Rich lands of poor people: resource governance deficit costs to millions

Why a natural resources rich country can’t feed its own people. Let’s review a recent study of Revenue Watch Institute on how the world failed on natural resource management

Most of the countries across the world who are blessed with enormous natural wealth are still developing or are under- developed. The extractive industrial sectors in most of these countries such as mining, oil & gas exploration run their economy. And surprisingly, large chunk of their population remains poor and aggrieved despite having unimagined natural wealth beneath their feet. This is the story of most of the mineral rich countries.

Way back in 2008, Centre for Science and Environment (CSE), a Delhi based NGO, studied the mining sector in India and concluded its findings in its 7^th report of State of India’s Environment named “Rich lands poor people: is sustainable mining possible?”.  CSE observed that majority of the mineral reserves in the country is also the home of the poorest people in the country. The huge mineral reserves under the houses of the poor which gives strength to the economy of the world, cannot earn enough bread for their survival. Therefore, the large portion of the population is also affected with naxalism or other kinds of public movements. The question was to find where the problem is! And it was found deep rooted into the government policies; lacking transparent governance, missing social and environmental contracts, lack of accountability and  weak rules, regulations and compliance.

CSE study put forward a mirror image of what is happening in most of the natural resources rich nations, not only under-developed and developing ones but also the developed nations. Now four years later, this is what has been concluded by Revenue Watch Institute (RWI), a New York based non-profit, in its report “Resource Governance Index”. The report was released globally in May 2013.

The NGO took a survey of 58 natural resource rich countries, as a representative sample, across the globe. The mineral and hydrocarbon extraction sectors in these countries capture 80 to 90 percent of the world’s production of petroleum, diamond and copper. For the countries that produce both the minerals and hydrocarbons, assessment was done for the sector which generates higher revenue.  For federal countries with decentralized natural resource governance like United States, Canada and Australia only one resource-producing region was selected. For India, government managed gas sector was studied.

The sample was assessed on four broad components: 
1) institutional and legal setting; 
2) reporting practices; 
3) safeguards & quality controls and; 
4) enabling environment.  

Performance on enabling environment was assessed for broader environmental governance based on accountability, government effectiveness, rule of law, corruption and democracy. Organizations such as World Bank, Economic Intelligence Unit, International Budget Partnership, Transparency International etc. supported with the information for this study.

Other three components assessed the performance specifically of extractive sectors for which information was collected through questionnaires from expert researchers in these countries. The reporting practice which is actually the best indicator to capture the transparency in a country was given the highest 40 per cent weightage while other three components had equally 20 per cent of total weightage.

The poor performer

More than half of the countries in the list could not meet even basic standards of resource governance. One fourth of the countries like Cambodia, Iran, Qatar, Libya, Equatorial Guinea, Turkmenistan and Myanmar failed to disclose any meaningful information about the extractive sector and lacked basic governance standards. Only 11 countries performed satisfactorily with more than 70 per cent score. Only Norway, United Kingdom and the United States (Gulf of Mexico) managed satisfactory score in all four components among all. Norway stood on the top with 98 per cent score and Myanmar at the bottom with 5 per cent. U.S. allies are among the poor performing countries whereas the oil rich countries like Saudi Arabia, Qatar, Iran scored less than 40.

India managed to get 12^th position with 70per cent score, which is surprising. The reason is that the assessment was done for natural gas sector instead of mining. It should be noted that gas sector has very small contribution to the revenue generation and is under government control. For India, mining sector is huge and equally mismanaged. 80 per cent of the mining in India is in coal and remaining for various metal and other raw materials such as gold, copper, iron, lead, bauxite, zinc and Uranium. If mining sector would have included by RWI, India could have performed miserably on all four components.  Having the gas sector included in the list India performed satisfactorily i.e. only on safeguard and quality control component.

Extraction sector is a grey yard globally

More than 60 per cent countries lack a freedom of information law. The most resource-dependent countries such as Angola and Saudi Arabia have no reporting requirements for extraction sector. In 20 countries such as Cameroon and Venezuela substantial resource revenues bypass the national treasury. Most countries failed to provide access to comprehensive information about extractive sector operations and payments. 21 countries even do not publish information on primary sources of revenue such as royalties, taxes and profit shares while 30 countries publish almost nothing about licensing practices. Most countries lack mechanisms for limiting conflicts of interest, curbing discretionary powers and ensuring the quality of disclosed information. Thirty-four countries scored less than 40 per cent in Enabling Environment component because of high levels of corruption, limited government effectiveness or opaque budgets, or lack democratic institutions and rule of law. Transparency is missing where it is needed most. Reporting practices were poor in almost 80 per cent of the countries, with citizens lacking access to fundamental information about the sector.

The 2013 Resource Governance Index

Source: Revenue Watch Organization

Non- resource dependent are better performer

41 countries in the list where economy is dominated by extraction sector, only 5 out of them, Norway, Mexico, Chile, Peru and Trinidad and Tobago could perform satisfactorily. Resource-rich countries performed weaker than less- dependent resource rich countries. The most resource dependent countries such as Algeria, Cameroon, the Democratic Republic of Congo, Equatorial Guinea, Iran, Libya, Qatar, Saudi Arabia and Turkmenistan performed worst.

Source: Revenue Watch Organization

Poor resource governance costs to millions

Major lack of transparency, accountability and governance deficit has been the core reasons for millions of people lying in poverty despite having enormous natural wealth with them.  Nearly, 450 million people across these 58 nations (10 percent of composite population) lives on 2 dollar a day only. It comprises the 50 per cent population of the countries that failed or performed weakly, 32 percent of their population that performed partially and 10 per cent of the population that performed satisfactorily. All the credits go to the striking resource governance deficit in these countries. Thankfully some countries managed higher standards of transparency and accountability, setting a standard for others.

To learn from

Being wealthy is not the pre-condition for good governance, which is clearly a message from the countries like Brazil, Chile, Colombia, Mexico, Peru, and Trinidad and Tobago being among the top performer.  It also indicates dependency on extraction sector does not rule out the transparency and accountability.

The extractive sector across the globe has political and economic importance so it is important and possible to maintain high level of transparency in the system. When a country like Timor-Leste which has severe economic issues can adopt transparent and accountable system for its oil exploration sector, it is very much possible for others. Guinea despite having weak minerals governance has recently initiated reforms to improve its institutional and legal framework. Afghanistan and Democratic Republic of Congo have however failed on overall resource governance, but recently decided to publish most of their extractive contracts. Indian mining sector is no where better. It has to learn from them. 

Author: Sanjeev K Kanchan