• Dirt in the Ground, Money in the Bank

    Posted by Jennifer

    30 July, 2013

    The continent of Africa is richly endowed in natural resources and yet suffers the highest rates of poverty in the world. 

    In the past decade, many resource-rich African nations have enjoyed significant economic growth, which have been reflected by massive jumps in Gross Domestic Product (GDP) and per capita income. For example, in Angola, GDP grew an average of 10% annually and per capita income increased by 111% between 2000 and 2011. 

    And yet this wealth has not been accompanied by improved wellbeing in all countries. Despite the growth in its economy, Angola has the eighth highest rate of child mortality in the world and ranks 148th on the United Nation’s Human Development Index. This highlights a massive misalignment which exists between the resource wealth and development progress being experienced in many countries in Africa. 

    The African Progress Report 2013, published by the Africa Progress Panel, seeks to explain these discrepancies and offer potential policy solutions to redress them. 

    So why do Africa’s citizens not enjoy the benefits of Africa’s natural resource wealth? 

    The report identifies illicit outflows, and in particular, transfer mispricing by multinational corporations, as a major cause of this inconsistent relationship between wealth and development. Africa loses more from tax evasion and other illicit financial flows than it receives in both aid and private foreign direct investment.

     

    Transfer mispricing refers to the artificial adjustment of prices when trading between subsidiaries of the same multinational corporation, with the intent to shift profits offshore into low-tax jurisdictions. Transfer mispricing is illegal, however can be extremely difficult to identify due to inadequate international reporting requirements. 

    You can read a short case study of how transfer mispricing by mining giant Glencore cost Zambia $63 million over 3 years here

    The Africa Progress Report describes this “haemorrhaging of resource revenues” as “an unconscionable blight on the lives and hopes of [Africa’s] citizens.” 

    So what can be done to prevent revenue lost through this illicit activity?

    Transparency is the crucial missing ingredient in the recipe for linking resource wealth and human development outcomes. Mandatory disclosure of contracts and agreements made between extractive companies and governments as well as of payments made by extractive companies to governments would provide the knowledge needed for citizens to hold their governments to account for the use of natural resource wealth.

    Unfortunately, most of Africa's resource-rich nations score poorly when ranked according to transparency.

    But there is good news: progress is being made. The implementation of domestic level reform such as compliance with the Extractives Industries Transparency Initiative (EITI) by many African countries indicates a move towards greater transparency and accountability. 

    Ghana, for example, has become EITI compliant and additionally introduced legislation establishing comprehensive reporting requirements for the national oil fund assets and investments. This means that citizens can access information concerning the use of oil revenues as well as participate in public debates assessing this expenditure.   

    Despite progress being made at national levels, the APP report notes the need for a more coordinated international approach to be made for a genuine impact to be made. 

    Micah Challenge is advocating for country-by-country reporting to be introduced as a global standard, with multinational companies required to report on their operation – including sales, profits and taxes due and paid – for every country in which they operate.   

    The United States and the European Union have already introduced legislation requiring something like this standard for companies registered in their jurisdictions. Global impetus is building, and it's time for Australia to follow suit.  

    It's one way that we could help stem this haemorrhaging of revenues from Africa. The nations and the people of Africa deserve to benefit, transparently, from the use of the natural resources which belong to them. But while multinationals use secrecy and tax tricks to strip resources and revenues from Africa, and while corruption thrives on secrecy, the poorest people cannot benefit.

    We all need to stand together to tackle tax evasion. Because the best way of putting money in the hands of the poor is not to steal it in the first place.

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    Jennifer Vaccari is the political engagement intern at Micah Challenge.