Clamping down on corruption in Africa's extractive industries

Africa still fails to translate the increasing demand for commodities into socio-economic development, according to the African Progress Panel.

Published on 14 May 2013 in ISS Today

How to better utilise the wealth from Africa’s non-renewable resources – oil, gas and minerals – to eradicate poverty in Africa? This was one of the important questions asked at discussions on Africa’s economic growth prospects at the World Economic Forum (WEF) on Africa held in Cape Town from 8–10 May 2013. The soaring demand for commodities from developing nations in the last few years has created a unique opportunity for African countries to plough this windfall into socio-economic development. However, this has rarely been the case.

The 2013 report of the African Progress Panel (APP), an international panel of experts led by former United Nations (UN) Secretary-General Kofi Annan, indicates that people in Africa’s most resource-rich countries like Angola, Nigeria, Equatorial Guinea and the Democratic Republic of Congo (DRC) are often the poorest of the poor. The DRC, for example, is at the bottom of the list of countries on the UN’s Human Development Index. People in Equatorial Guinea, the country with one of the highest growth rates in the world and the biggest gross national income per capita in Africa, suffer extreme poverty with a life expectancy of 51 years.

In an editorial published in the International Herald Tribune last week to coincide with the launch of the APP report at the WEF on Friday 10 May, Annan said ‘few governments have used the increased revenues generated by resource exports to counteract rising inequality, build better healthcare and education systems or strengthen smallholder agriculture’. Instead of leading to economic development, funds emanating from resources have often fuelled corruption and conflict in Africa on a grand scale. These funds have distorted economies and propped up undemocratic leaders, with the complicity of outside actors and the private sector. Wealth from oil and minerals has also often increased the gap between rich and poor instead of narrowing it.

This is not the first time that influential individuals and organisations like the APP have stressed the need for Africa’s resources to be better distributed. Other initiatives like the Extractive Industries Transparency Initiative, launched as far back as 2002, have attempted to force governments and companies to make public the use of profits from the exploitation of resources – with mixed success. Analysts, non-governmental organisations and international financial institutions have grappled with this issue for a long time: how to make sure all of Africa’s citizens, and not only an elite few, benefit from the wealth of its natural resources.

The APP seems to opt for a two-fold strategy: on the one hand appealing to governments and the private sector to genuinely care about the wellbeing of Africans by pouring more of the profits from commodities into education, health services and social infrastructure; and, on the other, calling for punitive measures to combat the looting of Africa through legislation and through naming and shaming. An addendum to the report, focusing on mining deals in the DRC, where billions of dollars have been lost through corruption, did exactly that. Media like the influential Financial Times almost exclusively focused on this part of the report, detailing the enormous scale of corruption in the DRC. According to the APP, the sale of the DRC’s valuable mineral concessions and licences at an estimated one-sixth of their actual commercial value lost the country $1,36 billion – a figure the report admits could be much higher. The money from five separate deals was siphoned off through offshore trading companies making margins of an average 512%.

Of course, this doesn’t only happen in the DRC. The report estimates that Africa loses a total of $38,4 billion a year through trade mispricing and $25 billion through other illicit flows. This is more than what Africa receives through aid and foreign direct investment.

Africa is certainly not the only continent plagued by corruption at the highest levels. Oil deals around the world are particularly notorious when it comes to collusion between government and private companies benefiting from corrupt deals. Yet there is an increasing global clampdown on these practices. Better disclosure standards like the US Dodd-Frank Act and increasing efforts in Europe to curb opportunities for tax evasion are slowly but surely leading to more transparency. There is also an increasing global awareness among governments and citizens of the importance of tighter regulations to curb tax evasion and money laundering. Unfortunately, often the complicity of those in government positions makes it extremely difficult to enforce such laws. Relying on the goodwill of companies and governments just isn’t enough.

However, despite the grim picture it paints of corrupt dictators cheating their citizens out of a better life, the APP report is not overly pessimistic. It sites several positive developments in countries such as Ghana, which only recently joined the club of Africa’s oil producers. General improvements in the political and economic policy environment and increased awareness of transparency in resource management are also likely to contribute to better distribution of natural resource wealth, according to the report.

To make sure African countries build on this progress, the report makes a series of recommendations and appeals to governments to strengthen their commitment to investments in health, education and social protection. The report calls on resource-rich countries to promote the transformation of raw materials – another huge problem often linked to the ‘resource curse’ – and to diversify their economies. It also urges mineral-rich countries to support artisanal mining, an important job creator in many countries.

On a global scale, the APP calls for the adoption of a global standard for extractive transparency, urging for example Australia, Canada and China to ‘actively support the emerging global consensus on disclosure’. Finally, Annan has appealed to G8 members to discuss this issue at its upcoming summit in the United Kingdom in June this year. The report calls on the G8 to ‘establish the architecture for a multilateral regime that facilitates tax transparency’ that will, among others, force companies registered in G8 countries to be fully transparent about their business dealings. In the end, sustainable and inclusive economic growth is only possible if African governments and leaders use the revenues from natural resources for economic development instead of self-enrichment.

Liesl Louw-Vaudran, ISS consultant

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Kofi Annan's remarks at the APP launch