By Daniel Litvin and Brenda Won (May 2010) – A version of this article first appeared on the EITI blog –Click here to view
Supporting good governance can help companies profit over the long-term, as Critical Resource’s contribution to the EITI blog argues
Whether one believes that the glass is half empty or half full, however, one thing is for sure: the future success of the initiative and the fulfilment of its broader agenda depends not just on future progress by governments, but on the efforts of companies too. The role of governments has rightly been the focus of attention so far. But companies should also understand that going the extra mile in supporting the EITI may not just be critical for the initiative’s success but can serve their interests too.
Under the EITI rules, companies already have several clear responsibilities, including publicly disclosing all material payments as required by implementing countries, and (for corporate ‘supporters’ of the EITI) making public statements in support of the initiative. But, as highlighted in the EITI ‘Business Guide’, there are additional things they can do. This includes encouraging governments to sign up to the EITI, and helping to build civil society capacity where it may be lacking. For example, in addition to encouraging EITI implementation in Azerbaijan (one of the two countries that passed validation), BP has contributed to improving the capacity of NGOs, holding informal workshops on how product sharing agreements with the government function.
More broadly, companies can support governance improvements in-country so that resource revenues are not just transparently reported, but are spent well. Companies clearly need to avoid adopting a political role or otherwise unduly influencing domestic debates (among other things, this could trigger backlash against them). Even so, there is much they can do in this area – for example, in building government capacity. In Peru, for example, Anatamina Mining Company (owned by BHP Billiton, Xstrata, Teck Resources and Mitsubishi) has help build the capacity of local authorities in the mining region to invest tax revenues efficiently.
Profiting from transparency
Going this ‘extra mile’ is not a mere philanthropic exercise: it can help protect and strengthen a company’s ‘socio-political license to operate’. Over the long term, the more resource revenues drive and are seen to drive development, the less likely commercially-damaging backlash will occur against companies, whether from governments or local communities. We have researched some 60 resource projects which have experienced threats to their ‘license to operate’ (such as governments toughening fiscal terms or community protests stalling production). A key underlying factor in the bulk of these episodes of backlash is local and national perceptions that the investments concerned are not leading to sufficient economic benefits (whether or not the blame for this can fairly be pinned on companies).
There are countless examples of such perceptions making life tougher over the long term for resource companies. The review of mining contracts in the Democratic Republic of the Congo in recent years, for example, was due in part to perceptions (fair or not) that companies were not contributing enough to national development.
In this way, companies might look upon their EITI responsibilities as setting a minimum for their efforts to protect the ‘license to operate’ on such economic governance issues. This thinking underlies various elements of Critical Resource’s LicenseSecure model, which we have developed based on our analysis of the 60 resource projects to provide a rating of the overall health of a resource project’s ‘license to operate’. In the aspects of the model which focus on economic governance, LicenseSecure not only takes into account of whether the company fulfills their direct responsibilities under the EITI, but additional recognition is given for going above and beyond – for unilateral reporting of payments to governments, for example, and for building partnerships and engaging in capacity building efforts with the government and civil society.
Admittedly this can be a challenging area for many companies, and as mentioned it needs to be done sensitively and diplomatically. But over the long term it can reap rewards for the company – as well as helping the EITI in this crucial phase of its development.
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