Stewart M. Patrick

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Extracting Justice: Battling Corruption in Resource-Rich Africa

by Stewart M. Patrick and Guest Blogger for Stewart M. Patrick
August 13, 2014

Local residents' clothes dry over the gas pipelines running through the Eleme community near the city of Port Harcourt, a major Nigerian oil hub in the country's southeast. Local residents' clothes dry over the gas pipelines running through the Eleme community near the city of Port Harcourt, a major Nigerian oil hub in the country's southeast (Akintunde Akinleye/Courtesy Reuters).

Coauthored with Isabella Bennett, assistant director of the International Institutions and Global Governance program.

Last week, when more than forty heads of state met in Washington for the U.S.-Africa Leaders Summit, improving economic opportunities topped the agenda. The leaders could take pride in Africa’s recent economic performance. But the gathering also spotlighted a daunting obstacle to sustaining robust and widely shared growth on the continent: rampant corruption that robs citizens of billions of dollars every year.

By one estimate, illicit financial flows from Africa amounted to $1.4 trillion between 1980 and 2009—more than the economic aid and foreign direct investment the continent received during that period. A joint report by the African Development Bank and Global Financial Integrity found that a staggering 60-65 percent of this lost cash disappears during “commercial transactions by multinational companies.”

The extractive industries—which take natural resources like oil and minerals from the ground—are particularly prone to corruption, because they generate huge wealth that is easily diverted to line the pockets of venal rulers or businesses. This can be devastating in resource-rich developing countries like the Republic of the Congo, where the government depends on earnings from extractive industries for 85 percent of its revenue. The siphoning of Africa’s riches is an old story, of course, though today’s culprits are not European imperialists like Belgium’s King Leopold II but unaccountable African officials and corporations, both foreign and domestic. The paradoxical result is the persistence of grinding poverty amidst apparent plenty, a paradox visible in Angola, the Democratic Republic of the Congo (DRC), Nigeria, and a dozen other African nations. For too many Africans, improving governance of natural resource extraction is “a matter of life or death.”

The sentiment is broadly shared among civil society groups across the continent. African citizens are increasingly aware that corruption and poor governance is cheating them and their countries out of billions of dollars. In a moving letter to President Obama on the eve of the leaders’ summit, civil society leaders from nine African countries declared that their children’s future depended on ending this destructive cycle:

Our natural resources are an opportunity for us to create better lives for our future generations, but if good governance does not prevail that chance will be squandered. And with oil, gas and mining, the one chance is all you get…. We are fighting every day to change our future. We risk arrest and intimidation to bring the issue of natural resources into the open. Where once silence reigned people now debate in the streets how their revenues should be managed.

Improving governance in the extractive industries would go a long way toward achieving the five goals of the Obama administration’s vision for the Africa leaders’ summit: expanding trade and investment ties, engaging young African leaders, promoting inclusive sustainable development, expanding cooperation on peace and security, and gaining a better future for Africa’s next generation.

In his closing summit press conference, the president announced that the assembled leaders had “agreed to step up our collective efforts against the corruption that costs African economies tens of billions of dollars every year—money that ought to be invested in the people of Africa.” The centerpiece of this effort would be “a new partnership to combat illicit finance,” based on “an action plan to promote the transparency that is essential to econmic growth.”

But where to begin? Though it is an uphill battle, there are already a number of worthwhile international initiatives seeking to empower citizens to fight corruption and help ensure that natural resources benefit local communities. The authors of the abovementioned letter, for example, all belong to one network of nongovernmental organizations called Publish What You Pay (PWYP), which campaigns for transparency in extractive industries. The idea is that forcing companies and governments to publicly release information about their negotiated contracts and commercial transactions will discourage them from engaging in corrupt practices, and allow citizens to hold them accountable if they do.

The Extractive Industries Transparency Initiative (EITI) is another, increasingly influential coalition that requires participating governments to ensure that transactions between extractive companies and governments are fully disclosed to the public. To maintain their status as “EITI compliant,” member countries must prepare annual reports about how they are implementing common standards. In parallel with this campaign, the Organization for Economic Cooperation and Development (OECD) has released its own set of best practices, “Guidelines for Multinational Enterprises,” and the United Nations has produced its own document, “Guiding Principles on Business and Human Rights” [PDF].

These are all welcome initiatives. But what has their impact been? And how might they be improved?

To assess how these various efforts are doing, CFR held a workshop in May 2014, “Governing Extractives on a Global Scale: Challenges and Opportunities.” The event included civil society groups, private sector representatives, and officials from Europe, North America, and Africa. (The entire rapporteur’s report can be read here [PDF].) Despite predictable disagreement about the relative value of different approaches—and criticism regarding overlap among them—participants agreed on one obvious requirement for improving governance: to be able to hold leaders accountable for corruption or poor allocation of revenues, nonexperts must be able to interpret the information that is made public.

Simply releasing government contracts to the public, for example, is unlikely to generate results. A 123-page contract [PDF] between the government of Ghana and Tullow Oil, for instance, would likely overwhelm many experienced lawyers, let alone typical Ghanean citizens (who on average receive only seven years of education [PDF]). In the DRC, where the schooling averages only three and half years [PDF], the barriers to harnessing published information for the population’s benefit are even higher. For transparency intiatives to be useful, the United States, other bilateral donors, and multilateral organizations must invest more in training programs that help citizens understand and utilize newly available data.

Of course, success in the fight against corruption in extractive industries will require holding accountable not only African leaders but also the foreign oil, gas, and mining companies investing and operating in these countries. The United States has taken some initial steps to raise standards for U.S.-domiciled firms, including by joining EITI. Notably, however, the Securities and Exchange Commission (SEC) has not implemented Section 1504 of the Dodd-Frank Act, which requires SEC-registered companies to publicly report how much they pay governments for access to oil, gas, and minerals. The American Petroleum Institute and other extractive associations successfully challenged the SEC’s disclosure rules in a July 2013 lawsuit. Ironically, while the provision is stalled in Washington, other advanced market democracies inspired by Section 1504—including the United Kingdom, the European Union, and South Korea—have already passed similar legislation of their own.

The ultimate objective—particularly given the surge of Chinese investment in Africa—should be to create globally-accepted, industry-wide standards, and a level playing field for all would-be investors. Without such universality, Western companies will remain wary of limiting their own investment opportunities as less scrupulous corporations—including Chinese state-owned enterprises—look the other way.

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