with civil society activists, academics, industry and international financial experts and others concerned with corruption.

Introduction to The citizens’ checklist

The Checklist is part of a broader global debate about the best ways for countries to manage their natural resource endowments to maximize the long-term benefits to their citizens while protecting other public goods, such as the natural environment. An important product of this debate is the Natural Resource Charter, a set of principles for natural resource management by governments that was created by academics and civil society thinkers working with the British development economist Paul Collier. The Charter is designed to be used by reformist government officials, so our Checklist is a civil society complement to that approach, framing allocation issues from the perspective of what a citizen should be able to find out to be confident that the allocation of a resource concession was broadly free and broadly fair.

The Citizens’ Checklist has three main principles:
• Citizens need full information about the ownership of companies that bid for oil, gas or mining rights, to ensure they are bona-fide companies with the competence to do the job, not simply fronts for corrupt vested interests.

• The process for awarding oil, gas and mining rights, and its outcome, need to be open to public scrutiny. Licences and contracts should be published.

• Independent mechanisms are needed to check that the rules are being upheld. These mechanisms should actively involve civil society groups from the country concerned African countries with mineral resources have too long been held back from prosperity by a baleful history of collusion between corrupt and incompetent rulers and amoral international companies: more transparency would ensure a more open competition and one that is fairer to countries and their citizens.

This is also true in other countries where competition between Western, Asian and other international extractive investors is growing.  Iraq, with its huge oil and gas reserves, is an example of a country long plagued by conflict and misrule that will need to carefully manage the international competition for its resources, to avoid further corruption and instability.   

Another example is Afghanistan, with its large mineral reserves. In oil rich Libya, where former dictator Colonel Muammar Gaddafi was recently overthrown, Global Witness has just started a dialogue with local civil society and activists: their consistent message is that oil should now become
the servant of the people of Libya, not its master.  

International extractive companies, whether from the Americas, Europe, China or other parts of the world, would also benefit from a more open competition for access to natural resources in Africa and other developing regions. More transparency and public accountability would reduce the risk that well-intentioned companies lose out to corrupt rivals. It would ensure greater legitimacy for extractive companies, in the eyes of citizens, in countries where they may need to operate for decades to come, boosting investor confidence and reinforcing the rule of law in these countries’ extractive sectors.

The home countries of international extractive companies also have an interest in a global competition for access to oil, gas and minerals that is more open and fair. Corruption and mismanagement of the natural resources sectors in poor countries can not only threaten the security of resource supplies, as in the Niger Delta region of Nigeria, where armed attacks on oil companies forced major cuts in production in the mid-to-late first decade of this century.

Corruption also makes developing countries poorer and less stable, creating risks of conflict and humanitarian disaster which taxpayers in the world’s richer countries will be expected to respond to.
For all these reasons, there is a pressing need for the principles of the Citizens’ Checklist to be endorsed and put into effect by resource-rich countries, by multinationals and their home governments in the West, Asia and other regions.

Corruption in the extractive industries has always been an international problem and the solutions must also be international. International Financial Institutions, such as the World Bank and the European Bank for Reconstruction and Development, should make public disclosure of beneficial ownership a condition for providing financing to companies. International governments should ensure that anti-corruption and anti-bribery laws become a global norm and are adopted in all countries.

There is no single instrument that can enact all these reforms across a diversity of sovereign states. Solutions need to arise from national law such as stock listing regulations which require companies to disclose payments, from voluntary associations like the EITI, from good practice amongst corporations and, in the end, from the creation of international agreements which govern the access and trade of natural resources and ensure that public goods are adequately protected.

All these solutions need to start from a sincere recognition amongst decision-makers in both governments and industry, that for reasons of morality and enlightened self-interest, corruption should no longer be tolerated in the interest of securing cheaper oil and minerals for the rich world, at the expense of the poor.




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