Extractive Industries (Developing Nations)

Bob Stewart Excerpts

Friday 29th November 2013 Commons Chamber

[Eric Joyce (Falkirk) (Ind)]

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 I have 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.

[Bob Stewart (Beckenham) (Con)]

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?

[Eric Joyce]

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 led 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.