"Raw materials wealth – the population must also benefit"

Blessing or curse?

Natural resource wealth is not always a blessing. Often, it goes hand in hand with poverty, corruption and conflict and seems to hinder rather than help sustainable development. For mineral wealth to have a positive impact, you need transparent policies and commodity flows and sustainable production systems.

Most people think of oil states as wealthy states. But Nigeria proves that sometimes the opposite is true. It is Africa's leading oil producer, and yet it is one of the world's 20 poorest countries. What's more, the people living in the Niger Delta, the country's oil-producing region, are among Nigeria's most impoverished communities, with a large percentage of the population having to survive on less than one dollar a day. For these people, 'black gold' has not brought prosperity or development. Instead, it has increased corruption, social problems, environmental damage and armed conflict. The many billions of US dollars in oil revenue that have poured into the country during its oil industry's 50-year history have completely bypassed these communities.

Oil and other natural resources are a lucrative business, accounting for more than one third of world trade. The United Nations estimates that global consumption of these resources could almost triple to 140 billion tonnes a year by 2050. This sharp increase is being driven by world population growth, high levels of consumption in industrialised countries, and the ongoing transformation of emerging economies and more advanced developing countries into modern industrial nations. With a combined GDP of almost USD 9 trillion, the flourishing BRICS economies alone – Brazil, Russia, India, China and South Africa – comprise 40% of the world's population and have accounted for 45% of global economic growth since the onset of the latest financial crisis, according to these countries' own figures and a recent study by Louisiana State University. Experts like investment guru Jim Rogers, who has been active in the resource segment for decades, are predicting that more resources will be extracted in the next 25 years than in the whole of human history.

Some produce, others consume

Metals and minerals, oil, coal and gas generally do not originate in the regions where they are processed or consumed. Germany, for example, is one of the world's largest consumers of raw materials. It imports its energy resources, metals and numerous industrial minerals from more than 160 countries. This sounds like a good basis for lively international trade and economic prosperity throughout the world – but in reality, it can be problematic for importing and exporting countries alike.

This is due to one simple fact: the deposits of these natural resources are scattered unevenly around the globe, and many of them lie in politically unstable countries. Three quarters of the world's oil reserves are located in the 'strategic ellipse', which extends from the Middle East to the Caspian Sea region and onwards into northern Russia, and around 13% are extracted in Africa. Uranium is imported not only from Canada and Australia but also from Kazakhstan, Niger and Russia. The world's leading source of bauxite ore for aluminium production is Guinea. Three countries – South Africa, Russia and Zimbabwe – account for more than 90% of world platinum production. Tantalum ore is found in Australia, Brazil and Canada, but also in Ethiopia, Mozambique, Rwanda and the Democratic Republic of the Congo.

Growing importance of access to resources

Against the backdrop of the world's growing resource hunger, the processing industry is facing supply bottlenecks that put its competitiveness at risk. The German Government and the EU have listened attentively to the demands voiced by numerous companies and industry associations for resource security to be adopted as a political goal. However, this has not produced the commitment from governments that many companies wanted. In contrast to the situation in China, where the government acts as a kind of 'central purchaser' of natural resources for its domestic industry and quite openly makes its development assistance to Latin America and Africa conditional on a guaranteed supply of metals from the countries concerned, German companies have to source their inputs themselves – and this situation is unlikely to change. In its Raw Materials Strategy, published in 2010, the German Government makes it clear that 'it is basically a matter for the companies themselves to ensure their own supply of raw materials.' According to the Strategy, the German Government aims to establish raw materials partnerships with various producer countries, whereby its approach 'closely integrates foreign, economic and development objectives.' In other words, as much importance is attached to economic and social development in the producer countries as to safeguarding the supply of raw materials for German companies. Meanwhile, the EU has adopted 'active resource diplomacy' as an objective, with strategic partnerships and policy dialogue meant to secure access to resources. In 2010, the African Union Commission (AUC) and the European Commission agreed to engage in bilateral cooperation with regard to access to raw materials and development, focusing on three areas: governance, infrastructure and geological knowledge and skills.

Continued focus on sustainable development

According to the German Government's Raw Materials Strategy, specific measures will continue to 'follow the principle of sustainable development'. Ten of the world's least developed countries are in sub-Saharan Africa. They are expected to fall short of most of the Millennium Development Goals (MDGs) adopted by the United Nations, even though they are rich in resources.

Great poverty despite natural resource wealth is known as the 'paradox of plenty' or the 'resource curse'. In many countries, such abundance often goes hand in hand with poverty, poor governance and armed conflict and seems to hinder rather than help sustainable development. But even industrial nations with well-functioning systems of governance are not immune. In the 1960s, the Netherlands generated substantial revenues from its natural gas exports. This made its currency stronger compared to that of other nations, making its other export-oriented sectors much less competitive. Wages and prices also increased along with inflation. These symptoms of 'Dutch disease' are currently afflicting a number of countries that are heavily dependent on natural resource exports, notably Venezuela and Azerbaijan.

However, the 'resource curse' and 'Dutch disease' are not the inevitable consequences of natural resource wealth, even if these resources are located in less developed countries. Botswana has proved the opposite for decades.

In 1966, when Botswana gained its independence, it was one of the world's poorest countries. One year later, diamonds were discovered in Botswana's Kalahari Desert, and since 1969, Debswana, a joint venture between the Government of Botswana and De Beers, the South African diamond company, has carried out diamond-mining operations in the country. This is a multi-billion dollar business, extracting around 25 million carats a year – a quarter of global production. In 2006, the Government of Botswana and De Beers established the Diamond Trading Company Botswana (DTCB) as a 50:50 joint venture responsible for sorting, valuing, sales and marketing. More than 50% of the profits go to the state – and the government of Botswana not only has the political will to redistribute these profits equitably; it also has well-functioning institutions, democratic structures and – according to Transparency International – the lowest level of corruption in sub-Saharan Africa.

Politics and business promote transparency

But without this type of framework, there is a real risk that diamonds in particular will not foster economic and social development but will instead be used to finance arms acquisitions and civil war. Sierra Leone, Angola and the Democratic Republic of the Congo are prime examples of how countries are blighted by the trade in 'conflict diamonds'. Diamonds are precious stones that are in great demand all over the world and, being so small, are easy to traffic and difficult to trace. So in 2003, the international diamond industry and non-governmental organisations launched the Kimberley Process, which enables governments to certify shipments of rough diamonds as 'conflict-free'. This innovative approach has yielded some success in breaking the link between diamonds and conflict. But for Ian Smillie, the architect of the Kimberley Process, it does not go far enough: he points to a lack of willingness on the part of some governments to take effective action against the illicit diamond trade and human rights abuses.

Further backing for transparency in natural resource supply chains has come from the political arena. In July 2010, for example, US President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the 'Dodd-Frank Act' for short. Section 1504 of the Act requires US stock market-listed companies operating in the mining and oil industries to report any payments made to foreign governments. The European Commission is already working on a similar rule for Europe. It might also take up Section 1502 of the Dodd-Frank Act. This calls for the adoption of legislation governing disclosure for 'conflict minerals' – gold, cassiterite, wolframite and coltan – originating in the Democratic Republic of the Congo and ad-joining countries. The Act thus aims to improve transparency in the trading of minerals which have been used to fund conflicts in the region, resulting time and again in human rights violations on a massive scale. US stock market-listed companies will henceforth be required to disclose their supply and product chains if they obtain any of these resources from the region. A sensible approach – but one which may prove to be premature. For some years now, projects have been under way, for example, to certify mineral resource supply chains or support the chemical and mineralogical identification of tantalum ore concentrates from recognised or registered companies within these supply chains, but the new structures are not yet in place throughout the region. Faced with the provisions of the Dodd-Frank Act, companies may well look for other sources of supply on the world market – and the countries concerned could well lose their key markets for a long time to come.

But it is not only legislators who are now demanding that raw materials should come from unobjectionable sources: many companies are doing the same via their Corporate Social Responsibility (CSR) programmes. 'There is now a much greater awareness of these issues among customers and consumers,' says Michael Rösch from GIZ, whose field of expertise includes transparency initiatives. 'The industry's need for transparency goes beyond CSR, however: transparency in contractual relationships and in the legal and tax systems in resource-producing countries must be viewed as a vital safeguard against corruption, as well as being essential for legal certainty and successful economic cooperation.' This is the starting point for the Extractive Industries Transparency Initiative (EITI), launched at the World Summit on Sustainable Development (WSSD) in Johannesburg in 2002, with Germany in particular being a strong advocate for the Initiative. The EITI focuses on disclosure of payments made by extractive industry companies and disclosure of government revenue in the resource-producing countries. At present, 11 countries have achieved compliance with the EITI Principles and Criteria. A further 23 candidate countries are working towards compliance, and four other countries are preparing to embark on the EITI process. The EITI is supported by a large number of governments, international organisations including the UN and the OECD, numerous oil, gas and mining companies, and major investment institutions.

'A mix of coordinated instruments is needed if resource wealth is to benefit sustainable development,' says Kristian Lempa, GIZ's resource governance expert. For example, certification schemes, says Lempa, should also aim to build the capacities of the local administration that will ultimately be responsible for monitoring and enforcing the relevant standards. However, various other steps are required to achieve good resource governance, as a World Bank value chain analysis of the resource sector shows. These steps include the transparent publishing of payments and revenues, improved contracts and contract negotiations between companies and governments, the involvement of local communities and civil society organisations in decisions affecting them, transparency in the use of government revenues, and the adoption of environmental and social standards. The resource governance strategies that GIZ is now pursuing through various bilateral and regional programmes in Africa and Asia on behalf of the German Government are correspondingly comprehensive and diverse. Their main goal is to achieve more transparency and accountability, better oversight, and a greater awareness of the responsibilities associated with resource extraction and the use of revenues.

In Africa, the projects are generally aligned with local blueprints for reform, such as the Africa Mining Vision, launched in 2009. They also tie in with German and international engagement, within the EITI, G8 and World Bank frameworks, for improved transparency in the resource sector. In two of West Africa's post-conflict countries, Liberia and Sierra Leone, BMZ and GIZ have for the first time adopted a strategic and systemic approach to regional resource governance since 2009. This has helped to mitigate conflict potential in mining areas, modernise concession management as a means of combating corruption, improve efficiency in administrative procedures, and substantially increase government revenue from resource extraction. For the 11 African countries comprising the International Conference on the Great Lakes Region (ICGLR), regional initiatives to promote peace, stability and development are the priority, with a particular focus at present on the initiative to curb the trafficking of conflict resources.

In the Democratic Republic of the Congo, mineral resources are being exploited illegally in the east of the country to finance weapons and rebel groups. Here, the focus is on supporting good governance in the exploitation of mineral resources. Besides supporting implementation of the Extractive Industries Transparency Initiative (EITI), GIZ, on behalf of BMZ, is working with the German Federal Institute for Geosciences and Natural Resources (BGR) to introduce a certification system for combating illegal resource exploitation. Improving transparency via the EITI is a particular focus of attention for the members of the Economic and Monetary Community of Central Africa (CEMAC): Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of the Congo. These countries are determined to reduce the discrepancy between the wealth of natural resources in the region and the poverty of the general population and to mobilise indigenous resources more effectively in the fight against poverty. Their efforts are receiving support from the 'Strengthening Governance in Central Africa's Extractive Sector' programme, commissioned by BMZ. Besides focusing on EITI, this cooperation also aims to turn the regional organisation into a capable partner for its member states in the field of extractive resource governance, harmonise mining and investment legislation, and promote more efficient use of public revenue from the extractive sector.

Ghana is a good example of the kind of success that can be achieved by implementing the EITI standards. The country generates 40% of its export earnings and more than 10% of its tax revenues from the extractive industries, mainly gold mining. Ghana became an EITI pilot country in 2003 and has been receiving advice from GIZ, on behalf of BMZ, on implementing these standards since 2006. Having increased its transparency in this way, Ghana is now better able to achieve a balance between investment incentives and tax compliance. It is also establishing the necessary parameters so that revenues from the extractive industries are used to benefit the public. The 'Good Financial Governance (GFG)' programme in Ghana also supports the reform of tax policy/administration and the modernisation of public finances. Under BMZ's develoPPP programme – a framework in which business and development agencies jointly plan, finance and implement projects – a development partnership has been initiated with the German software company SAP AG. The outcome is a modern and secure IT solution for the EITI in Ghana, which Ghana's Ministry of Finance and Economic Planning will use to monitor, analyse and consolidate payments and revenue flows from its extractive industries, and which can also be utilised by mining companies.

Advice also needed in Asia

On behalf of BMZ, the Federal Ministry of Economics and Technology (BMWi), the Federal Foreign Office (AA) and the World Bank, GIZ is implementing various projects in Asia that focus on sustainable development in the resource sector. Mongolia, for example, faces major challenges relating to the social and environmental sustainability of its resource exploitation. It therefore requires a strategy to utilise the revenue from its massive deposits of gold, copper, coal, molybdenum, fluorite, zinc, uranium, lead and oil in order to promote sustainable, broad-based growth in line with its development needs. This is the starting point for the Integrated Mineral Resource Initiative (IMRI), which is being implemented by GIZ in cooperation with the German Federal Institute for Geosciences and Natural Resources (BGR) and the Physikalisch-Technische Bundesanstalt (National Metrology Institute – PTB). The Initiative focuses on building capacity and expertise in the Mongolian authorities and ministries and on developing a national pool of competent advisors. It also delivers training for private sector organisations and Mongolian and foreign companies. In parallel, domestic value chains based on the resource sector are being established. In Afghanistan, GIZ's activities in the resource sector include capacity building for the Afghanistan Geological Survey.

Breaking the resource curse

Resource-rich countries should not slide into corruption, a rent-seeking economy and armed conflict, but should pursue a development pathway. This is a guiding principle of the development agenda. At the same time, the countries concerned should become efficient suppliers for the international commodity markets. This is the latest demand from industry, which has now been taken up in various policy strategies. Promoting good governance in the resource-producing countries might help to attain these twin goals. This is the approach now being pursued by Ghana, for example, as it embarks on the development of an industry which, in the Niger Delta only a few hundred kilometres further east, has caused so much poverty and suffering. Ghana's goals are to distribute the revenues from its fledgling oil industry in an equitable manner, protect the environment and ensure that the public can share in the benefits of a booming economy – thus breaking the resource curse.

Author: Petra Hannen, freelance journalist.
The article was first published in the GIZ magazine akzente, issue 04/2011.