At the beginning of December, Transparency International published thelatest edition of its Corruption Perceptions Index. E&MJ assesses some ofthe implications for mining-sector investment worldwide.
Most mining companies are at least aware of the risks that come with corruption. But to what extent is this taken into account when evaluating projects for development? Some of the majors have clearly defined policies that state zero tolerance to corruption in any form, publicly and unequivocally. In some respects, they have an advantage in terms of their size and global presence, and no doubt are used to diplomatically fend off any suggestions that could be deemed inappropriate.
Even then, the industry’s leading companies can still sometimes find themselves embarrassed through the actions of individual staff members—and in that respect are no different from majors in other sectors. In an interview broadcast on the BBC in June, Rio Tinto CEO Sam Walsh stated publicly his disappointment at the bribery incident in 2010 involving four of the company’s employees in its Shanghai office. “They let us down, and we fired them,” was the gist of what he said.
For smaller companies, of course, the situation can be more difficult. Lightweight entities obviously have a more challenging time when it comes to negotiating with authorities in jurisdictions where “easements” are an accepted way of doing business. It requires strong ethics, and understanding shareholders, to walk away from one’s prime project if the conditions prove to be unacceptable in this respect.
Unfortunately, corruption is like blackmail; once accepted, however unwillingly, it never goes away. And with the incentive of discovering world-class deposits in areas of the world that have yet to receive thorough exploration, it is something that the mining industry in all its forms has to be aware of, and find ways of preventing.
The World’s Saints and Sinners
In early December, Transparency International (TI) launched the 2014 edition of its Corruption Perceptions Index (CPI), ranking 175 countries based on expert opinions of public-sector corruption. Countries’ scores can be helped by open government where the public can hold leaders to account, while a poor score is a sign of prevalent bribery, lack of punishment for corruption and public institutions that don’t respond to citizens’ needs, the organization explained.
From the mining industry’s perspective, the need for transparency has increasingly become a watchword for corporate probity, with a number of countries where companies are either domiciled or listed on stock exchanges having introduced legislation to this effect. On the other hand, there have been several occasions in recent years where companies from less-regulated jurisdictions have appeared to “claim-jump” projects, especially in countries that—perhaps unsurprisingly—rank quite lowly on the CPI. Examples that spring to mind include ENRC’s acquisition of some copper projects in the DRC, which cost the company $1.25 billion in compensation. Likewise, BSG Resources’ acquisition of part of the Simandou iron-ore concession in Guinea has since been publicly called into question.
So where in the world is it relatively safe to explore, and to develop deposits that such exploration uncovers, and where should the prospector be on guard? Remember, of course, that this is only looking at a greater or lesser risk of corruption, and that other factors, such as political or fiscal changes, can also play a major role in corporate perceptions about where to spend exploration and development dollars.
Looking at the list, countries that have both mineral potential and the highest ratings on the CPI include New Zealand, Finland, Sweden and Norway, with Canada and Australia not far behind. The United States and Chile also rank highly, while the top-rated country in Africa, Botswana, falls only just outside the top 30 of the 175 covered.
The second quartile of the list includes Namibia, South Africa, Brazil, Mongolia and the Philippines, but by now countries are scoring only between 30 and 40 points out of a maximum 100. That is becoming uncomfortably worrying, given their mineral potential.
Sadly, the lower half of the list contains many of the countries that one might uncharitably refer to as “the usual cast of suspects.” Prominent among them from a mineral-industry perspective are Zambia, China, Argentina, Indonesia, Russia, Papua New Guinea, the DRC, Venezuela and Uzbekistan. The warning here is clear: be very, very careful when considering investments there.
Other Considerations
Corruption is, of course, just one aspect that companies (and individuals, for that matter) need to take into consideration. The Fraser Institute’s annual Survey of Mining Companies, due for its next edition in March, looks at wider perceptions of investment attractiveness and does not mention corruption specifically at all. The one section of its report that refers to corruption in passing is in relation to individual countries’ legal systems, insofar as they are fair and transparent, and produce results in a timely manner.
Comparing the listings compiled by the two organizations, overall there are few surprises in terms of countries’ relative positions. However, looking specifically at the Fraser Institute’s “investment attractiveness” index, which includes both geological favorability and perceptions of national policy into account, there are some significant differences. Mexico, for example, ranks higher in the Fraser Institute list than in the TI CPI; Argentina, despite its massive mineral potential, is depressingly lower.
It should also be remembered that the two surveys are not strictly comparable in terms of their coverage. The Fraser Institute looks specifically at jurisdictions where mining and exploration companies are already at work, and for the United States, Canada and Australia, subdivides them further. The TI CPI provides broad-brush coverage of all the world’s countries, including many where mining is of minor or no significance.
Keeping It Clean
Corruption comes in all shapes and sizes, from the individual having to “grease the palm” of a local official in order to get the right stamp on a piece of paper, to transactions between parties during high-level negotiations over major investment or purchase proposals. “Grand corruption in big economies not only blocks basic human rights for the poorest but also creates governance problems and instability,” said TI Chairman José Ugaz, in December. “Fast-growing economies whose governments refuse to be transparent and tolerate corruption, create a culture of impunity in which corruption thrives.
“Countries at the bottom need to adopt radical anti-corruption measures in favor of their people. Countries at the top of the index should make sure they don’t export corrupt practices to underdeveloped countries,” he added.
The exploration and mining industry is in a strong position in this respect, with many international participants domiciled in low-corruption jurisdictions while working elsewhere. Major companies have a role to play here, leading by example. Last November, TI published Transparency in corporate reporting: assessing the world’s largest companies, looking at the reporting practices of 124 of the biggest publicly listed companies. Included within this list under the “basic materials” heading were ArcelorMittal, BHP Billiton, Rio Tinto, Vale and China Shenhua Energy.
Having clearly defined anti-corruption programs is one aspect on which the companies were judged, with ArcelorMittal, BHP Billiton and Rio Tinto all ranked highly in this respect. Vale’s performance was assessed at near-average for the whole sample, while anti-corruption policies at Shenhua were found to be wanting.
As part of its report, TI offered recommendations to companies, governments and investors. For companies, a key weapon against corruption is to ban facilitation payments, it said. “Facilitation payments are bribes and should be treated as such. They are part of a cycle of bribery that corrodes public and business standards and contribute to a climate that is conducive to larger-scale public sector bribery and state theft.
“More and more companies recognize that facilitation payments may pose legal and reputational risks and may have a cost that is not insignificant. As a result these companies have adopted a zero-tolerance policy with respect to facilitation payments.”
For investors, TI suggests that they demand that companies report more comprehensively, and use this information in investment decisions. “Investors must evaluate all risks related to their investments. To identify a company’s financial, political and reputational risks, investors must know how the company is addressing the risks of corruption.”
