The tragic cycle of resource politics

Perceptions that the extractive industry is corrupt and fails to bring broad-based benefits fuel resource nationalism, which in turn undermines socially beneficial resource investment, argues Daniel Litvin, Critical Resource’s Founder and MD.

It’s not as though the general public needed convincing that oil, gas and mining can fuel corruption. But global news in recent weeks will have more than confirmed the perception.

Counting the cost

Saudi Arabia, the world’s biggest oil producer, launches a stunning anti-corruption purge led by the reformist crown prince Mohammad bin Salman, arresting more than 200 senior figures in the country. Angola’s new president dismisses the head of its state oil company, Isabel dos Santos, Africa’s richest woman (whose accumulation of vast wealth has raised eyebrows, but who denies allegations of corruption). In South Africa and the Democratic Republic of the Congo, controversy swirls around a range of mining deals and interests seen to have enriched elite groups at the expense of the broader population. In the UK, meanwhile, the Serious Fraud Office charges two oil executives with conspiracy to make corrupt payments to secure contracts in Iraq.

Across the world, the connection between corruption and oil and mining has become rooted in public and political debates. It is a theme regularly reprised not just by international NGOs and many in the ’liberal intelligentsia’ in developed countries, but also the public at large in many poorer countries who perceive that their oil and mineral endowments have been appropriated by a combination of large (often foreign) companies and domestic elites. And there is in some cases good reason for these suspicions: the huge wealth that a single large mine or oil field may generate can be a magnet for the corrupt and the unscrupulous, and may help solidify existing patronage networks in a country.

Fuelling backlash

Eventually, in many countries, that triggers backlash against those elites or companies seen to have benefited disproportionately – even if their activities may have been entirely legal. Again, recent global news provides no shortage of illustrations. In Tanzania, a populist president angry at the perceived failure of foreign mining companies to contribute to state coffers and social development, earlier this year brought London-based Acacia Mining, its biggest foreign investor, to its knees commercially by issuing giant demands for apparently unpaid taxes and imposing an export ban. In Indonesia, following a bitter dispute with the government, Freeport-McMoRan, the US mining firm, has agreed to divest a majority stake in its giant Grasberg mine in the country to local investors. Importantly, both Freeport and Acacia have strongly denied all allegations against them. There are parallels here with earlier waves of ‘resource nationalism’: in the 2000s in Venezuela, for example, the late Hugo Chavez capitalised on widespread popular disquiet about the lack of broad benefits from the country’s oil wealth by nationalising oil assets as well as overturning the existing order in multiple ways.

Meanwhile today in Saudi Arabia, one of the biggest questions is whether the anti-corruption drive and other reforms instituted by Mohammad bin Salman will unleash social forces that eventually bring down the House of Saud. For with the scale of elite corruption around oil wealth now more formally acknowledged, public demands for more fiscal accountability and wider sharing of the country’s oil revenues may be hard to put back in the box.

So the corruption and failure to benefit broader populations that often appears to accompany mineral and oil extraction in turn sows the seeds of political instability and future backlash. And therein lies part of the tragedy of the situation.

Unjust deserts

For, as the many thousands of upright, honest executives in the industry already know, far from all resource extraction is corrupt or monopolised by elites. Indeed, for millions of people it is an economic lifeline. In many countries, oil, gas and mining is an essential contributor to government taxes and export revenues. It can create many skilled jobs, in particular through the industry’s supply chain. For poor countries with few other ways of attracting foreign investment, it can provide an important route to economic growth and poverty reduction, provided the revenues are managed well. The industry’s undoubted environmental costs can, to a degree and with good management and regulation, be mitigated.

Not a joke for miners: South Africa’s President Zuma and Tanzania’s President Magafuli

But when the backlash comes, all these benefits may also be tragically extinguished too. Recent events in Tanzania are a case in point. Whatever the justification of the moves by the government against Acacia Mining (and most serious observers believe it has exaggerated its case against the company), they have significantly damaged Tanzania’s credibility with international firms.

Several reputable resource investors – extractive firms and private equity funds – have told Critical Resource that they are now avoiding Tanzania following the dispute. Some even say they are now giving East Africa, and even Africa as a whole, a much wider berth, as a result. This may be an overreaction – but it equates to thousands of potential job opportunities lost, and millions and perhaps billions of dollars of responsible investment unrealised. Indonesia, too, has created a similar deterrent to foreign investors, whatever the merits of its case with Freeport. And Venezuela is now a tragic example of a country in economic meltdown, partly due to resource nationalist policies that drew a lot of their original fuel from public disquiet about oil corruption and governance.

This is a long-term cycle that is complex to unpick and difficult to remedy. Global anti-corruption programmes like the Extractive Industries Transparency Initiative certainly help. But progress might also be quicker if those many honest, un-corrupt companies and investors in oil, gas and mining, ratchet up further their efforts to enhance and communicate the societal benefits from their operations in different countries – and decry more loudly and visibly the corruption of others when they see it.

Daniel Litvin is Founder and Managing Director of Critical Resource, and author of ‘Empires of Profit: Commerce, Conquest and Corporate Responsibility’.