Towards a more equal distribution of value? A look into the extractive industry in Africa

If places such as Alaska or Norway have led the way in making changes to how revenues from exploitation of natural resources are distributed, other states still have work to do. The World Bank, who for a long time has viewed free markets as an effective way in itself to stem poverty, has revised its stance. The extraction of natural resources raises a clear question: what roles do the states and mining companies play? How can we assure that the value created is distributed fairly? Juan Pablo Pérez Alfonso, the former Minister of Mines and Hydrocarbons of Venezuela, has underlined that while oil certainly generates revenue, it is also potentially a source of corruption and debt, which doesn’t necessarily bring profit to local populations. A proper management of natural resources needs to address three conditions: ‘budgetary transparency, budgetary policy based on clear regulations, and solid institutions for managing public finances’(1). Norway, Chile and Botswana are the leaders in this area. The implementation of a model redistribution system in Alaska(2) is also relevant: ‘It is a conservative model with a relatively small dividend amounting to only 3 to 6% of Alaskans’ per capita income. Just a share of Alaska’s oil revenue goes into the fund, and only the investment income from this fund is distributed – subject to a cap of 5% of the fund’s total market value. The fund is managed by the Alaska Department of Revenue, and strong checks and balances within the budget make it in many ways a model of transparency.’

The Oil Paradox

For a long time in Africa, the population did not see much wealth flowing from the exploitation of natural resources. As an example, Angola(3) is the second largest producer of oil in sub-Saharan Africa and has one of the richest stores of raw materials in the continent. Despite this, its Human Development Index is lower than the majority of countries in the world. The paradox of Gabon also illustrates this point: ‘The revenue per capita is very high, says Philippe Hugon, research director at IRIS (Institute of International and Strategic Relations). However, the population is extremely poor’. A survey by Afrobarometer conducted in 2013 throughout 22 of 34 African countries (4) highlights this well: 62% of inhabitants questioned estimated that it is difficult or very difficult to find out how the state uses those profits. In fact, the relationship between the state and oil companies has been opaque for a long time. In a classification of perception of corruption developed by the NGO Transparency in 2014, some countries, such as Guinea and the Democratic Republic of Congo, rated at the bottom of this scale.

Paradoxically, Angola is the 2nd largest oil producer in Sub-Saharan Africa but its HDI ranks 149.

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A New Deal: Reshuffling the African Context

However, for the last twenty years, some progress has been made. With the arrival of new operators such as Chinese, Brazilian and Malaysian oil companies, ‘the competition has made the game more open’, surmises Philippe Hugon. ‘In one way, the logic of competition has restructured the situation. The cards are now, more than before, in the hands of African decision-makers, who negotiate contracts themselves’. The emergence of a new generation of leaders, the growing power of youth, hostile to the gerontocracy, the rapid circulation of information as well as the transparency defended by NGOs has also contributed to stabilising the situation.

Introducing the 2013 report of the Africa Progress Panel, its president, Kofi Annan, declared: ‘acting alone, African governments cannot resolve the most intractable natural resource governance challenges. The international community must also shoulder responsibility’. In 2008, the African Development Bank put in place the African Legal Support Facility, in order to assist the states with drafting their mining contracts. Amongst other indicators, one can measure the change by the fact that certain countries now use their oil-based revenue to create domestic infrastructure, rather than to finance expenditure such as the purchase of overseas real estate. Although this system of ‘package deals’ – access to oil resources in return for construction of roads, buildings, hydraulic systems etc. – needs to be approached cautiously, it can give profits directly back to populations. Philippe Hugon also discusses the involvement of external experts. ‘To make these ‘package deals’ more competitive, oil companies promote their social responsibility projects. External firms conduct audits to verify if the practices of these companies conform to environmental and transparency standards’.

Alone, African governments can't resolve the intractable resource governance challenges — @KofiAnnan

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The Auditor, Guarantor of Transparency and Trust

The project conducted by Mazars in Niger is a benchmark example of this process. Mazars responded to a tender issued by the state of Niger, who were anxious to implement a ‘Cost Oil audit’, as part of a Production Sharing Agreement with a private company. ‘This project was highly technical and required a lot of sensitivity in order to verify that the ‘chargeable costs’ – the operating costs that the petrol company had charged to the state, as per the contract between them– were legitimate’, explained Taïbou M’Baye, a Mazars partner based in Dakar. ‘We had to mobilise multi-disciplinary resources: a team composed of experts from a wide range of countries with a high knowledge of internal auditing but also the intricacies of regulation, as well as engineers who understood the oil economy’. This complex mission covered various fields, from contract analysis to IT audit, and from benchmarking of market practices to accounting services. Taïbou M’Baye highlights the benefits of the pressure created by this type of audit, first on the operator, and then on the Nigerien state. Given the fact that results of audits are publicly available, the government was able to identify potential improvements to national oil legislation and governance. ‘That is the role of an auditor: to serve the public interest and generate trust between different parties.’

For more information: www.mazars.com/CostOil

(1) Sharing the Wealth, by Sanjeev Gupta, Alex Segura-Ubiergo and Enrique Flores. FMI, December 2014.
(2) Ibid.
(3) Ibid.
(4) Oil and mining countries: Transparency low, official impunity high, Afrobarometer, December 2013.