MAC: Mines and Communities

Revenue Transparency: A Priority for Good Governance and Energy Security

Published by MAC on 2004-03-24

Revenue Transparency: A Priority for Good Governance and Energy Security

24 March 2004

Coming clean on oil, mining and gas revenues. - Also available in French, Portuguese, Spanish and Russian.

Across the globe, revenues from oil, gas and mining that should be funding sustainable economic development have been misappropriated and mismanaged. This Global Witness report considers five major examples of this problem: Kazakhstan, Congo Brazzaville, Angola, Equatorial Guinea and Nauru.

In these countries, governments do not provide even basic information about their revenues from natural resources. Nor do oil, mining and gas companies publish any information about payments made to governments. Huge amounts of money are therefore not subject to any oversight and crooked elites can extract all sorts of ‘facilitation payments’ from firms that would probably prefer not to pay bribes. Investigations also reveal that some companies have played a willing role in facilitating off-the-books payments, misappropriation of state assets, and other nefarious activities such as arms shipments, as part of an anti-competitive, under-the-table method of winning business with unaccountable regimes. Ordinary citizens, who often own a country’s resources under its constitution, are thus left without the information to call their governments to account over the management of their revenues. The end result is a litany of corruption, social decay, increased poverty, reinforcement of authoritarian government and political unrest, which can ultimately lead to state failure and the spread of instability across regions.

In Kazakhstan, the largest-ever foreign corruption investigation in US legal history has uncovered a major international corruption scandal that ‘defrauded the Government of Kazakhstan of funds to which it was entitled from oil transactions and defrauded the people of Kazakhstan of the right to the honest services of their elected and appointed officials’. The scheme was based around Kazakh President Nursultan Nazarbayev and Oil Minister Nurlan Balgimbayev demanding that international oil companies such as Chevron (now Chevron-Texaco) and Mobil (now ExxonMobil) pay a series of unusual fees to middleman James Giffen on behalf of the Republic of Kazakhstan. This arrangement, the indictment alleges, helped Giffen to skim money from the deals and send some US$78 million in kickbacks to President Nazarbayev and others through dozens of overseas bank accounts in Switzerland, Liechtenstein and the British Virgin Islands. Only Giffen is charged in this indictment. Another US$1 billion of Kazakh oil money has also been uncovered offshore and out-of-sight under Nazarbayev’s direct control in a secret fund in Switzerland. Ironically, the only reason that such information has emerged is because President Nazarbayev inadvertently revealed the true state of affairs whilst trying to discredit a presidential rival.

Congo Brazzaville is one of the petro-states most closely associated with the legacy of influence peddling and dirty deals in Africa by the now-notorious French state oil company Elf Aquitaine (now Total). Elf treated Congo as its colony, buying off the ruling elite and helping it to mortgage the country’s future oil income in exchange for expensive loans. The company even financed both sides of the civil war, as it also did in Angola.

Although former senior Elf officials have been jailed in France for ‘misuse of company assets’, their legacy of opacity and hair-raising accounting endures. Despite huge existing debts and a supposed programme of cooperation with the international community to restructure Congo’s finances, the government has entered into ever more arcane and tortuous deals to avoid financial scrutiny from the international community and its own citizens. Indeed, the national oil company Société Nationale des Pétroles du Congo makes a multi-million dollar profit but, according to the IMF, does not pay a single penny of this money into the government’s coffers.

In Angola, new evidence from IMF documents and elsewhere confirm previous allegations made by Global Witness that over US$1 billion per year of the country’s oil revenues - about a quarter of the state’s yearly income - has gone unaccounted for since 1996. Meanwhile, one in four of Angola’s children die before the age of five and one million internally-displaced people remain dependent on international food aid. This report highlights the latest revelations from the ‘Angolagate’ scandal, in which political and business elites in France, Angola and elsewhere exploited the country’s civil war to siphon off oil revenues. Most recently, evidence has emerged in a Swiss investigation of millions of dollars being paid to President Dos Santos himself. The government continues to seek oil-backed loans at high rates of interest which are financed through opaque and unaccountable offshore structures. A major concern exists that Angola’s elite will now simply switch from wartime looting of state assets to profiteering from its reconstruction.

In Equatorial Guinea, oil companies appear keen to do business with the brutal regime of President Obiang Nguema. The country’s government has been tarnished by allegations of corruption, political violence, human rights abuses, and narcotics trafficking. Although the country’s oil boom has resulted in a dramatic increase in GDP, its living standards remain among the worst in Africa. This may be because much of the country’s oil money stays abroad: journalists have recently uncovered evidence that major US oil companies are paying revenues directly into an account under the president’s control at Riggs Bank in downtown Washington DC.

Riggs Bank has also managed the purchase of million-dollar mansions for Obiang and his family. The line between state revenues and the president’s personal finances seems unclear. The government maintains that it is completely open and transparent about its oil revenues but, so far, the only way that any information has entered the public domain is when it has been dragged there by the international media.

Finally, the opaque and unaccountable management of phosphate reserves has transformed tiny Nauru from the richest nation in the world (per capita) to a bankrupt wasteland. Phosphate mining took place in a country synonymous with secret banking and money-laundering, where over US$80 billion was laundered during Russia’s economic transition in the 1990s. In this tax-free, reporting-free environment, the island’s phosphate revenues were squandered by irresponsible officials, frivolous speculation, and in the words of one observer, ‘a steady stream of carpetbaggers and outright crooks’. The money has now dried up. Bankrupt, in social and political turmoil, and facing possible extinction from rising seawaters, Nauru is a sinking ship.

The major finding of this report is that none of the revenue embezzlement scandals discussed herein could have happened if multinational companies had been required to disclose publicly their basic payments for resources to the state.

More generally, transparency in the management of revenues from natural resources is fundamental for successful development and poverty reduction. Oil, mining and gas are critically important economic sectors in about 60 developing or transition countries. Amongst the 3.5 billion people in those countries, some 1.5 billion live on less than US$2 per day and constitute over two-thirds of the world’s poorest people. Twelve of the world’s 25 most mineral-dependent states and six of the world’s most oil-dependent states are classified by the World Bank as Highly Indebted Poor Countries with amongst the world’s worst Human Development Indicators.

The status quo in the resource extraction business is a lose-lose situation for all parties:

• Businesses see their legitimate revenues paid to governments being misappropriated and squandered, which leads to social divisiveness and an unstable business environment. Investors managing some US$6.9 trillion of funds recently highlighted the significant business risk represented by lack of transparency, stating that: ‘legitimate, but undisclosed, payments to governments may be accused of contributing to the conditions under which corruption can thrive’. Failing to disclose net payments not only lays companies open to ‘accusations of complicity in corrupt behaviour’; it also undermines their social ‘license to operate’, making them ‘vulnerable to local conflict, and insecurity, and possibly compromising their long-term commercial prospects in these markets’. A recent example of these problems is the continuing unrest in Nigeria’s oil region which has led to significant interruptions in oil output.

• Ordinary citizens, who often are the real owners of the resources, are left dispossessed and reliant on donor assistance.

• Taxpayers in the North are required to compensate for state failure in the South in the form of aid: this is inefficient and undermines the current donor emphasis on improving governance in non-transparent countries.

• The international community faces instability that, in some cases, directly threatens the security of energy supplies. Current policies of energy security seem to rely on leaving failed and failing states alone whilst the resources keep flowing out. The lessons from this report are that this approach does not work: initial problems with accountability are left to become fatal flaws in a state’s whole architecture, eventually causing a collapse that interrupts resource flows and renders states vulnerable to infiltration by criminal and terrorist groups.

The international community has taken its first steps towards recognising the importance of improved transparency and accountability of natural resource revenues, but its proposed solutions are neither efficient nor comprehensive. UK Prime Minister Tony Blair and his Department for International Development have convened a forum called the Extractive Industries Transparency Initiative (EITI) to promote action by governments and companies on this issue. Whilst the EITI has done some valuable work, including identifying the main revenue streams in the resource extraction business and developing a series of templates for collecting data, it remains poorly resourced and relies purely on voluntary reporting by companies and governments. The 2003 declaration of the G8 summit in Evian similarly highlighted a voluntary approach to promoting transparency in the extractive sector.

This voluntary approach will not work in the majority of countries where it is most needed. The massive financial improprieties uncovered in this report show that political and business elites currently have a vested interest in avoiding transparency. Indeed, when BP wanted to disclose payments in Angola, it immediately faced the threat of losing its licence to less scrupulous competitors. If disclosure was required by law, it would void ‘gagging clauses’ in licence agreements with some governments that prevent disclosure and would thus avoid the problem of companies being penalised for breach of contract. Disclosure of key financial data is required by law in every developed country, so why should it be different in Angola and other developing economies?

To that end, the Publish What You Pay coalition of more than 190 Northern and Southern NGOs is calling for legislation to require extractive companies to disclose their payments to all governments. This crucial first step would help citizens in resource-rich-but-poor countries to hold their governments to account over the management of revenues. In addition, by creating a level playing field through regulation, companies’ reputational risks will be mitigated and they will be protected from the threat of having contracts cancelled by corrupt governments.

The last section of this report looks at the pressing need for international regulations and a systematic foreign policy approach to promoting revenue transparency. International stock markets and accounting standards should require oil, mining and gas companies to disclose their payments worldwide. A requirement for transparency about a country’s resource income and expenditure should become a standard condition in all international financial assistance to all countries where such transparency does not exist. Transparency should also be a condition of resource-backed loans from private banks. Export credit agencies, which insure many major extractive investments, should also require disclosure of revenues.

The monitoring of revenues could be improved by amending the operational parameters of the World Bank and the IMF to mainstream revenue transparency across their lending and technical assistance portfolios, by making it a condition of all aid and loans, and national poverty reduction strategy consultations.

The public disclosure of revenues by extractive companies and governments in resource-dependent countries will not stop all corruption overnight. But without transparency, there can be no accountable government, and efforts to ensure that resource revenues are well spent are likely to fail, with the effect of deepening poverty, instability, conflict and state failure. It is time for companies and governments to come clean on the revenues generated by natural resource exploitation.


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