Remarks to WTO Public Form 2014: Working Session 16
By Edward Harris, Head of Communications, Africa Progress Panel
Thank you for the introduction, Peter, and for this opportunity to talk.
I am going to focus my comments on oil, gas, and minerals in Africa, which, by some estimates, holds about a third of the world’s mineral reserves, and even higher proportions of the world’s deposits of cobalt, platinum, and diamonds.
If managed and traded correctly, these and other natural resources – including oil – could transform the continent. Natural resources could provide governments with precious revenues to spend on, say, health, education, energy, and infrastructure. They could unlock economic opportunity and help generate vital jobs.
This issue is important not just for Africa. We all of us here in this room have a vested interest in Africa’s success. For better or worse – Africa is set to play an increasingly influential role in the world.
In the good scenario, Africa develops a large, healthy, well-educated labour force. This allows it to become the world’s largest consumer market, a global hub for manufacturing, and a politically stable engine of growth for the global economy.
In this scenario, and based on IMF estimates, Liberia doubles its GDP, lifts its health and education, and builds much-needed infrastructure to create a virtuous cycle of growth. Mozambique and Guinea use their natural resources to eradicate extreme poverty altogether.
In the bad scenario, however, Africa’s young population grows faster than jobs can be created. The hopes and frustrations of a young but unemployed generation become politically and socially destabilising. The instability spills beyond the continent’s coasts and borders.
Within Africa, these different scenarios are already playing out.
Niger has been supplying uranium to France for the past fifty years, for example, but is ranked by the United Nations as the least developed country in the world. Tuareg nomads wage low-level war in the north and foreigners in the country fear kidnap by Al Qaeda. A third of France’s light bulbs are lit with Niger’s uranium, but 90 percent of the population has no access to electricity.
Further to the south, the Democratic Republic of the Congo has been described by some as a “mineral superpower”, but the United Nations ranks it the world’s second least-developed country. Violence rumbles on in the east, where more than 5.4 million have died since the early 1990s, the deadliest conflict since 1945. The UN has more than 21,000 peacekeepers in the country at a cost of US$1.4 billion each year.
Further to the south, however, Botswana remains a textbook example of how to convert mineral wealth into social and economic growth.
In the more than half-century since three small diamonds were first discovered in a remote river bend, this semi-arid, landlocked country has transformed itself from one of the world’s poorest countries to become one of Africa’s most prosperous nations. Noted for its political stability, Botswana and its wildlife attract tourists from all over the world. Its per capita income stands at more than US$7,300 per year.
For sure, the political leaders of all these countries have critical choices to make, but the international community and global business must make important contributions too. As I said, we all have a vested interest.
For the purposes of this afternoon’s meeting, I’d like to highlight three broad policy themes – tax, transparency, and beneficial ownership.
Other themes such as fair contracts and better government spending are also an important piece of the equation that turns natural resource wealth into social and economic progress.
But I’d argue that fair tax, transparent financial flows, and transparent company ownership are more current right now. They are important reputational issues too.
My first policy theme – tax – revolves around the need for natural resource companies working in Africa to pay fair tax.
This is not uniquely an African story, by the way, or even a uniquely natural resource story either. I have been fascinated to read this week’s media stories about the European crackdown on tax arrangements between Ireland and Apple. Apple reportedly has more than US$54 billion worth of profits tied up in Ireland, largely untaxed.
Put another way, national and international tax systems have failed to keep pace with globalisation in the 21st century, where multinational business efficiently shift profits to jurisdictions with the lowest rates of tax.
To paraphrase, Kofi Annan, Chair of the Africa Progress Panel, the organisation for which I work, tax avoidance may be legal, but the scale of it has become repugnant.
If multinationals avoid tax and do not pay for health and education, why should they enjoy the benefits of a healthy, educated workforce?
In Africa, tax avoidance and evasion can be the difference between life and death.
Every year, the continent loses an estimated 5.7 percent of its GDP to illicit financial flows. The very words – “illicit financial flows” – suggest association with criminal and corrupt activity. In Africa’s resource-rich countries, these illicit flows are mostly linked to tax evasion in the natural resources sector.
Just one single tax evasion technique – trade mispricing – costs Africa an estimated US$38.4 billion per year, more than the continent receives in either international aid or foreign direct investment.
The good news is that international tax reforms are gathering speed. Tax evasion and avoidance are becoming harder.
Some 65 countries, covering about 98 percent of tax payments, have now committed to the automatic exchange of tax information, for example. They should be exchanging tax information by the end of 2017.
Meanwhile, the OECD has introduced a new tax reporting standard, the so-called “country-by-country” reporting, which will allow tax officials to identify potential avoidance and quickly follow up.
This is not perfection.
Automatic exchange of tax information still excludes about a third of the world’s population. And the country-by-country reporting will be private to tax authorities, not public as many had hoped.
But these reforms are heading in one direction. Their benefits must now be extended to African and other lower income countries who have largely been excluded from these reforms so far.
G20 and other world leaders should bring African nations into global tax reform discussions, support capacity building in Africa to tackle tax evasion and avoidance, and extend the automatic exchange of tax information to African tax authorities too.
Transparency of money flows
My second theme is transparency, the need for legislation so that extractive and trading companies around the world are more transparent with their payments for oil, gas, and minerals.
This transparency is critical for Africa. First, it reduces corruption and waste. Second it facilitates discussions on how best to manage a country’s natural resources.
If communities can see how much their government is receiving for gold from the nearby mine, then they can ask more serious questions about how to use that money. This helps, by the way, to build trust with local communities – the so-called “social licence” to operate.
Despite cynical resistance from the US oil lobby, the moral and intellectual argument is won on this issue. The European Union has introduced its own transparency legislation for European-listed companies; the Extractive Industries Transparency Initiative now has 29 compliant countries – of which 17 are in Africa – and many more are on the way.
Even the former head of BP, Lord Browne, has argued for more transparency. And in August last year, for example, investors representing more than US$5.6 trillion, wrote a public letter urging the US Securities and Exchange Commission to implement transparency legislation. Transparency makes their investments more stable and secure, they said.
Transparency can also spark meaningful change.
Auditors in Nigeria, Africa’s first EITI-compliant country, caused a political storm when they identified US$800 million worth of oil money missing from government coffers.
Besides the heated discussions that followed, the audit also led to the closure of several procedural loopholes, saving the equivalent of Nigeria’s health, education, and power budgets combined.
Closer to home, Switzerland may not be close to any major shipping routes, but it accounts for as much as a third of the global trade in oil and two thirds of the global trade in metals and minerals. Most of the commodities traded in Switzerland do not even pass through this country.
Meanwhile, the combination of Switzerland’s financial secrecy, the size of its commodity trade, and its non-membership of communities such as the European Union, raises questions about accountability.
An estimate by the Center for Global Development suggested that Swiss-based traders may be engaging in tax evasion worth as much as US$120 billion per year.
Switzerland could quickly tackle such reputational issues by meeting international transparency norms. But by failing to regulate its commodities sector, Switzerland may unwittingly be sustaining corruption and mismanagement.
Beneficial ownership / Transparent company ownership
My third theme is around beneficial ownership – the need for company ownership to be completely transparent.
Tax evaders, terrorists, and corrupt politicians use anonymous company ownership to protect their dirty money. Using anonymously-owned companies, they can open a bank account, buy a yacht or mansion, and move money around the world – at will and virtually without fear of identification.
Such companies are registered all around the world in financial centres famous for their secrecy.
Last year’s Africa Progress Report described five mining deals in the Democratic Republic of the Congo, for example, in which national assets were sold at below market prices to anonymous companies, registered in the British Virgin Islands.
We don’t know who pocketed the difference when these assets were sold for profit, because we don’t know who owns the companies. But we do know that the DRC lost an estimated US$1.36 billion in the process, an amount equivalent to twice its combined budgets for health and education. In a country which has some of the world’s worst malnutrition, child mortality rates, and an estimated more than 7 million children out of school, this should trouble us all.
Nudged along by the excellent work of organisations such as UK-based Global Witness, the world has made progress on company ownership too.
The UK now looks set to have a public registry of companies in place by early 2016. The European Union could vote on legislation for registries of companies and trusts as early as this year. And G20 leaders are expected to make a statement on this issue when they meet in Brisbane next month.
To be sure, loopholes still need to be closed. Registries of company owners must be public and they must be extended to trusts and foundations in order to be completely effective.
The only losers from this transparency are criminals, tax evaders, and corrupt politicians. But for the rest of us, it should be win-win. Investors do not like surprises.
To give an example, in 2012, it emerged that three of the most powerful officials in Angola had held concealed interests in a US-listed company called Cobalt International Energy. The lack of transparent company ownership led to an investigation by the US Securities and Exchange Commission and a drop in the company’s value to the tune of US$900 million.
Closing the loopholes and extending the principle of transparent company ownership around the world will bring benefits for government, business, and citizens alike.
The underlying theme, in conclusion to all these issues is the need for Africa’s citizens to get a fair deal from their natural resources.
The trade in Africa’s commodities certainly generates jobs, business, and economic activity elsewhere in the world, but it is not always obvious that the majority of Africans have benefitted themselves.
As consumers of Africa’s oil, gas, and minerals, we all bear some responsibility for this state of affairs and – most importantly – for Africa’s future.
Listen to audio here.
Photo credit: WTO