Aug '13

MAC Economic Commentary

Countries, companies, citizens benefit from greater transparency

By Brendan Marshall

Resource extraction is a powerful ally of international development if done responsibly. Tremendous potential exists for the sector to assist many of the world’s resource-rich but poor countries in elevating their living standards. For this to occur, however, a number of conditions need to be met.

Transparency through financial disclosure, when implemented properly, enhances responsible resource development and helps address a key challenge impacting the broad social acceptance that underpins many companies’ privilege to operate. But this privilege can be compromised when the consequences of mismanaged resource revenues create an atmosphere of distrust among project stakeholders and, in some instances, escalate into events that disrupt operations or delay project development.

Part of the privilege to operate lies in the project-generated benefits the host communities receive by virtue of development and continued operation. By creating jobs and business opportunities, developing infrastructure, providing skills training and building capacity, resource development can meaningfully reduce poverty through direct and indirect social and economic impacts.

In many instances, governments accrue significant benefits through the collection of mining taxes and royalties. These revenues have the potential to be transformed into valuable public investments such as health and education services and infrastructure. Such investments would reinforce a company’s privilege to operate while also addressing local challenges through investment. Barriers remain, however, that prevent the potential benefit from such investments in the public interest from being realized.

Some developing countries have weak civil society institutions. Poor governance and mismanagement have, at times, meant that the expenditure of extractive sector revenues have not always enhanced the public good as one might expect. In some cases, revenues collected by public officials have not made their way into government coffers. Secrecy around flows of funds from the extractive sector has also contributed to mistrust between local citizens, their governments, and companies, at times leading to outright conflict.

These challenges are systemic and, lying within the host country’s jurisdiction, have historically been beyond the purview of any single company to address independently. Acknowledging this, organizations such as the Extractive Industries Transparency Initiative, Publish What You Pay (PWYP) and the Revenue Watch Institute (RWI) have promoted their vision for the transparent and accountable management of natural resources and the revenues generated there from.

Efforts have sought to equip communities with the information necessary to hold governments accountable for the expenditure of extractive sector revenues. This entails developing credible frameworks for the public disclosure of company payments to governments, and government reporting of payments received. By developing an accountability framework, the theory holds that resource revenues will be more likely to benefit the citizens and rightful proprietors of the resources.

As these frameworks become mainstream, investors managing significant portfolios that are key to the development of resource projects have been more vocal about their desire for strong disclosure rules. Both the ethical dimension of good-­conscience investing and the desire to avoid risk associated with projects operating under volatile regimes have come to the fore.

Many countries and companies are now participating in these frameworks, and individual countries, like the U.S., have implemented their own rules independently. This momentum has raised the profile of transparency over the last decade, culminating with the G8 adopting it as the theme for recent meetings held in June. Immediately prior, Canada announced its intention to implement a transparency framework for company payments to foreign governments, with consultations beginning later this year.

Given that roughly 60 per cent of the world’s mining companies are registered in Canada, and more than 800 Canadian exploration companies are active in 100 countries, Canada’s commitment to this initiative is significant. Canadian stock exchanges, the Toronto Stock Exchange and TSX Venture in particular, host the lion’s share of the total global value of mining sector market capitalization, and mining equity capital raised.

In July 2012, the Mining Association of Canada, the Prospectors and Developers Association of Canada, PWYP and RWI signed a memorandum of understanding to develop a Canadian framework for mining and oil and gas companies to disclose payments made to governments. The working group recently completed the draft framework and has made it publicly available for comment. The aim is to make informed policy recommendations to federal government policymakers and/or provincial security regulators for the Canadian adoption of mandatory disclosure requirements based on the framework.

View the document here

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, transportation, innovation, international trade and investment, and energy and climate change.

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