The G8 and Africa: trade, tax and transparency

Since the last post earlier this month, the most significant development at the nexus of business and society in sub-Saharan Africa has probably been last week's G8 summit, where the UK government promoted its 'Three-Ts' agenda (trade, tax and transparency).

This weekend a far smaller meeting took place here in Oxford, organised by the University's China-Africa Network (OUCAN) on 'Emerging Powers in Africa'.

The two very different events are related in at least one sense ... efforts in Western countries to regulate for more transparency in the way that companies interact with developing country governments still have some way to go in making a stronger case for such regulations among industry members that must compete with firms from settings, such as China, which do not impose such requirements.

One dimension of the UK government's agenda has been promoting greater transparency by UK-based extractive industry firms on what these firms pay to host governments. Africa accounts for many of the settings where shortcomings in government revenue transparency are a major issue for donors and lenders, local and transnational advocates, and increasingly for firms themselves (often at the behest of their financiers and insurers).

The G8 meeting followed shortly after the European Parliament voted on June 12 on laws (that will take effect in 2015) requiring European oil, gas, mining and logging firms to disclose payments above 100,000 euros made to host governments in relation to accessing or extracting natural resources -- even if the host government's laws prohibit such disclosure. The European regulatory initiative follows the US Dodd-Frank Act (which applies only to US listed entities' disclosure of payments) and reflects many years of 'publish-what-you-pay' advocacy and extractive industry transparency initiatives, the most notable of which was first supported by the British and other governments.

There are many dimensions to this topic, and what follows is only one thought-line.

One does not need to be an apologist for the extractive industries to acknowledge the force of their various arguments questioning such regulations.

One is the risk that Western firms subject to such requirements might be unable to compete for access to resources with less scrutinised, less scrupulous, and perhaps more socially indifferent firms from China and other 'emerging' powers. One can call this the 'Talisman factor', after the Canadian operator that withdrew, partly under pressure at home, from Sudan's conflict-affected oil sector; its concessions were taken up by firms with far less incentives to implement progressive environmental, social and governance norms.

One sees insufficient efforts by regulators (and their political principals at forums like the G8) to develop persuasive lines of argument about the strategic merits of such transparency regimes, in addition to their moral rectitude.

Late last year I blogged on the place of values and principles such as transparency in strategic competition for natural resources (here). It was a post calling for greater suasion on why such transparency regimes matter and why firms should embrace them.

Aside from indisputable matters of principle about the importance of revenue transparency, it is possible to make an argument that regulating for payment disclosures is not materially different from regulating for disclosure of other latent liabilities or political risk triggers. The market appreciates such information and, over time, appreciates those firms that are candid about disclosing material risks.

This sort of persuasion is important since regulatory compliance -- as experience shows and theory argues -- is far easier to secure where an industry accepts that the overall regulatory objective is of long-term value to it as a matter of business strategy (in addition to being warranted on the basis of being a responsible member of society).

That is, in order to get support from CEOs and boards we tend to speak of the need to make the 'business case' for voluntary corporate responsibility outreach. But making a 'business case' also matters for issues of compulsory regulation, because making it improves the prospects of fuller compliance.

The extractive industries are formidable forces when it comes to shaping the content of regulation, which should not be deferential to industry as a matter of course. Yet it seems hard to deny that politicians -- and the academics who advise them -- have not spent enough time acknowledging the commercial-strategic reality of collective action problems and the lack of a level regulatory field when it comes to strategic competition for natural resources. This means that they insufficiently frame moves to regulate revenue transparency in ways that persuade Western firms that these will improve those firms' long-term strategic positions.

Jo

ps -- see also my previous recent posts on taxation and corporate responsibility in Africa (here) and corporates, contracts and clarity (here).

ps -- my colleague Hannah Waddilove blogged last week on the G8 summit in relation to African governments' revenue-raising dilemmas: see here.

Taxation and corporate responsibility in Africa

For those following African issues, of all the current topics of global debate about the social impact of business or public-private sector relations one stands out more than others: corporate taxation.

 

Here the tax-tightening agenda of developed but revenue-strapped G8 governments now somewhat aligns with that of developing African governments.

 

The recent 'Africa Progress Panel' report highlighted the extent of unrealised revenues lost to African governments through practices such as transfer pricing; the Zambian government, most notably but hardly alone, has continued in recent months to move on its promise to tighten compliance with existing tax and duty requirements on foreign firms in its mining sector.


 

The relationship between tax issues and corporate responsibility ones is fairly simple, at least in the resource extractive industries in developing African countries.

 

A principal (and principled) argument available to a mining firm under pressure to 'do more' for its host community or country is that along with paying its employees, it pays taxes to the government, whose responsibility it is to provide services and infrastructure to the population. On this classic account, it is the government, not the firm, that should be primarily accountable to the public about the use made of tax revenues. For instance, in March 2012 I heard Ivan Glasenberg, CEO of Glencore, make this argument forcefully if rather unsubtly during a panel on 'resource nationalism' in Africa.

 

Likewise, when faced with government attempts to raise a firm's taxes, royalties and duties, an argument available to a firm which has made extensive local social investments is that the firm should be spared further increases since it is carrying some of the state's social spending burden.

 

The public relations or political risk vulnerability for firms is that if it transpires that their effective taxation levels or volumes are in fact far lighter than is widely assumed, the first-mentioned argument loses its force.

This is particularly so for firms in sectors that despite their revenue by nature do not create a lot of local jobs, something that would otherwise help illustrate their social value even if their tax footprint is low.

 

Of course the dilemma for firms which spend heavily on their social investment side, believing that it is pointless to wait for the government to translate taxes and royalties into palpable gains for the host community, is that the firm's uptake of this responsibility removes the incentives on the government for doing so. Moreover, the firm may pay tax to the central government but be answerable for local conditions to a provincial or municipal government, whose relations with central government may be beyond the firm's control. 

 

Technically speaking, tax issues are matters of legal obligation -- one is either liable or not -- whereas issues of 'corporate responsibility' tend by definition to relate to things done despite there being no legal requirement to do them.

 

The recent first issue of our firm's 'Business and Society Monitor' observed that taxation is one issue that has largely not been framed in the language of 'corporate responsibility' -- no doubt for the legal / voluntary reason just mentioned, yet despite the close relationship between tax and corporate social investment discussed above.

Given the often blurred or highly technical nature of compliance (which underpins the distinction between 'avoidance' and 'evasion' of tax), the Monitor implicitly noted that it would be unsurprising if mainstream corporate ethics, corporate responsibility and related debates increasingly focus on taxation issues. A parallel development is that increasingly social investment issues are covered in investment contracts, so that they become legal issues; this can be in a firm's interest, since it delimits the extent of its otherwise open-ended non-legal responsibility.

 

Like the issue of revenue transparency that the UK will push at this year's G8, taxation issues relate to much broader questions for African policymakers about competitiveness in attracting foreign investment, in the absence of cooperation from peer (competing) governments on uniform approaches to revenue management.

 

One strategic consideration for major extractive industries in Africa is their interest in reducing the share of national revenue for which their industry accounts. That implies that those in the oil sector, for instance, should be interested in boosting the non-oil economy (and non-oil or oil-related employment) in their host country, increasing the number of tax-paying firms and decreasing their exposure as single dominant sources of government revenue. Initiatives such as Tullow Oil's 'Invest in Africa' scheme reflect an understanding that for an oil firm, a booming non-oil sector is directly in its commercial and government relations interests.

 

Jo

 

For a recent post distinguishing (corporate) responsibility from (government) duty, see here.

 

These issues are raised in multiple previous blogs, see for example here on social investment by the mining sector in Africa.