Tough lessons for miners, but transparency needs to be a goal

Two recent events have highlighted the potential pitfalls of miners doing business in developing states.

The first was the departure of Tom Albanese as Rio Tinto’s chief executive following a $13.3 billion writedown that included $3 billion impairment charges on its Mozambique coal investment, Riversdale Mining. The other was the resignation of professor Ross Garnaut (discussed in detail here) as chair of the PNG Development Fund after a public disagreement with Prime Minister Peter O’Neill.

Mining companies, including those based in Australia, have long been attracted to developing states, and as a result face problems unique to an industry in which the most lucrative finds are often found in the most risky operating regions. These firms, driven by the necessity to add new and proven and probable reserves to their balance sheets, will continue to face significant levels of sovereign risk.

In addition to the risk-reward payoff for firms, growth in the mining sector presents both positives and negatives for developing states. Multinational mining firms such as Rio Tinto bring with them a level of legitimacy and authority over areas such as environmental practices and development of local communities.

An emerging area of scholarship highlights the role firms play in setting the rules and regulations within developing states. Known as private governance, this area of research suggests that firms will self-regulate, often going above and beyond what is required by the state. Furthermore, these regulations may positively influence other firms operating in similar areas, or may even be adopted by host governments.

The idea of promoting regulation appears incongruent with the aims of mineral extractive firms who, like all corporations have a responsibility to shareholders to maximise profits. However, the evolution of the Extractive Industries Transparency Initiative (EITI) shows us that firms can indeed be dually motivated by profit and an acceptance of the norm of transparency.

The initiative is entirely voluntary and yet it currently has 70 corporate supporters, all of whom support the initiative’s core goals of disclosure and improved governance of mining industries in developing states. However, it should be noted that there is no requirement for these firms to disclose payments to governments, with this only occurring when the state is an EITI Compliant Country.

While the EITI is not perfect – its reliance on transparency as a norm results in several weaknesses – it is a way in which firms can contribute positively to the development goals of host states. Mozambique is a Compliant Country within the EITI, meaning the country’s ability to reconcile taxation from its emerging mining industry revenues has been deemed to be adequate.

In addition the country ranks 123rd of 176 countries included in Transparency International’s 2012 Corruption Perception Index. This ranking places the country on par with Vietnam and Sierra Leone, and suggests that while taxation from the country’s mining industry can be accounted for, there remains a distinct lack of transparency elsewhere in the economy.