By AINSLEY ELBRA
Doctoral Candidate in Government and International Relations at University of Sydney
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.
 |
| The replacement of Tom Albanese by Sam Walsh as Rio Tinto chief
following write-downs on Riversdale Mining in Mozambique indicates some
of the continuing difficulties of working in developing countries.
AAP |
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.
