Equity in Extractives Stewarding Africa’s natural resources for all Africa Progress Report 2013 AFRICA PROGRESS REPORT 2013 ABOUT THE AFRICA PROGRESS PANEL The Africa Progress Panel (APP) consists of ten distinguished individuals from the private and public sector who advocate for shared responsibility between African leaders and their international partners to promote equitable and sustainable development for Africa. Mr Kofi Annan, former Secretary-General of the United Nations and Nobel laureate, chairs the APP and is closely involved in its day-to-day work. The life experiences of Panel members give them a formidable capability to access a wide cross-section of society including at the highest levels in Africa and across the globe. As a result, the Panel functions in a unique policy space with the ability to target decision-making audiences, including African and other world leaders, heads of state, leaders of industry, plus a broad range of stakeholders at the global, regional, and national levels. The Panel facilitates coalition building at the highest levels to leverage and to broker knowledge, break bottlenecks, and convene decision-makers to influence policy and create change for Africa. The Panel has exceptional networks of policy analysts including academics and policy practitioners across Africa. By bringing together experts with a focus on Africa, the APP contributes to evidence-based policies. Kofi Annan Michel Camdessus Peter Eigen Bob Geldof Graça Machel Strive Masiyiwa Olusegun Obasanjo Linah Mohohlo Robert Rubin Tidjane Thiam ABOUT THE AFRICA PROGRESS REPORT Published every year, the Africa Progress Report is the Africa Progress Panel’s flagship publication. The report draws on the best research and analysis available on Africa and compiles it in a refreshing and provocative manner. Through the report, the Panel recommends a series of policy choices and actions for African policy makers who have primary responsibility for Africa’s progress, as well as international partners and civil society organizations. ISBN 978-2-9700821-2-5 2 Equity in Extractives: Stewarding Africa’s natural resources for all AC KNOWLEDGEMENTS This report was prepared by a team led by Caroline Kende-Robb, with Kevin Watkins as lead author, Peter da Costa as advisor and Andrew Johnston as editor. The report draws on background papers and data analysis provided by a number of experts in their fields, including: Natasha Audrey-Ledlie (Brookings Institution), Daniel Balint-Kurti (Global Witness), Oli Brown (Consultant), Ntagahoraho Burihabwa (Humboldt-Viadrina School of Governance), Laurence Chandy (Brookings Institution), Nicholas Cheeseman (Oxford University), Sarah Coxon (Global Witness), Jim Cust (Oxford University), Mark Divall (SHAPE Consulting), Paul Francis (Consultant), Adama Gaye (New Force Africa), Alexandra Gillies (Revenue Watch Institute), Michael Hackenbruch (Urbanpol), Gavin Hayman (Global Witness), Gavin Hilson (University of Surrey), Antoine Heuty (Revenue Watch Institute), Rosalind Kainyah (Tullow Oil), Karuti Kanyinga (South Consulting), Sheila Khama (ACET), Richard Manning (Oxford University), Mthuli Ncube (AfDB), Paolo de Renzio (Revenue Watch Institute), Adrienne Stork (Consultant), Simon Taylor (Global Witness), Peter Veit (World Resources Institute), Lai Yahaya (FOSTER), Pichamon Yeophantong (Oxford University). The Africa Progress Panel would also like to acknowledge Vicky Bowman (Rio Tinto), Doug Brooks (Asian Development Bank), Juana Chun-Ling de Catheu (Consultant), Laurent Coche (AngloGold Ashanti), Paul Collier (Oxford University), Nathalie Delapalme (Mo Ibrahim Foundation), Shanta Devarajan (World Bank,) Rob Donnelly (Shell), Alan Doss (Kofi Annan Foundation), Jamie Drummond (ONE), Adriana Maria Eftimie (International Finance Corporation), Benedikt Franke (Cambridge University), Holger Grundel (DFID), Max Jarrett (UNECA), David Jensen (UNEP), Veronica Nyhan Jones (World Bank Group), Sonia Kerr (Wood Mackenzie), Franklyn Lisk (Warwick University), Carlos Lopes (UNECA), Antonio Pedro (UNECA), Judith Randel (Development Initiatives), Changyong Rhee (Asian Development Bank), Marinke van Riet (Publish What You Pay), Urs Rybi (Berne Declaration), Elisabeth Sandor (OECD), Tara Schmidt (Wood Mackenzie), Rosie Sharpe (Global Witness), Jon Shields (IMF), Kathryn Smith (Consultant), Patrick Smith (Africa Confidential), Tesfai Tecle (Alliance for a Green Revolution in Africa), Baroness Shriti Vadera, Johnny West (Open Oil), and Ngaire Woods (Oxford University). Consultation meetings held in Oxford, Geneva, and Accra produced invaluable input to this report. The Africa Progress Panel would like to thank all those from business, government, civil society, and academia who attended and to show our gratitude especially to organizing partners at Oxford University’s Blavatnik School of Government and the African Center for Economic Transformation. The APP would also like to acknowledge the generous support from the Bill & Melinda Gates Foundation, the Dangote Foundation, the German Ministry for Economic Cooperation and Development (BMZ), the UK Department of International Development (DFID) and Virgin Unite. The cover design and infographics of the report were designed by Carolina Rodriguez and Pauline Stockins. The layout was done by Blossom Communications in Milan and printed by Imprimerie Genevoise SA in Geneva, Switzerland on recycled paper. SECRETARIAT Caroline Kende-Robb, Executive Director Solomon Appiah Afia Darteh Violaine Beix Edward Harris Alinka Brutsch Temitayo Omotola Peter da Costa Fawzia Rasheed This report may be freely reproduced, in whole or in part, provided the original source is acknowledged 3 AFRICA PROGRESS REPORT 2013 TABLE OF CONTENTS FOREWORD – KOFI ANNAN 6 INTRODUCTION 8 PART I: THE NATURAL RESOURCE PARADOX: RESOURCE WEALTH AMID HUMAN POVERTY 13 1. A decade of unprecedented growth – and uneven development 14 The rising tide of economic growth 14 Mixed progress on poverty and human development 19 2. The great divergence: wealth and wellbeing in resource-rich countries 20 The view from the Marginal 20 Many resource-rich countries are leaving the poor behind 21 A tale of two rankings: human development versus income 21 Inequality drives a wedge between growth and poverty reduction 27 3. From national to local – employment, environment and social impacts 32 Avoiding harm to the environment 32 A mixed blessing for communities 33 Artisanal mining can play a positive role 35 PART II: THE COMMODITY “SUPER-CYCLE” AS AN ENGINE OF GROWTH 37 1. Riding the crest of the natural resource wave 39 The commodity super-cycle 39 2. Booming resource wealth promises strong revenue flows 42 Gas and oil discoveries could transform the energy sector 42 Mineral reserves hold significant potential 44 Resources are poised to provide large revenue flows 44 Unless it adds value to exports, Africa will miss out 45 3. Foreign investment: a source of growth and an institutional challenge 46 Foreign investors in the extractive sector: a complex picture 48 Investment flows bring potential – and challenges 50 PART III: THE COSTS OF MISMANAGEMENT 53 1. Managing state companies and concessions 55 Lost revenues in the Democratic Republic of the Congo 55 Lack of transparency in state companies - a cause for concern 59 Offshore companies can facilitate corruption 60 Lack of budget transparency undermines the public interest 61 2. “Aggressive tax planning” drains the public purse 63 Designing fair tax regimes 63 When companies evade tax responsibilities 64 3. Public spending: the price of inequity and inefficiency 66 Escaping the boom-bust cycle 66 Public spending on basic services needs to be more equitable 67 4 Equity in Extractives: Stewarding Africa’s natural resources for all PART IV: UNLOCKING THE POTENTIAL FOR FUTURE GENERATIONS 69 1. Transparency and accountability: empowering Africa’s citizens 71 Opening up the accounts – national legislation and international action 72 Africa on the move – building on the Extractive Industries Transparency Initiative 72 Building transparency takes time 74 Towards mandatory reporting – the US Dodd–Frank Act and EU legislation 76 When companies are unwilling partners in transparency 76 2. Using natural resources to expand opportunity: fair taxation, equitable spending and stronger linkages 78 Fair taxation – an international challenge 78 International tax action needs to go beyond dialogue 79 Spreading benefits through revenue management and equitable public spending 80 “Investing in investing” 80 Managing revenue flows 81 Public spending – the equity imperative 82 Beyond the enclave – boosting prosperity and adding value 84 3. Managing social and environmental impacts 86 Assessing environmental and social impacts 86 Environmental and social protection: an incomplete journey 87 Conflict and human rights abuses: breaking the link with resources 87 Artisanal mining: harnessing the potential, protecting rights 88 Protecting children 90 PART V: SHARED AGENDA FOR CHANGE THAT BENEFITS ALL 91 1. Recommendations for Immediate Action 92 2. African Governments 93 3. Regional Organization and Initiatives 96 4. Wider International Community 97 5. International Companies 98 ANNEXES 99 ANNEX 1 100 ANNEX 2 105 LIST OF ACRONYMS 107 LIST OF BOXES 108 LIST OF FIGURES 108 NOTES 109 5 AFRICA PROGRESS REPORT 2013 FOREWORD BY KOFI ANNAN demand for limited resources is driving what some commentators describe as a commodity super- cycle, keeping prices high. With a strong focus on equity, this year’s report explores