Extractive Industries (Developing Nations)

– in the House of Commons at 2:30 pm on 29 November 2013.

Alert me about debates like this

Motion made, and Question proposed, That this House do now adjourn.—(Mark Lancaster.)

Photo of Eric Joyce Eric Joyce Labour, Falkirk 2:34, 29 November 2013

I want to take this opportunity to say a few things about the extractive industries, particularly those across the world. Many of our constituencies have an interest in such industries, but it is not necessarily the biggest interest across the whole of our country. In Scotland, of course, most Members have some interest in the oil and gas industries, because of assets in the north or the people who work in the industries. The Grangemouth refinery is on my doorstep. It rarely makes the news, but employs many people. My own family have worked in the oil and gas industries for many years, as have many of my constituents and people who live around the area. Such involvement gives us an interest in the broader extractive industries.

Naturally, our primary concern is for our constituents and our local areas in the UK. However, over the years, my interest has increasingly focused on the impact of large—they are often, although not always, large—companies in the extractive sectors on the economic development of countries across the world. Those companies also have a big impact on the UK because they often pay tax here. They might have their headquarters in the UK, and they employ people in the UK. I am thinking not just of oil and gas—that is what we tend to think about in the UK when we talk about domestic issues—or of small operations that have open-cast mining or deal in aggregates, but large operators that might be headquartered in the UK and that operate in parts of the developing world.

It seems to me—I hope that this does not appear tangential—that when we think about the UK industrial and commercial effort and how it impacts on the developing world, it tends to be almost as a secondary line of debate in the discussion of how the Department for International Development and aid impact on the developing world. What I am saying is that when we think about the economies of the developing world it tends to be about the great good that we do with our munificent and generous taxpayer donations that go through various projects involving European institutions or non-governmental organisations.

It is increasingly important, particularly in the current economic context, that we start to tilt the debate. When we think about developing world economies, we should not simply think about DFID, aid and how fantastically generous we are. Of course DFID does great work, and the Government spend a great deal in this area. Our constituents often say that perhaps that money should be spent at home. The Government are committed to a high level of DFID expenditure, as were the Labour Government, who, one might say, kicked off the whole thing. That is the issue and the figure that people are keen to discuss instead of the figure of inward investment that goes into economies from companies that are either based or headquartered in the UK. I appreciate that for some people there is a significant distinction. It is perhaps worth being up front from the start about the fact that for some people there is a difference between companies that are seen to be truly British or truly operating in the UK and that employ people in the

UK—I am talking about companies that operate around major assets, such as refineries in the North sea—and companies that are based, headquartered or listed in London, either on the London stock exchange or the alternative investment markets. People often fail to grasp the scale of economic activity that is created through the potential of the extractive industries sector that is headquartered in the UK. What is or is not a British company is a moot point. In many ways, it is not helpful to reflect on that quite deep theological question.

The fact is that many companies that are attracted to investing in the developing world on an enormous scale have chosen to have their headquarters in London. That has sometimes created issues for the extractive industries sector, most notably mining. There have been problems with the listing of particular companies, and their practices before they listed, their management practices, the assumptions owners might have made about how governance should operate and so on are often very different from those that are the culture in the UK. There is an ongoing negotiation, to put it at its mildest, that lays down rules for companies so that when they list in the UK they have to change their culture to fit the high standards of London listing.

There have been one or two well-publicised issues, and I might refer to one of them in a short while, but the standards are generally very high. For companies that list in London and operate elsewhere in the world, there is a large amount of transparency and accountability. The standards in those industries have traditionally been quite high. When new companies come in from elsewhere in the world with different cultural backgrounds, those standards become even more important.

There are two or three initiatives that I want to mention that augment and bolster the standards that already apply in the City of London. One is the extractive industries transparency initiative, which was created just over 10 years ago by the Labour Government and has been carried on by this Government. Oddly, we never actually signed up to it, although I think I understand why. It is a fairly straightforward worldwide initiative signed up to by 25 countries that aims to lay down a standard by which countries agree that all the companies operating out of those countries, or which are listed in those countries, are required to declare what payments they make to Governments, often and usually in the developing world, and the Governments agree to say what payments they have received, as well as other conditions and criteria. That leads to a standard of accountability and transparency that was not there before. The purpose is to de-risk and to make things more realistic and practical for companies that are nervous about relative insecurity or uncertainty about what happens to cash that is paid to Governments. Historically, we know that a lot of cash has gone missing in the developing world. Instead of paying for infrastructure, education or health, it has paid for mansions in Paris or Brussels, or wherever the taste of the person receiving the cash might have led them.

There are other Members in the Chamber who have as much or probably more experience than me in this, but as we travel across Africa we often end up talking to the people who run young democracies. Companies that are often listed in London come in and try to operate in their countries, and those people are keen to show that the cash is being distributed and used appropriately for Government works. Transparency helps them. It also helps companies, which are often wrongly accused of spreading cash around to get contracts when that is simply not true. The idea of greater transparency helps everyone.

Many organisations lobbied for the EITI, but one of my favourites is Global Witness, which George Soros had an important role in creating. In the first two or three years of its existence, most of the heavy work involved encouraging people to sign up to a voluntary arrangement. Now the EU accounting transparency directive and other directives are, in effect, essentially embedding that arrangement into EU law. My understanding is—I could be wrong—that it will be embedded in UK law by 2015. That will not supplant the functions of the EITI, but it will augment them and there will still be a strong purpose in signing up to the initiative.

There is a similar piece of legislation in the States. The Dodd-Frank Bill has an amendment called the Cardin-Lugar amendment, which is still being argued about. It was passed, but there were some issues with how the Securities and Exchange Commission implemented it—perhaps not enough resources were put into it. Some people will say that such legislation does not exist in the US, but it does, it has just not been fully implemented. It will be in due course.

The standards of transparency, which in many ways are above the basic EITI standard, are increasingly high. Within a couple of years, they will be embedded everywhere in all the major markets. The EITI has played an important role in all of that.

Photo of Bob Stewart Bob Stewart Conservative, Beckenham

I presume the hon. Gentleman gives full recognition to the fact that companies from other countries operating in Africa do not operate under the same rules as British companies, which often gives us a competitive disadvantage. Will he comment on that?

Photo of Eric Joyce Eric Joyce Labour, Falkirk

The hon. Gentleman makes a good point. We often fail to make a distinction between the developing world of China, Russia and the former Soviet states, and the developing world of impoverished states in Africa and elsewhere. Without wishing to digress—you would pull me up for doing so, Madam Deputy Speaker—it is true that China and Russia have different cultural and transparency assumptions. Most importantly, they have different sovereignty assumptions. They tend to say, “It’s entirely up to a country what it does with its cash. It is not for us to ask.” Chinese companies therefore often operate to a different standard. Many in London are concerned that, if that standard is lower, the small number of people who want to make dodgy deals—they are small in number, but of a significant scale—will do their deals with companies that are not regulated in the UK. That is unquestionably a problem. We must continuously work to have those countries understand that they are major world players and have major responsibilities to ensure that corruption does not once again run amok in Africa. I recognise the hon. Gentleman’s point—he has experience in the field—which is frequently made. I would not want to regulate UK companies in a way that damages them in the context of international competition.

Currently, the EITI voluntary arrangement has worked well, but statutory underpinning in the UK and US within the next two years will bolster standards in Africa, which is my interest, and in developing countries throughout the world. That is what the countries and the companies want.

The UK Government have agreed to sign up to the EITI, which is great. They were concerned in the first instance that the initiative would lay unnecessary costs on small UK operators, which, frankly, one would not expect to be in the ambit of this discussion. The UK must lead the way and sign up if it wants other countries, such as Angola, which wants to sign up, to do so. Other countries would also like to sign up.

It is a two-year process. By good fortune, I am on the multi-stakeholder group in the UK. The process, which is currently happening, is put in place by a multi-stakeholder group of relevant interested companies from the various industrial sectors, including from the oil, gas, minerals and mining extractive industries; civilian organisations with an interest, such as green and transparency organisations; and the Government—it is lead by the Department for Business, Innovation and Skills. It puts the UK in a position to help to lead the world in high standards for the extractive industries.

I want to make one more point. The Government have stressed the importance of beneficial ownership. In the next year or two, legislation will emphasise the importance of beneficial ownership throughout the developing world. That means that we will know where the cash ends up. It is currently possible to construct a series of layers of ownership. We can say that people must declare where the money is going, but they can say, “It goes to company X in the British Virgin Isles,” and we will have no idea who that is. If the Government introduce legislation, which I believe they will, we need to know who beneficial owners are. When companies trade and invest enormous amounts of money in developing countries, the money should go to the appropriate place. From my point of view, that would draw the eye towards the good that enormous and small companies do when they invest in countries that otherwise have very little in the way of revenue.

I shall now conclude, and I do not intend for this to be on a depressing note. The Select Committee on Business, Innovation and Skills is undertaking an excellent inquiry into this whole issue. I have noticed that some people who care passionately about economic development in the developing world seem to set the theoretical principle of the standard so high that they make it almost impossible for companies to invest in the developing world. It seems from the World Development Movement’s submission to the Committee that it does not want any extractive industries to operate in any part of Africa. The reality is that without those industries many countries will simply never develop their economies, and the extractive industries, operating transparently in the way that I have described, are the primary potential driver of economic development. I am talking not about aid, but about proper investment by very large companies that want to carry out extraction that is good for them and their shareholders, and good for the taxpayers of these countries. Such companies are often the biggest taxpayer in these countries and they often represent the only way in which these countries can get good tax revenue and move their economies forward as we want to see them moving forward.

Photo of Matthew Hancock Matthew Hancock The Minister for Universities and Science, Minister of State (Department for Business, Innovation and Skills) (Jointly with the Department for Education) 2:50, 29 November 2013

I congratulate Eric Joyce on securing this debate on the extractive industries and their impact on the developing world. During his speech, I was reflecting on the role of trade, alongside aid, in lifting developing countries out of poverty—he made the case for that powerfully. The rise of Africa and Asia is driven, in the first instance, by the free market operating in a strong framework of the rule of law. We are discussing one aspect of that, and how rules on transparency for the operation of extractive industries can strengthen that process and ensure that British companies and companies across the world can contribute to the growth of developing nations. Not only has he prosecuted his argument well over a long period, but it is gaining salience. The proof of that is in the strong growth rates of many of the countries around the world; so I would probably start on a more optimistic note than he finished on.

I also wish to pay tribute to, and put on the record the Government’s thanks for, the work that the hon. Gentleman does as the civil society representative on the UK extractive industries transparency initiative multi-stakeholder group. He has had an interest in this area for some time. He referred to issues relating to the Grangemouth refinery, and we know that such issues can be political hot potatoes at times, but I have noticed that he always seems to be on the side of those supporting the growth of the British economy, and I am grateful for that.

Natural resources such as oil, gas and minerals make a major contribution not only to this country’s economy, but to those of many developing countries. They can deliver transformational change, if managed well, and can be worth billions to developing countries. For instance, Nigerian oil exports were worth almost $100 billion in 2012—that is more than the total net aid to the whole of sub-Saharan Africa. Interestingly, the acronym BRICBrazil, Russia, India and China—has been used for some years to represent the fast-developing countries, but countries such as Turkey and Nigeria are quickly coming into their own and challenging the BRIC countries as the next phase of fast-growth countries.

In 2007, Botswana became an upper middle-income country. In 1996, when it gained independence, it was one of the world’s poorest countries, and its success is largely due to well-managed diamond mining. Such examples show that international mining has the potential dramatically to boost economic growth and provide a route out of poverty for resource-rich countries. Listed and unlisted extractives companies are important partners for us in government. We work together with them to ensure that developing countries make the most of their resources to drive growth and tackle poverty, and do so in an open and transparent way. We work through DFID to help resource-rich developing countries derive the maximum possible benefits from oil, gas and mining projects in the region. We also work directly with companies, Governments and communities across the developing world, including in Africa, to improve the development impact of extractive industries. For instance, we are working with the World Bank in the Democratic Republic of Congo, where we are investing in mining sector reform. Our immediate focus is on conflict minerals in the east, where we are partnering with responsible mining companies.

Work is under way with UK-based and other extractive companies to build skills and capacity in east Africa, too, where we are evaluating whether to contribute to the African Legal Support Facility. That organisation plays an important role in procuring world-class legal expertise for Governments who are negotiating complex oil, gas and mining investments, so that the Governments of developing countries have the same access to high-quality legal advice as large companies.

We are also committed to increasing transparency in the extractives sector. I want to dwell on several points that the hon. Gentleman made. As he is well aware, we are committed to encouraging strong, transparent and accountable institutions, which can regulate extractives and promote open markets and open societies. Helping to create that environment is an important part of attracting responsible investment too.

The UK presidency of the G8 was used by the Government to commit to working towards common global standards of transparency. Transparency was one of the goals of the summit. We want to level the playing field for business internationally and provide information for citizens around the world, so that they can hold their own Governments to account in the same way as we are held to account in this Chamber. We have launched eight partnerships, working with companies, Governments and civil society in resource-rich countries to improve transparency and build accountability. It was very encouraging to hear the leaders of UK-listed extractives companies, including Sam Walsh, the chief executive officer of Rio Tinto, join us in calling for other countries to adopt common global standards of extractives transparency.

As the hon. Gentleman mentioned, in May the Prime Minister announced that the UK would sign up to the extractives industries transparency initiative. As he said, it is a matter of getting the right balance between transparency to support the good use of resources and ensuring that such transparency is not over-burdensome. The EITI is designed to build trust and dialogue and promote public debate by putting information into the public domain. For instance, in countries with very poor governance, the EITI prompted the first time that different stakeholders sat round the same table to discuss the management of the mining sector. The initiative has a direct impact.

Many extractive companies listed or headquartered in the UK are active in supporting the EITI. Shell sits alongside Rio Tinto on the international EITI multi-stakeholder board. By signing up, we want Governments to know that the EITI is not just for developing countries, but should be a truly global standard. The hon. Gentleman put the case very well. It means that we have a stronger argument to encourage emerging and developing countries to adopt similar rules.

The Under-Secretary of State for Business, Innovation and Skills, my hon. Friend Jo Swinson, who is the Minister for employment relations and consumer affairs, is the UK’s EITI champion. She has committed to implementing an effective and timely initiative for the UK. Unfortunately she could not be present to respond to the debate today, but across the Department for Business, Innovation and Skills we take an interest in ensuring that the initiative works properly.

While the EITI shines a spotlight on domestic production, chapter 10 of the EU accounting directive requires listed and large extractive companies to report the payments they make to all Governments. We are committed to early implementation and are exploring whether we can put regulations in place in 2014, about a year ahead of the transposition deadline—not least because bribery and corruption are barriers to trade and growth, including in the extractives industry. They hinder development, distort competition and ultimately perpetuate poverty. Those problems can have a profound impact on developing economies, and the evidence is widespread. That is why the UK is a signatory to the UN convention against corruption and the OECD bribery convention. Under the Bribery Act 2010, which came into force in July 2011, a company that carries out business in the UK can be prosecuted for bribery anywhere in the world. Those companies can also trade on the honesty and integrity that the Bribery Act implies. It includes an innovative “failure to prevent” offence, and an “adequate procedures” defence to encourage companies to put in place measures to prevent people associated with them from bribing.

The Bribery Act is an important part of the agenda, but another barrier to growth is weak corporate governance. London is the world’s leading international financial centre, and a wide range of companies choose to list on our markets. That includes many extractive industries companies, whose operations are largely overseas. One of the reasons for that is our strong legal and regulatory framework, which includes corporate law and good corporate governance, giving shareholders clear rights on voting and information, and holding companies to account. That flexibility and confidence helps London as a listing location, and making sure that we keep that strength and confidence is important. We continue to enhance the listing rules to ensure that they are strong and well recognised internationally. The rights of independent shareholders in premium listed companies with controlling shareholders will be strengthened.

There is new guidance on independence requirements for companies with a premium listing in some sectors, including mineral and extractive industries.

Ultimately, those and other measures that we are putting in place are there to ensure that we have a strong and well recognised system that has the right balance of transparency. As with the trust that is built up through the EITI, the trust and transparency within the UK corporate law and governance framework is vital to achieve long-term sustainable economic growth, including in extractives. I hope that the hon. Gentleman will agree with that.

We consulted on these issues during the summer, following the Prime Minister’s announcement in May that we were joining the EITI. We will publish our official response in early 2014. I am sure that the comments made by the hon. Gentleman today will be taken into account in that. Last month, the Prime Minister announced the outcome of an important part of the trust and transparency agenda. The Government obtained information on the individuals who really own and control UK companies. The hon. Gentleman referred to some of the difficulties that a non-transparent process can lead to. We will implement a central register of this information, which will be maintained by Companies House, and the register will be publicly accessible.

I hope that I have assured the hon. Gentleman that the Government take seriously the role of extractive industries, not least in promoting development in the fast-growing parts of the world, and that we strongly support greater transparency, an agenda on which the Prime Minister has led. It is important to grow economies and empower citizens, to encourage the development of strong and flexible corporate governance and to make sure that UK listed mining companies can lead the way. I am grateful to the hon. Gentleman—

House adjourned without Question put (Standing Order No. 9(7)).