Revenue Watch: 4 out of 5 Companies Fail in Good Governance

The Resource Governance Index (RGI) measures the quality of governance in the oil, gas and mining sector of 58 countries. From highly ranked countries like Norway, the United Kingdom and Brazil to lowranking countries like Qatar, Turkmenistan and Myanmar, the Index identifies critical achievements and challenges in natural resource governance.

The 58 countries produce 85 percent of the world’s petroleum, 90 percent of diamonds and 80 percent of copper. Profits from their extractive sector totaled more than $2.6 trillion in 2010. In 41 of these countries, the extractive sector contributed a third of gross domestic product and half of total exports on average. Revenues from natural resources dwarf international aid: In 2011, oil revenues for Nigeria alone were 60 percent higher than total international aid to all of sub-Saharan Africa. The future of these countries depends on how well they manage their oil, gas and minerals.

Mismanagement and corruption have many manifestations and can have dire consequences. Some countries negotiate poor terms with extractive companies, forsaking potential long-term benefits. Many countries do not collect resource revenues effectively. And even when resource revenues do end up in government coffers, they aren’t always spent in ways that benefit the public. Too often, governments keep citizens and civil society leaders in the dark regarding government contracts and resource revenues. This opacity deprives the public of a voice or even representation in basic decisions on natural resources.

The RGI is based on the premise that good governance of natural resources is necessary for the successful development of countries with abundant oil, gas and minerals. It provides a diagnostic tool to help identify good practices as well as governance shortcomings.

The RGI evaluates four key components of resource governance in each country: Institutional and Legal Setting; Reporting Practices; Safeguards and Quality Controls; and Enabling Environment. The Index (See Figure 1) assigns a numerical score to each country and divides them into four performance ranges—satisfactory (71-100), partial (51-70), weak (41-50) and failing (0-40).

Main Findings

The RGI shows a striking governance deficit in natural resource management worldwide. Only 11 countries earn an overall score of above 70. The vast majority of countries exhibit serious shortcomings in resource governance.

More than half the sample, 32 countries, do not meet even basic standards of resource governance, performing weakly or simply failing. Among the 15 failing countries, seven score below 30: Cambodia, Iran, Qatar, Libya, Equatorial Guinea, Turkmenistan and Myanmar. As of 2012, when the data collection took place, these countries failed to disclose any meaningful information about the extractive sector and lacked basic governance standards.

There is room for improvement even among the 11 top-ranked satisfactory performers. For example, Brazil and Chile fail to publish their extractive industry contracts. Western Australia does not require public officials to disclose information about their financial interest in mining projects.

An examination of the four RGI components clearly shows the endemic nature of the resource governance deficit. Only Norway, the United Kingdom and the United States (Gulf of Mexico) earn a satisfactory score in all four components, leaving 95 percent of the sample without satisfactory standards in one or more areas. In the Reporting Practices component, the vast majority of countries (45 out of 58) have partial, weak or failing standards of transparency. In these countries, citizens lack access to fundamental information about the oil, gas and mining sector. For instance, a country might provide little or no information about which companies (domestic and foreign) operate in the extractive sector, how much the government collects in resource revenues and where those funds are allocated.

The governance deficit is largest in the most resource-dependent countries.

Of the 58 countries in the RGI, 41 are classified as resourcerich by the International Monetary Fund.5 That is, in each of these countries, oil, gas and/or minerals dominate the economy, making up at least 25 percent of gross domestic product (GDP), exports or government revenues. Only five of the 41 countries (Norway, Mexico, Chile, Peru and Trinidad and Tobago) have satisfactory standards of resource governance (a composite score of 70 or more).

Resource-rich countries receive an average score of 48 in the RGI composite, nine points lower than the average of their 17 less resource-dependent peers (see Figure 2). Similar disparity is evident in all four components of the Index. Among the resource-rich countries, only Norway rates satisfactory in all components. Thirty-seven of the resource-rich countries rate less than satisfactory in at least two of the four components.

Transparency is missing in the countries where it is needed most. Nine of the 15 failing performers (Algeria, Cameroon, the Democratic Republic of Congo (DRC), Equatorial Guinea, Iran, Libya, Qatar, Saudi Arabia and Turkmenistan) are among the most resource-dependent countries in the world. In 2010, resource profits in these countries totaled more than $530 billion, or about $1,500 per capita; oil, gas and mining contributed an average of 34 percent of GDP and a staggering 60 percent of total government revenues. Resource wealth of this scale affects every aspect of economics and politics in these countries. Yet governments provide the public negligible, if any, information about the industry on which their economic future depends.

The governance deficit affects nearly 450 million poor people in the most resource- dependent countries.

The share of the population living on less than two dollars a day is higher at the bottom half of the RGI ranking. In 26 resource-rich countries with weak and failing performance, more than 300 million people (or 50 percent of their combined populations) live on less than two dollars a day.

By comparison, in countries scored as having partial performance, 149 million people (32 percent of the population) live on less than two dollars a day; for the countries with satisfactory performance, the figure is 10 million people (7 percent of the population).

Satisfactory performance is possible in diverse contexts.

Six of the 11 top performers are middle-income countries—Brazil, Chile, Colombia, Mexico, Peru, and Trinidad and Tobago—showing that being wealthy is not a precondition for good governance. And with the exception of Brazil, all are resource-rich, demonstrating that resource dependence does not preclude transparency and accountability. The Index shows it is possible to adopt high reporting standards, including disclosure of timely, extensive information on operations and primary sources of revenue, when the extractive sector is of the utmost political and economic importance.

Even countries facing significant economic challenges exhibit good practices in selected components. For instance, Timor-Leste has adopted transparent and accountable systems for managing its oil wealth. And though Guinea’s overall minerals governance is weak, it recently initiated reforms to improve, as reflected in its high Institutional and Legal Setting score. Afghanistan and the DRC, both rated failing for overall resource governance, recently decided to publish most of their extractive contracts. These improvements could be a springboard for more decisive resource governance reforms.

Figure 1:

Rank	Country	Resource Measured	Composite Score	Institutional & Legal Setting	Reporting Practices	Safeguards & Quality Controls	Enabling Environment
1	Norway	Hydrocarbons	98	100	97	98	98
2	United States (Gulf of Mexico)	Hydrocarbons	92	88	97	89	90
3	United Kingdom	Hydrocarbons	88	79	91	83	93
4	Australia (Western Australia)	Minerals	85	88	87	65	96
5	Brazil	Hydrocarbons	80	81	78	96	66
6	Mexico	Hydrocarbons	77	84	82	81	53
7	Canada (Alberta)	Hydrocarbons	76	67	72	74	96
8	Chile	Minerals	75	77	74	65	87
9	Colombia	Hydrocarbons	74	75	73	91	58
10	Trinidad and Tobago	Hydrocarbons	74	64	83	86	52
11	Peru	Minerals	73	88	83	56	55
12	India	Hydrocarbons	70	60	72	83	61
13	Timor-Leste	Hydrocarbons	68	77	82	70	28
14	Indonesia	Hydrocarbons	66	76	66	75	46
15	Ghana	Minerals	63	79	51	73	59
16	Liberia	Minerals	62	83	62	71	31
17	Zambia	Minerals	61	71	62	72	37
18	Ecuador	Hydrocarbons	58	70	64	65	28
19	Kazakhstan	Hydrocarbons	57	62	58	76	32
20	Venezuela	Hydrocarbons	56	57	69	67	18
21	South Africa	Minerals	56	69	31	75	72
22	Russia	Hydrocarbons	56	57	60	62	39
23	Philippines	Minerals	54	63	54	51	46
24	Bolivia	Hydrocarbons	53	80	47	63	32
25	Morocco	Minerals	53	48	60	56	42
26	Mongolia	Minerals	51	80	39	49	48
27	Tanzania	Minerals	50	44	48	68	42
28	Azerbaijan	Hydrocarbons	48	57	54	51	24
29	Iraq	Hydrocarbons	47	57	52	63	9
30	Botswana	Minerals	47	55	28	53	69
31	Bahrain	Hydrocarbons	47	38	40	59	58
32	Gabon	Hydrocarbons	46	60	51	39	28
33	Guinea	Minerals	46	86	45	43	11
34	Malaysia	Hydrocarbons	46	39	45	39	60
35	Sierra Leone	Minerals	46	52	47	59	24
36	China	Hydrocarbons	43	43	46	46	36
37	Yemen	Hydrocarbons	43	57	46	52	16
38	Egypt	Hydrocarbons	43	40	44	48	40
39	Papua New Guinea	Minerals	43	59	34	50	38
40	Nigeria	Hydrocarbons	42	66	38	53	18
41	Angola	Hydrocarbons	42	58	43	52	15
42	Kuwait	Hydrocarbons	41	28	43	36	57
43	Vietnam	Hydrocarbons	41	63	39	31	30
44	Congo (DRC)	Minerals	39	56	45	42	6
45	Algeria	Hydrocarbons	38	57	41	28	26
46	Mozambique	Hydrocarbons	37	58	26	37	37
47	Cameroon	Hydrocarbons	34	63	33	25	17
48	Saudi Arabia	Hydrocarbons	34	30	35	31	38
49	Afghanistan	Minerals	33	63	29	38	8
50	South Sudan	Hydrocarbons	31	80	17	35	8
51	Zimbabwe	Minerals	31	48	23	56	6
52	Cambodia	Hydrocarbons	29	52	13	46	20
53	Iran	Hydrocarbons	28	26	33	26	23
54	Qatar	Hydrocarbons	26	15	14	20	66
55	Libya	Hydrocarbons	19	11	29	15	10
56	Equatorial Guinea	Hydrocarbons	13	27	14	4	4
57	Turkmenistan	Hydrocarbons	5	12	4	0	3
58	Myanmar	Hydrocarbons	4	8	5	2	2
Resource-rich countries, as defined by the IMF, appear in italics.

Source: Revenue Watch Institute