Fighting For Transparency In Emerging Markets
By: Karina Litvack & Elizabeth McGeveran
Corruption and government mismanagement of public revenue carries a high price tag for companies operating overseas. While the cost of poor public governance doesnʼt appear as a line item on the balance sheet, companies – and their investors – most certainly pay the increased cost of operations in markets distorted by corruption and lax governmental controls. As investors, it is in our own best interest to build more transparent markets that make it difficult for money moving through legitimate public channels to be spent inappropriately on arms and palaces or siphoned off into private bank accounts.
Many companies that refuse to bribe are still touched by corruption and mismanagement. In particular, companies in the oil, gas, and mining sector find that even when they play by the rules – paying billions of dollars in taxes, royalties, and signing bonuses into public coffers – the conditions that breed corruption create undesirable business environments. Beyond the obvious damage corruption and mismanagement inflict on local communities, they also have powerful knock-on effects for corporations and their ability to operate efficiently. Corruption and revenue mismanagement contribute to:
- Lack of infrastructure: Revenue that could have been used to deliver essentials such as roads, hospitals, schools, and fresh water is unavailable. Companies are expected to provide their own infrastructure, and also step into the breach by serving local communities – a costly distraction from their core competencies. While expedient, the provision of such services belongs to governments. At best, this model is unsustainable and, at worst, may inappropriately undermine local government and decision-makers.
- Underdevelopment of the small business community: Corruption undermines the growth of an efficient and competitive local business sector which prompts multinationals to go further a field to obtain goods and services. Local communities seeking job growth often resent outsourcing.
- Escalation of conflict and political instability: Revenue may be re-directed to buy arms or fuel local or regional conflicts. Armed conflict disrupts business operations and creates unwanted – and potentially deadly – security risks for company staff and local people. Ongoing conflict also results in higher security and insurance costs as well as wage increases as expatriate employees demand ʻcombat pay.ʼ
- Diminishing the ʻlicence to operateʼ: As local populations become isolated from the elites who benefit from resource wealth, the foreign companies come to be seen, rightly or wrongly, as complicit with corrupt behaviour. This impairs their local and global ʻlicence to operate,ʼ rendering them vulnerable to arbitrary action by government. Recent examples include changes in taxes or contractual terms as has been seen in Venezuela or Bolivia, and the acts of sabotage and violence which have occurred in Nigeria and Peru. In the longer term, this ʻguilt by associationʼ can seriously compromise a companyʼs commercial prospects in those markets.
Unfortunately, corruption and revenue mismanagement is vast and diffuse, making it difficult to eradicate. In many markets, companies wearily accept it as ʻjust another cost of doing businessʼ that they factor into the risk-return calculation and cannot combat individually. However, eradicating corruption is not a hopeless cause – just a difficult one that requires varied strategies and multi-lateral approaches involving as many market players as possible.
The Extractive Industries Transparency Initiative (EITI) is attempting to improve governance standards in resource rich developing countries by boosting disclosure of government revenue earned from natural resource contracts. In developed economies in Europe and North America, payments such as taxes, royalties, and signature bonuses are a matter of public record which enhances accountability of governments to their citizens. In contrast, these payments are deliberately confidential in many developing countries, leaving them vulnerable to misuse and misappropriation by officials.
The EITI, launched in 2002 by British Prime Minister Tony Blair, encourages host governments and extractive-sector companies to sign agreements for companies to ʻpublish what they payʼ and for governments to ʻpublish what they receive.ʼ This gives civil society the data to identify revenue gaps and call for government accountability.
The EITI has grown rapidly. It now embraces a variety of extractive-sector companies, northern and southern governments, investors, multi-lateral financial institutions, and non-governmental organizations. To date, more than 20 developing countries have pledged to pilot the EITI. Azerbaijan and Nigeria have forged ahead and already publish audited revenue and payment figures for the extractive-sector companies operating within their borders, and Kazakhstan is close behind with a Memorandum of Understanding to follow suit. Each country drives the process according to its own laws and regulations, but must follow a common, internationally accredited set of disclosure and audit principles to ensure the integrity of the data and consistent rules for both domestic and international companies.
The EITI has won official endorsement of the G8 nations, with particularly strong support from the UK, the U.S., France, and Germany. In addition, Norway has played an especially important role, thanks to its experience as an oil-rich nation. The prudent Norwegian Petroleum Fund – that provides inter-generational savings – serves as a useful model for resource-dependent developing nations.
At this stage, all the major publicly traded international oil, gas, and mining companies who depend on competitive access to capital are vocal supporters of the EITI because of the commercial benefits of curbing corruption.
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