Two recent events have highlighted the potential pitfalls of miners doing business in developing states.
The first was the departure of Tom Albanese as Rio Tinto’s Chief Executive following a $13.3 billion write-down that included $3 billion impairment charges on its Mozambique coal investment, Riversdale Mining. The other was the resignation of Professor Ross Garnaut (discussed in detail here) as Chair of the PNG Development Fund after a public disagreement with Prime Minister Peter O'Neill.
Mining companies, including those based in Australia, have long been attracted to developing states, and as a result face problems unique to an industry in which the most lucrative finds are often found in the most risky operating regions. These firms, driven by the necessity to add new and proven and probable reserves to their balance sheets, will continue to face significant levels of sovereign risk.
In addition to the risk-reward payoff for firms, growth in the mining sector presents both positives and negatives for developing states. Multinational mining firms such as Rio Tinto bring with them a level of legitimacy and authority over areas such as environmental practices and development of local communities.
An emerging area of scholarship highlights the role firms play in setting the rules and regulations within developing states. Known as private governance, this area of research suggests that firms will self-regulate, often going above and beyond what is required by the state. Furthermore, these regulations may positively influence other firms operating in similar areas, or may even be adopted by host governments.
The idea of promoting regulation appears incongruent with the aims of mineral extractive firms who, like all corporations have a responsibility to shareholders to maximise profits. However, the evolution of the Extractive Industries Transparency Initiative (EITI) shows us that firms can indeed be dually motivated by profit and an acceptance of the norm of transparency.
The initiative is entirely voluntary and yet it currently has 70 corporate supporters, all of whom support the initiative’s core goals of disclosure and improved governance of mining industries in developing states. However, it should be noted that there is no requirement for these firms to disclose payments to governments, with this only occurring when the state is an EITI Compliant Country.
While the EITI is not perfect – its reliance on transparency as a norm results in several weaknesses – it is a way in which firms can contribute positively to the development goals of host states. Mozambique is a Compliant Country within the EITI, meaning the country’s ability to reconcile taxation from its emerging mining industry revenues has been deemed to be adequate.
In addition the country ranks 123rd of 176 countries included in Transparency International’s 2012 Corruption Perception Index. This ranking places the country on par with Vietnam and Sierra Leone, and suggests that while taxation from the country’s mining industry can be accounted for, there remains a distinct lack of transparency elsewhere in the economy.
Rio Tinto participated in the most recent EITI reporting round in Mozambique, released in 2012, with the discrepancy between taxation declared as paid by Rio Tinto, and what was received by the government lower than the 3% threshold set by the EITI.
Overall, the Mozambique EITI team found that taxation payments from all companies largely reconciled, finding only minor discrepancies. As a leading multinational company operating in Mozambique, Rio Tinto’s support for the initiative is important in affirming the initiative’s legitimacy.
While Rio Tinto’s experience participating in reconciliation process was a positive one, it unfortunately did not reflect a strong relationship with the Mozambique government. Upon the announcement of Albanese’s departure, it was revealed that a disagreement with the government over plans to barge coal down the Zambezi (contrary to the government’s wish that it be transported by rail) and a lack of Portuguese speakers amongst Rio’s in-country staff had strained relations with the government, contributing to the firm’s huge writedowns.
Conversely, Papua New Guinea is yet to join the EITI. As recently as September last year the government showed interest in applying for membership and appeared openly committed to transparency in its mine licensing process. Unfortunately the implementation of any transparency measure in Papua New Guinea - including the EITI - would be hampered by pervasive corruption which sees Papua New Guinea ranked 150th on Transparency International’s Corruption Index.
The recent departure of Professor Ross Garnaut, a long-time Papua New Guinea watcher, as head of the PNG development fund was a result of the decision by PNG Prime Minister Peter O’Neill to effectively ban Professor Garnaut from entering PNG.
At the time, Professor Garnaut was Chair of the $1.4 billion PNG Sustainable Development Program, a development fund established by BHP as a response to the Ok Tedi environmental disaster. The dispute arose from comments by Professor Garnaut, which were interpreted as offensive by Mr O’Neill and resulted in a travel ban and eventual resignation.
This reminder of the sovereign risk that Australian mining companies face in return for lucrative mineral deposits should, however, not overshadow the ability Australian firms have to lead the way in contributing to improved mining industry governance in our nearest neighbour.
Australia has signed a memorandum of understanding with the Papua New Guinea government supporting its aims to eventually join the EITI. This is an important step, but also needs to be accompanied by pressure on Australian mining firms to exercise private governance and lead on the issue of transparency and disclosure – as well as on important environmental considerations arising from mineral extraction.
While it’s been a tough week for Australian mineral extractive firms operating overseas, we should not lose sight of the benefits these firms can bring to host states. Research on private governance tells us that firms can both increase profitability and contribute to positive development outcomes – often through voluntary membership of initiatives such as the EITI.
The promotion of transparency and a focus on disclosure can not only assist citizens of developing states in holding their governments to account, it can also benefit the firms involved. Firms operating in EITI countries are likely to engage in less corruption and graft as well as meeting shareholder expectations of best-practice social responsibility.
As Rio Tinto’s experience in Mozambique shows us, while private governance is not a panacea for the potential downside risks of mining in the developing world, it remains one important piece of the puzzle.