Improving investment climates
in resource-rich countries
62. In addition to tighter regulation of loans, a
range of other interventions are crucial to improving the business
environments of resource-rich but poverty-stricken countries.
Resource-rich countries tend to experience weaker growth than
non-resource-rich ones. The well-documented 'resource curse'
the self-perpetuating cycle of economic dependency, corruption
and conflict to which resource-rich countries are prone
has contributed to weak growth in countries such as Equatorial
Guinea, Angola, the Democratic Republic of Congo, Chad and Nigeria.
Empirical evidence shows, however, that the 'resource curse' can
be avoided. Through good governance, macro-economic stability
and careful management of its diamond revenues, Botswana averaged
12% annual growth between 1975 and 1995.
63. Mis-mananaged and non-transparent expenditure
of the revenues from natural resources is a key contributor to
corruption, poor governance and conflict. The payments made by
oil, gas and mining companies to governments currently tend not
to be made public, severely impairing the ability of citizens
to chart these nationally-owned funds and yet these flows
are massive: the Overseas Development Institute estimates that
due to high global oil prices, the annual surpluses of around
US$35 billion received by the eighth largest resource-producing
countries in Africa will easily dwarf the total amount of aid
pledged by G8 governments to the whole of the continent in the
64. DFID has attempted to develop
a strategy to address these problems of transparency by initiating
the Extractive Industries Transparency Initiative (EITI). The
EITI a partnership of oil, gas and mining companies, NGOs
and producer/consumer countries was launched by the Prime
Minister in 2002, following pressure from civil society.
By increasing public knowledge of revenue levels, the Initiative
aims to empower citizens and institutions to hold governments
and companies to account. Twenty countries have endorsed the principles
of EITI and 11 are currently at various stages of implementation.
DFID has convened the EITI process since its inception and now
jointly hosts the EITI Secretariat with the World Bank. DFID
has spearheaded and hosted the EITI process over the past four
years. DFID's leadership has secured buy-in to the process from
companies and countries alike.
65. However, implementation of the EITI that
is, meeting the EITI criteria including the regular publication
of all oil, gas and mining payments by companies to governments
and all revenues received by governments remains patchy.
Whilst Nigeria and Azerbaijan have developed quite substantive
EITI reports, other countries such as Ghana are 'stuck' at the
early stages of reporting. Key oil-producing regions (North Africa,
Middle East and Latin America) remain under-represented: the overwhelmingly
majority of current EITI countries are in West Africa.
The EITI implementation process needs to be expedited within
signatory countries. Under-represented oil and gas producing regions,
such North Africa, the Middle East and Latin America, need to
be brought on board.
66. Another primary concern with the EITI approach
relates to poor implementation standards; in many countries, governments
and companies propose aggregating payments and revenue data, thereby
Civil society may not always be sufficiently empowered nor have
the political space to serve fully in a watchdog role, as demonstrated
by the case of the Democratic Republic of Congo, where two civil
society members of the EITI National Commission were subjected
to death threats in May 2006.
Parallel measures to build capacity and
open the political space available to civil society will greatly
enhance EITI's potential to improve transparency and accountability.
67. Moreover, civil society organizations argue that
the whole premise of transparency is jeopardised by the EITI's
reliance on a voluntary rather than mandatory approach.
Possible options for a mandatory mechanism include requirements
in stock market listings or relevant national and international
DFID claims that, for now, the voluntary approach is the right
one and that adopting the listings approach would risk excluding
the 70% of resource revenues emerging from state-owned companies.
However, the Department admits that the merits of adopting a mandatory
approach should be revisited in two or three years' time.
68. DFID's future involvement in EITI is unclear.
DFID plans to withdraw from hosting the Secretariat in the near
future ("sooner rather than later");
they state that this is due to the need for international ownership
rather than efficiency savings or other reasons.
Discussion is ongoing as to EITI's future governance and institutional
arrangements. DFID is "actively considering" how to
extend the principles of EITI to others sectors, most likely to
be procurement, construction and/or arms.
DFID should keep an open mind as to potential
strategies for underpinning the EITI with mandatory disclosure
requirements and should, at the very least, actively consider
transferring from a voluntary to a mandatory approach in 2008-9,
when further international implementation and political will has
been secured. DFID must energetically explore when, how and to
whom EITI's Secretariat should be transferred, with the ultimate
aim of international 'ownership' the driving decision-making factor.
Securing and consolidating further 'buy-in' from other donors
will be particularly important to achieving this. DFID needs to
move ahead with extending the EITI framework to other sectors
such as procurement, construction and arms.
Enabling investment climates
in fragile, crisis-affected and least developed states
69. Resource-rich states are just one example of
priority and more challenging contexts for investment
climate work. Other such environments include fragile and crisis-affected
states, which are an increasingly prominent area of DFID engagement.
DFID has an emerging work-stream on how to minimise the private
sector's contributions to fragility or crisis, and maximise its
solutions to these problems. The Department lists the following
interventions as having helped the private sector contribute to
stability and development: public works programmes in post-conflict
situations; micro-finance; remittance initiatives; technical assistance
on legislation, customs and taxation; financial sector restructuring
and monetary policy advice.
70. Property rights are omitted from this list but
are clearly a significant strategy in building investment climates
in fragile states.
Land and property titling assist with reconstruction and economic
integration. Disciples of Hernando de Soto's approach to property
rights even claim that integration into the formal property system
can form part of anti-terrorism strategies.
DFID is working on property rights in a few fragile states - for
instance, in Angola, where is co-funding the Luanda Urban Poverty
Project, which has a considerable focus on land law.
However, DFID's property rights programmes are overwhelmingly
concentrated in more stable states such as Uganda, Kenya, Rwanda,
India and Vietnam. DFID should expand its resources for property
rights work to ensure programmes and projects are prioritised
for fragile and conflict-affected states.
71. But whilst property rights, access to finance
and other interventions in the enabling environment will open
market opportunities to a degree, PSD in such contexts may simply
not be appropriate or possible. Wars tend to eliminate or seriously
disable investment climates, and accordingly conflict prevention
strategies are, of course, the ultimate tool for addressing PSD
in fragile and conflict-affected states. As the Secretary of State
himself admitted, "The very basic responsibility of governments
is not having a war [
] Somalia [is] a country devastated
by 15 years of conflict, people are eking out an existence [
but is anybody going to come and invest money in Somalia while
the conflict goes on? No, they are not."
72. However, for states that are no longer in the
throes of out-and-out war, DFID needs a clearer strategy for
improving nascent, disabled and damaged investment climates. DFID's
emerging work-stream in this area must be strengthened to develop
a specific PSD strategy for fragile and conflict-affected states,
with strong links to complementary policy areas such as transparency
in the natural resources industry and conflict reduction. This
is particularly important given DFID's increasing profile in such
73. Another issue that this inquiry has grappled
with is how to improve the climate for investment and PSD in the
poorest countries. The Committee's visit to Malawi in February
2006 witnessed a country which is simply too poor to have much
of a formal private sector. It is clear that in very poor countries,
where there is very little capital or purchasing power, donors
and governments have a particular obligation to step in and 'fill
the gap' between private sector reach and the poorest of the poor.
As Robert Annibale of Citibank told the Committee:
"There is a public good about providing
a certain level of inclusion into society, and some of that may
need to come from specialised institutions understanding that
post-conflict, war-affected or isolated communities or indigent
people may not be reached by commercial models".
74. To some extent, filling this gap is about pioneering
investment in difficult business environments to create a 'demonstrator
effect', which DFID has attempted to do for many years through
its principal instrument for risk finance, CDC (see Chapter 5
for more information on the CDC). DFID also works with pioneering
investors such as the IFC and helps to mitigate risks for the
private sector by providing initial finance for infrastructure
projects through the Emerging Africa Infrastructure Fund and GuarantCo.
75. Microfinance is clearly of signal importance
in reaching the financially excluded and thereby pulling the margins
of the private sector right down to the poorest of the poor. DFID
is often praised for its microfinance work,
but its successes in this area need to be scaled up radically
within the poorest countries; more than 90% of the population
in African countries remains financially excluded.
76. Instituting general measures to improve the investment
climate addressing competition, taxation, regulation,
infrastructure and corruption will be particularly pressing
within the poorest and least developed countries. Yet beyond re-stating
these wider PSD strategies, DFID had no specific strategies for
improving the investment climates of least developed countries
to share with the Committee. When asked about the specific example
of Malawi, the Secretary of State's response was simply that it
is "a small market
a very difficult example."
DFID had no clear answers to this inquiry on specific PSD
strategies for the poorest countries, beyond work on the enabling
environment and regional integration. A specific work-stream on
improving the investment climate of the poorest countries would
help identify a coherent strategy and more creative approaches
towards this end.
61 World Development Report 2005, Overview (pp.1-15). Back
World Development Report 2005, p.190. Back
Electricite de France, 'Electricity for All: Timetables, Targets,
Instruments' (2002), available online at http://www.geni.org/globalenergy/library/media_coverage/
UNICEF and WHO, 'Meeting the MDGs drinking water and sanitation
target - A mid-term assessment of progress' (2004). Back
See Commission for Africa, Section 7.3.2 on Infrastructure (pp.
Ev 187 [Professor Keith Palmer] Back
World Bank, 'Pro-Poor Growth in the 1990s' (2005). Back
Asian Development Bank, Japan Bank for International Cooperation
and the World Bank, 'Connecting East Asia: A New Structure' (2005).
Online at http://web.worldbank.org/WBSITE/EXTERNAL/
Ian Curtis, 2005, 'Infrastructure in the Context of the 2005 Agenda',
paper presented at Institution of Civil Engineers Conference:
'Accelerating Progress towards the Millennium Development Goals:
Scaling-up Investment in Infrastructure', held in London, 28 November
Commission for Africa Report (2005), pp.233-234. Back
Q 444 [Hilary Benn, Secretary of State for International Development] Back
Commission for Africa Report (2005), p.233-234. Back
Q 247 [Professor Keith Palmer] Back
The Private Infrastructure Development Group (PIDG), whose founding
members are DFID, the Swedish Government acting through the Swedish
International Development Co-operation Agency, the Netherlands
Minister for Development Co-operation and the Swiss State Secretary
for Economic Affairs of the Government of the Confederation of
Q 206 [Petter Matthews] and Q 272 [Professor Keith Palmer] Back
UN Habitat Submission to Commission for Africa Report, 2004. Back
Hernando de Soto, 'The Mystery of Capital: Why Capitalism Triumphs
in the West and Fails Everywhere Else' (Black Swan Books, 2000). Back
DFID, 'An Assessment of Hernando de Soto's Work', internal DFID
paper attached to letter sent by Hilary Benn, Secretary of State
for International Development, to John Bercow MP (24 February
2006). Copy of letter placed in the House of Commons Library. Back
Q 65 [Sharon White] Back
Ev 145. See the sub-section on fragile, conflict-affected and
least developed states later in this chapter for further discussion
of the location of DFID's property rights programmes. Back
Q 66 [William Kingsmill] Back
Ev 141. DFID currently employs 25 PSD Advisers. Some are known
as 'Enterprise Development Advisers' and others as PSD Advisers
- to avoid confusion, this report will refer to all 25 positions
as PSD Advisers. Back
Ev 141 Back
Q 66 [William Kingsmill] Back
DFID, 'An Assessment of Hernando de Soto's Work (24 February 2006). Back
World Development Report 2005, Overview. Back
Q 473 [Dr Claire Melamed] Back
World Development Report 2005, p.130. Back
World Bank, 'Doing Business in 2004 - Understanding Regulation'
(Washington: World Bank). Back
World Development Report 2005, p.10. Back
Ev 305 Back
See, for instance, Ev 290 and Ev 291. Back
Ev 305 Back
The ICF was formally launched at the World Economic Forum on Africa,
held in Cape Town from 31 May to 2 June 2006. Back
of 29 June, donor contributions included: DFID US$30m; IFC US$30m;
Netherlands 15m Euros; Ireland 2m Euro; European Commission: Pledged
- amount to be determined. Corporate contributions included: Shell
US$2.5m (over 5 years); AngloAmerican US$2.5m (over 5 years);
Unilever US$1 (for first 2 years, remaining $1.5m dependent on
performance in first phase); SABMiller US$2.5m. Back
World Development Report 2005, p.15. Back
Ibid, p.190. Back
Ev 321 Back
Statistics quoted in the Commission for Africa Report, p.222. Back
World Development Report 2005, p.37. Back
See, for instance, Q 166 [Jay Naidoo]. Back
Q 262 [Michael Pragnell], Ev 240 and Ev 220 Back
Q 405 [Hilary Benn, Secretary of State for International Development].
DFID, Eliminating World Poverty: Making Governance Work for the
Poor, Cm 6876, July 2006. Back
Ev 177 Back
For further details, see http://www.thecornerhouse.org.uk/item.shtml?x=471570. Back
Ev 177 Back
Q 443 [Secretary of State] Back
Q 442 [Secretary of State] Back
Ev 178 Back
Ev 318 [UK Social Investment Forum] Back
'Just Pensions' was launched in 2000 by Traidcraft and War on
Want and became a UK Social Investment Forum programme in 2002-2005,
receiving core funding from DFID for this period. Back
Ev 318 and Ev 319. The Equator Principles are a set of voluntary
guidelines for managing social and environmental issues in project
Steve Waygood, 'A challenge for the industry', Financial Times
(Responsible Business), 13 June 2006. Back
See, for example, Gabriel Rozenberg, Jonathan Clayton and Gary
Duncan, 'Thirst for oil fuels China's grand safari in Africa',
The Times, 1 July 2006. Back
'The Other Side of the Coin: the UK and Corruption in Africa',
Africa All-Party Parliamentary Group (March 2006). Back
For example, Global Witness, 'All the President's Men', (March
2002) and Africa All-Party Parliamentary Group, 'The Other Side
of the Coin: the UK and Corruption in Africa', (March 2006). Back
Lester Holloway, 'Africa: the Chinese Takeaway', BLINK (25 April,
2006), available online at http://www.blink.org.uk/pdescription.asp?key=11422&grp=18&cat=183. Back
Gavin Stamp, 'China Defends its African Relations', BBC News Online,
26 June 2006 http://news.bbc.co.uk/1/hi/business/5114980.stm. Back
Reuters AlertNet, 'Angola: China entrenches position in booming
economy' (17 April 2006). Back
Q 295 [Ann Grant] Back
Increase measured in average GDP per capita growth. Since 1995,
the rate has slowed due to factors such as the HIV/AIDS pandemic,
and currently stands at 5%. Back
Ev 301 [Publish What You Pay coalition] Back
The Publish What You Pay coalition of NGOs (www.publishwhatyoupay.org).
See http://www.eitransparency.org/section/countries for a map
of country membership of EITI. Back
Ev 302 Back
Ev 302 and 'Death threats against activists for denouncing abuses
in the natural resource sector in the DRC', Publish What You Pay
press release, 5 May 2006, available online at http://www.publishwhatyoupay.org/english/pdf/releases/pwyp_drc_050506.pdf. Back
Ev 302 Back
Ev 302 Back
Q72 [Sharon White] Back
Q74 [Sharon White] Back
Q73 [Sharon White] Back
Q75 [Sharon White] Back
DFID, 'Why we need to work more effectively in fragile states'
(2005), available online at http://www.dfid.gov.uk/pubs/files/fragilestates-paper.pdf. Back
Ev 139 Back
See also the earlier Property Rights sub-section in this chapter. Back
The Economist, 'The Economist Versus the Terrorist' (30 January
2003), available online at http://www.economist.com/people/displayStory.cfm?story_id=1559905
. See Paragraphs 42 and 43 for further
discussion of de Soto's ideas. Back
Ev 145 Back
Q 406 [Hilary Benn, Secretary of State for International Development] Back
Q 165 [Robert Annibale] Back
'DfID and the Private Sector' (2005), p.24. Back
See, for instance, Q 159 [Robert Annibale] Back
Ev 129. See Chapter 5 for more information on microfinance. Back
Q407 [Secretary of State] Back