Let’s assume you are a Finance Minister or ministry official of a country that has newly discovered oil or minerals.
What actions lay ahead? Or, if oil and mineral production is ongoing, , which is a mainstay for national economies around the world?
Planning for the development of an unfamiliar and complex sector can be daunting. How should sector policy objectives be determined?
Which economic, accounting and taxation principles should be considered? What kinds of laws and regulations would a government need to adopt? What roles do various ministries and government agencies play in administering these laws? How do technical, environmental and social considerations fit into the scheme of things? What about the investment of resource revenues, or the potential for new industry linkages?
Does governance matter?
Yes. Intuitively to many development practitioners, the link between governance and growth is established in the literature. But, what about hard-nosed financial investors? Is there a link between governance and financial returns? Initial cutting-edge research suggests that there is a link. And investors are increasingly paying attention to governance.
According to a study conducted by Global Evolution, an asset manager that specializes in emerging and frontier market sovereign investments, shows that governance may be a significant driver of sovereign bond returns. According to Ole Hagen Jørgensen, Research Director of Global Evolution, “improvements in a country’s Environmental, Social, and Governance (ESG) scores – and particularly the “G” of governance – significantly correlate to pricing of risk, credit ratings and return generation of sovereign bond funds in emerging and frontier markets.”
Resource rich developing countries face challenges in ensuring that revenues from Extractive Industries (EI) are used to foster economic development, reduce poverty and promote shared prosperity.
Effective governance of extractive revenue is a precondition for ensuring that the ‘development dividend’ that is meant to flow from the decision to extract becomes a reality. Good governance of the sector requires sufficient participation, transparency, and accountability across the entire EI value chain.
A wide range of stakeholders can contribute to these governance objectives, whether they be government agencies, private sector, civil society, and formal accountability institutions, such as parliaments.
Parliaments are coming to the fore as key stakeholders in ensuring that extractive revenues are equitably shared. That means making sure that extractive revenues are accurately captured in budget forecasts and estimates, appropriations are focused on delivering services to affected communities, and effective oversight of governments’ management of the sector is provided.
I participated in the recent 2015 Helsinki Parliamentary Seminar, hosted by the Parliament of Finland as part of the World Bank-Finnish Parliamentary Partnership, which brought together parliamentary delegations from Ghana, Iraq, Kenya, Mongolia, Somalia, South Sudan, Tanzania, Timor Leste, and Zambia to explore how parliaments could better contribute to the governance of revenues from extractive industries.
As the Financial Times pointed out recently, oil companies such as Exxon Mobil and Shell would, under measures considered for the global climate pact to be sealed in Paris next year, cease to exist in their current forms in 35 years. The proposal of phasing out global carbon dioxide emissions as early as 2050 was not resolved in the UN climate talks in Lima last December.
However, the adoption of even a watered-down version in Paris or in later rounds of climate negotiations would mean that the amount of oil and gas produced by these companies, and the quantity of coal mined by enterprises such as Rio Tinto, would need to be greatly reduced by mid-century. Such long-term concerns might over the next years trump current worries about an oil price slump that could be on the wane as soon as marginal projects and producers are shaken out from the bottom of the market.
Back in 2004, Extractive Industries Review noted that “the overall framework of governance within which Extractives Industries (EI) development takes place will be a major determinant of its contribution to sustainable poverty reduction.” The expert panel called for World Bank Group to do more on governance and transparency of the sector.
Source: Getty Images/Sam Edwards.
In Africa, estimates indicate that an annual investment of $93 billion is required to address the continent’s basic infrastructure needs – more than double the current level of investment.
The lack of productive investment of resource revenues, with spending of these revenues often heavily tilted towards consumption, is a critical component of the so-called resource curse, the observation that countries rich in natural resources frequently have slow long-term growth. Following oil or mineral discoveries, as the expectation of increased wealth spreads, pressures to spend typically become hard for politicians to resist, public sector salaries go through the roof, wasteful spending increases, corruption may flourish, hidden foreign bank accounts may be established, and the number of unproductive “white elephant” projects grows.
How can resource-rich countries ensure that a large share of oil, gas, and mining revenues are used for productive investment rather than excessive or wasteful consumption?
Does transparency lead to development? Not necessarily. At least not when it comes to the oil, gas, and mining sectors. Transparency is important but far from sufficient to improve livelihoods. An ongoing discussion among practitioners on the Governance of Extractive Industries (GOXI) platform reveals a lack of clear answers to this question.