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Despite what is often thought, it is far from simple for less-developed countries to translate investment by foreign companies in extraction of their mineral resources into national growth and development.

The trend of mineral-rich developing countries being unable to reap the promised benefits from their ample wealth has been so widely documented in academic studies and literature that it is now known as the ‘resource curse’ phenomenon. 

The theory associates the activity of mineral-resource extraction in less-developed countries with the exacerbation of poverty, corruption and conflict. Research over the last decade confirms that it is not a coincidence that the mineral-rich developing countries are some of the poorest and worst governed in the world.

The Australian Government is providing financial and other support for Australian business to invest in mining exploration and development in these mineral-rich countries. Over the last decade, one-quarter of finance and insurance provided by Australia's export credit agency, EFIC, has been to support Australian involvement in extractive projects in the Global South.

Australian government agencies such as EFIC should not be using public funds or public authority to contribute to mining investments that are unfavourable to the social and economic development and environmental protection of less-developed countries.

 

Australia's export credit agency, the export finance and insurance corporation (EFIC)

EFIC is a federal government agency that funds international projects to promote Australian exports.

EFIC support comes in the form of medium to long-term loans and guarantees to the buyers of Australian exports, as well as risk insurance and guarantee facilities directly to Australian exporters. The structure and function of EFIC clearly indicates that it is an organ of the state. However, like other export credit agencies around the world, EFIC operates in an environment of limited transparency, including a legislative exclusion from Freedom of Information Act 1982. In addition, the Minister for Trade can borrow funds for the purpose of supporting Australian companies on EFIC's 'national interest' (government) account, without any public or senate scrutiny.

 

PNG LNG Project

Jubilee Australia has taken particular interest in the liquid natural gas (LNG) project that EFIC is supporting in PNG. It is a featured case study on our 2009 publication “Risky Business” (LINK) exposing the problems with Australia's export credit agency, EFIC.

In it's biggest ever loan, EFIC agreed to provide up to $500 million to the Exxon Mobil-led PNG LNG project, 80 per cent of which will come from public money.

In 2011, a mere one year on from the signing of Papua New Guinea’s largest ever extractive industry project, led by American giant Exxon Mobil and Australian partners Oil Search and Santos, the PNG LNG project has already been linked with a number of worrying incidents, including tribal conflict, local landowner unrest, alleged abuses by the companies involved, and concerns over transparency of government decisions.

In late 2010 the project reached boiling point when landowners closed down gas plants by mobilising on project sites following increased discontent about their benefits payments. A National Court Judge has stepped in to stop all LNG payments from banks and to freeze all accounts relating to benefit agreements until proper and transparent processes are set up for the distribution of landowner payments. Jubilee Australia is concerned that this and a number of other developments during the first year of the project warrant serious examination, not least by the Australian government, which has helped finance the project through its largest ever export credit loan.

In December 2012, after more than 18 months of research, we released our in-depth investigative report into the PNG LNG Project, and its foreseeable impacts on the country’s precarious political institutions, economy and society. Find out more and download this report:

'PIPE DREAMS: The PNG LNG Project and the Future Hopes of a Nation".

 

Publish what you pay

For the reasons outlined above, if foreign investments in extractive industry projects are to translate into future development for less-developed countries, the potential for the host governments to generate public revenue through transparent and equitable mining tax laws, and to distribute this revenue through a participatory and transparent budget process, is of paramount importance.

Yet to date, international financial reporting standards for oil, gas and mining companies have made it impossible to monitor government revenue collection from these companies in a comprehensive way. The Extractive Industries Transparency Initiative (EITI) goes some way to resolving this by making governments who become candidates of EITI report publicly and accessibly each budget year on all revenues they receive from extractive companies. In turn under EITI all companies have to volunteer to submit reports to governments for public dissemination, including profits and expenditure, as well as financial remittances to government and related institutions. An aggregator then compares the respective figures and identifies and explains the inconsistencies.

The Australian Publish What You Pay Network, of which Jubilee is a founding member, is recommending that Australia promote best practice by becoming an EITI implementing country.

However EITI has limitations. Most mining investment in less-developed countries is undertaken by the subsidiaries of multinational corporations registered in countries such as Australia, Canada, USA, UK or South Africa. They may also be listed on one or several international stock exchanges. Under EIIT, Multinational companies are not required to report on their profits, expenditure and taxes on a country-by-country basis. Instead, their reports reflect their aggregate financial position across all their operations. Therefore it is very difficult, if not impossible, for citizens, parliamentarians and governments to detect tax avoidance strategies. Companies cannot be forced to publish national reports using the EITI template unless national laws regulating financial reporting require them to do so.

The US set a new global standard for extractive industry transparency when in July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which in addition to financial regulatory reform, requires all foreign companies registered with the US Securities and Exchange Commission to disclose, on a disaggregated basis, how much they pay governments for access to their oil, gas and minerals.

This new accounting standard will allow financial flows between parent companies and subsidiaries to be monitored, and tax avoidance to be detected. It is a major success for the international Publish What You Pay campaign, a global coalition of 600 development, environment, faith-based and human rights organisations in over 50 countries.

Jubilee has made recommendations to the Australian government that it harmonise accounting rules with the US Standards, by passing legislation that requires all domestic and foreign companies registered with the Australian Stock Exchange (ASX) to publicly report how much they pay governments for access to their oil, gas and minerals.