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Energy & Environment

How Latin America Can Use its Natural Resource Wealth Responsibly

Extractive industries can bring benefits for the region. But governance of the sector must continue to improve.
mining
Federico Rios/Bloomberg via Getty Image

Several countries in Latin America and the Caribbean have made progress in recent years in improving transparency standards in the extractive industries. Despite their efforts, results in the sector remain uneven, and challenges persist in ensuring good governance. 

Meanwhile, several corruption cases, many of them associated with the management of natural resources, have dominated public debate in the region. The Lava Jato case, which involved senior executives of Petrobras, is just one example. And concerns about the environmental and social costs of extractive industries continue to gain urgency. 

In response to these challenges, transparency has proven to be a fundamental instrument to strengthen governance in the sector. But it is not enough. In a time of lower commodity prices and increasing concerns about inclusive and sustainable development, what more can be done in the region? Here, we present some proposals for improvement.

Promote transparency, accountability and citizen participation

The extractive industries must be held to account for what they do and how they do it. For this to happen, civil society actors are essential. Governments need to find effective mechanisms of accountability and citizen participation, including through representatives in communities affected by extractive industries. These mechanisms can effectively connect the information the public has at its disposal with the action expected from both governments and companies, banishing “zombie transparency” and producing the conditions in which extraction can positively impact economic and social development. 

One example is the Extractive Industries Transparency Initiative (EITI), a global initiative that requires the dissemination of information generated throughout the value chain of the extractives sector, from permits and licenses, to the use of resources collected by the government. The initiative includes 52 countries, and important players such as Brazil have expressed interest in joining. EITI member countries are measured for their level of progress in the implementation of the EITI Standard. Even though 10 countries rich in natural resources in the region have joined, only one, Colombia, is currently listed as fully compliant.

Nonetheless, transparency commitments of this kind help generate a dialogue and a roadmap to improve the management of the sector. They aren’t the endpoint – complying with EITI requirements is not just about formal alignment with its mandates, but also about using these requirements to increase effectiveness in the sector. The next version of the EITI Standard, which will be launched at the 2019 EITI Global Conference, will include ambitious additional commitments for mandatory disclosure of contracts, along with encouragement for disclosure of payments and monitoring of environmental impacts.

Close the implementation gap in the sector

Even though advances in transparency norms have taken place, countries in Latin America and the Caribbean continue to exhibit an implementation gap with respect to those that regulate the governance of extractive industries. According to the 2017 Resource Governance Index (RGI), countries rich in natural resources need to redouble their efforts to strengthen the rules and institutional frameworks that govern the extractives sector, and improve implementation that follows the adoption of legislation and regulations. 

To reduce the implementation gap it is important that all actors have clarity, based on data, about what works and what doesn’t. Producing and analyzing evidence about the challenges associated with the extractives industry is fundamental to understand the context, progress and challenges countries face; this includes diagnosing the governance, corruption and integrity vulnerabilities along the chain of decisions in the extractive sector. 

Strengthen regulatory frameworks and institutional capacities

Improving governance in natural resource-rich countries means preventing possible corruption or capture of the extractive sector, strengthening regulatory frameworks, and improving institutional capacities at the national and local levels. 

To begin with, national governments need to advance with the regulation and identification of possible conflicts of interest and places where actors may be vulnerable to political pressure. Governments should also strengthen regulations that promote transparency at all points of the value chain, including for sub-contractors, traders of raw materials and national oil companies. Otherwise, islands of opacity will persist. 

Promoting the governance of natural resources also implies (among other things) moving forward with institutional reforms to improve procurement systems. As demonstrated by the Lava Jato case, there is an important link between the irregular flow of money in politics and the control systems regarding procurement and sub-contracting by state-owned enterprises. More generally, it is imperative that countries move forward in the implementation of compliance programs for these businesses, promoting specific frameworks for transparency and integrity. 

Sovereign wealth funds, which invest revenues derived from extractive industries, are an important source of leverage to foster growth, and especially to mitigate external shocks and to save for future generations. Thus, supporting the alignment of these funds with the Santiago Principles, which establish best practices for transparency, is essential. This is of particular importance for countries such as Guyana, which has recently come across oil discoveries that, if managed in a framework of good governance standards, could make it one of the largest producers in the region.

Finally, at the state and local level, there is a lack of institutional capacity, regulatory frameworks and effective incentive systems to improve the governance of extractive industries. This is a problem, because in most countries in the region, it is these governments that are responsible for executing and utilizing public investment derived from mining income. 

Technology provides a powerful weapon to combat these deficiencies by diagnosing and managing governance problems in the public sector and bolstering collective action. In Colombia, for example, the MapaRegalias platform, developed by the IDB and the Colombian government, maps the origin and destination of resources associated with the exploitation of extractive industries. Thanks to the platform, the number of irregularities detected in projects financed through the General Royalty System (SGR) and reported to a control institution for further investigation rose from only 57 in 2013 to more than 1,000 in 2016.

But technology alone is not enough. The MapaRegalias platform is built on a series of policy improvements, such as a reform of the SGR and its information system, which generated incentives for better management of public resources. Providing local communities with detailed information on the positive and negative effects of the extractive sector is also essential. 

The Sustainable Development Goals and the extractive industries

Governments should systematically address the links between the extractive industries and the Sustainable Development Goals (SDGs), which include the preservation of the environment and climate change and social conflict.

As mentioned in a recent IDB report, in countries that are rich in natural resources, extractive industries often play a central economic role and have diverse links with other sectors of the economy. That poses challenges to growth and sustainable development. But specific inter-sectoral strategies can allow for greater environmental preservation and reduction in the carbon footprint without undo economic losses.

Inclusion is also a key objective of the SDGs. That includes gender considerations, such as those related to protection of women activists. Work on this issue is taking place at NRGI, and is among the IDB’s top priorities, as seen in the Emerging Women Leaders Program of the Extractive Sector in Peru, which takes a public-private approach to the issue. A new emphasis in the EITI Standard on reporting the benefits accrued to women in terms of employment and sub-national expenditures presents an important opportunity in this regard.

In sum, transparency is fundamental and necessary, but not enough. Accountability and citizen participation are critical to strengthening governance in the extractive sector. This must be complemented with institutional reforms, including in public companies and to prevent and control both corruption and capture – while also integrating the need to address the effects for climate change, the environment and the social sector. 

It is an ambitious agenda, but one to which governments, extractive companies, civil society and the international community must give priority. 

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Kaufmann is President and CEO of the Natural Resource Governance Institute (NRGI); Robinson is Executive Director of the Extractive Industries Transparency Initiative (EITI)’s International Secretariat; Vieyra is Senior Specialist at the Inter-American Development Bank (IDB). This article draws on the discussions that took place in the First Regional Forum “Strengthening Transparency and Good Governance in the Extractive Sector in Latin America and the Caribbean,” jointly organized by the three organizations.

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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: mining, energy, Environment

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