Transparency and Anti-Corruption

3. An extractive industry investor’s viewpoint

It is helpful for government employees to first understand the corruption concerns of foreign investors in the extractive industries. In this way, host government employees are better able to anticipate problem areas and address them effectively while continuing to regulate the development of local resources in the most beneficial way for the host country’s public at large.

The extractive industries are commonly defined to include both mining and oil and gas and are collectively referred to in this topic as the “mineral industry” or the “extractive industries”. These industries have some special characteristics that make them particularly susceptible to corruption.

Vulnerability to corruption

General characteristics of the extractive industries

It is helpful to examine the differences that investors in the extractive industries face compared to investors in other industries. Mineral resources (including oil and gas) are buried beneath the ground and finding an economic mineral resource is difficult and often expensive. Locating, developing and constructing a modern mine usually requires hundreds of millions of dollars in capital investment. Exploring for oil can also costs millions depending on how many dry oil wells are encountered before a suitable oil reservoir is found. While construction times are much longer for mines, oil and gas often require pipelines, or railways and processing plants to bring the product to market in the most suitable form.  Both mine and oil and gas production also have reclamation issues when mines or well-sites are eventually shut down. Both mining and the oil and gas business are risky investments, with the added complication that the minerals that can be more easily discovered are often located in countries that, from a foreign investor’s perspective, may have a high level of political risk and corruption.

Time is money

Since mineral production is capital intensive, particularly for the mining industry, financing is normally required. Such financing must not only cover the cost of building a project, but also provide the initial working capital to allow the project to operate until cash flow from the sale of minerals is established on a regular basis. The loan normally would also provide funds to cover initial payments of the interest incurred on borrowings made during the construction period. Often financing requires that the project be built by a certain date. The need for speed makes mine developers especially susceptible to corruption from any unscrupulous bureaucrats who have the power to prevent, delay or halt the approval or construction process.

Government regulation

The mineral industry is much more highly regulated by government than many other industries. There are several reasons for this:

Nationalism - In most jurisdictions, minerals are owned by the state and governments regulate the acquisition of the rights to explore for and develop facilities to exploit such minerals. Consequently, mineral wealth is often considered to be part of the ‘National Patrimony’ in many countries. The populace consider these minerals as theirs to be exploited for the benefit of the people. They expect their government to ensure that this occurs.

Financial impact - Both modern mining and oil and gas development can involve huge sums of money which may be out of proportion to the overall wealth of the countries where the operations are situated. Naturally, the host government wants to obtain its share of this wealth by means of taxes, royalties and perhaps a direct carried interest in the project.

Environmental Impact - In the case of oil and gas projects, exploration can have a significant impact since it can cover an extensive area, some of which may be pristine in nature or have other values that society wants protected. More recently, oil and gas operations can also cause concern about their carbon footprint. In the case of a mining project, the environmental effect of the project can pose a hazard to the environment or human health in local areas if adequate precautions are not taken. Government approvals often require baseline studies and ongoing monitoring by both the operator and the government to ensure the impact on the ecosystem is as predicted. Some of the areas that are regulated are the discharge of effluents, water quality in local waterways, acid rock drainage, air quality, and tailings impoundment. In both oil and gas and mining projects, reclamation and rehabilitation of all disturbances caused by the project is another area regulated by government.

Social impact - Mineral projects are often located in remote or rural areas where a traditional way of life prevails. In such circumstances, the impact of bringing in numerous outsiders to work and paying them at much higher rates than those earned by the traditional residents is bound to affect the community. Adequate consultation with local stakeholders is often required by government in order to ensure that any government approvals for the project are consistent with a broad based consensus.

Safety and unions - Drilling operations and mines are inherently dangerous. A history of major accidents involving the loss of large numbers of lives, particularly in the coal sector, has resulted in heavy government regulation governing safety and union representation of the workers.

Impact on indigenous communities - Since mineral projects are often located in remote areas where indigenous people are likely to live and be affected, the extractive industry frequently has to deal with special laws designed to protect these people’s rights.

Transport requirements - Mineral projects are heavy users of roads railways and ports. The development of such a project often involves the development or upgrading of such facilities. Once again, extractive industry developers must deal with another set of officials that other types of investors may be able to avoid.

Energy requirements - In the case of mines, which are energy intensive, the proponent often has to negotiate to secure adequate power from regulated utilities. For the eight reasons mentioned above, the extractive industries have become heavily regulated. Because of the many approvals required from public officials for the exploration, development, construction and operation of a mineral project, the extractive industry has greater potential exposure to corruption involving public officials than many other industries.

Lack of choice of location

In the manufacturing industry, potential investors can look at a national market and decide whether or not they wish to locate a plant in that country. If they decide to proceed, they have choices about the region or community in which they will construct their plant and the scale of their investment. If they encounter problems with corruption in their planning stage, they can always threaten to locate elsewhere.

In the mineral industry, known and available economic mineral deposits are so few in number that there are tremendous pressures to proceed to explore and develop them, even if they are located in countries that are very difficult in which to do business. Consequently, the mineral industry operates not only in some of the most corrupt countries in the world, but often in difficult locations where companies in other industries would not choose to invest. In these circumstances, it would not be surprising to find these mineral companies being targeted for favours by underpaid public officials or those open to corruption.

Sudden wealth and easy money image

Mineral projects often have a very high profile, especially in less developed countries. Once it is known that a major mineral company is attempting to acquire exploration and development rights, the local populace has ‘dreams of untold wealth’. There is often a feeling that this is a once in a lifetime opportunity to enrich oneself by whatever means are necessary.

Previous experience

Often a major mineral company acquires a mineral deposit from a junior exploration company, or obtains the property from the government after the property has been held by a junior exploration company. Many of these companies are looking for a quick turn-over of the property and not the long-term relationship with local people and government that necessarily accompanies operations. Some of these companies have shown a tendency to take the expedient way and bribe public officials to obtain exploration rights or other approvals. If a major mineral company acquires a property from such a company, or after such a company has dropped the property, the expectations of the local people are often that such activity by foreigners is normal and will continue.

Sense of entitlement

Local peoples in the surrounding community or region often feel that they are particularly entitled to something from the project. Their view is that this their community or region and, if someone is going to make huge sums of money utilising the community’s or region’s resources, they should benefit. This often occurs in a highly centralised form of national government, where local regions do not feel adequately represented or are not receiving their ‘fair share’ of national revenues from mineral resources in their region. The argument is made that since the local region must bear the brunt of the significant impact that the project will have on the environment and their traditional way of life, the locals are entitled to benefits. If they are not going to receive them by some legal mechanism, they argue that it is not morally wrong to obtain them by other means.