The ‘resource curse’: DR-Congo, bad presage for Virunga

Extract from TROCAIRE – CAFOD briefing on Oil extraction in Lake Albert, Uganda and DRC*

The ‘resource curse’

Credits: FP

Over 50 countries worldwide are defined as natural-resource-rich. In sub-Saharan Africa nearly half the population lives in oil- and mineral-rich countries, yet most of such countries have poor levels of human development. The phrase ‘resource curse’ describes how many resource-rich
developing countries experience negative economic, social and environmental consequences from oil and minerals exploration and production.

Natural-resource-dependent economies tend to be vulnerable to ‘boom and bust’ cycles – large sudden inflows of revenue from selling oil and minerals at high prices, followed by declines in revenue when the resource prices or demand levels fall rapidly, or when production slows or reserves are depleted. Volatile prices and unstable revenues make budget forecasting difficult.

Other factors in the ‘resource curse’ include: companies using transfer mispricing to move profits out of host countries to tax havens and secrecy jurisdictions, depriving the host government of a fair share of the revenue; government financial mismanagement and corruption; unplanned public spending sprees on socially useless or divisive projects; high inflation that distorts and weakens other sectors of the economy, especially exports; strengthening of patronage systems that undermine accountability and stability; mistrust when contracts are kept secret; negative social and environmental impacts on local communities, with poor levels of compensation; a loss of governance transparency as ‘easy’ (unearned) money renders governments less reliant on earned income such as taxation; rising economic inequality; political instability; and in the worst cases violent conflict over who controls and who benefits from extracting the resources.

Counties that lack public sector capacity to develop the oil are also likely to have poor capacity in terms of negotiating, monitoring and managing contracts, managing revenue and expenditure flows, and mitigating negative social and environmental impacts.

The legal framework for the DRC oil sector is less well documented – at least in English language publications – than for Uganda. In the DRC the state is empowered to grant largescale commercial licences for oil development, but permits are sometimes granted outside the formal legal framework. Commentators mention the government’s currently limited capacity to negotiate satisfactory extractive industry agreements or to enforce compliance.

Since 2000 the DRC government has enacted new legal codes for forestry and mining and a new Environment Law (2011), and a new Oil Code released in 2010 by the Ministry of Energy has been under discussion. The Oil Code has reportedly been passed by the Senate and is currently with the National Assembly. It contains revisions to the regulatory regime and recommends changes to future PSAs to avoiding weaknesses of deals already signed.
Under the new code, disputes between the DRC government and foreign oil companies will be resolved not in DRC courts but by an international investment tribunal in Paris.

Further facts are available (in English) mainly from limited published details of specific PSAs signed prior to 2010. The DRC made its current PSAs with oil companies through the Ministry for Energy and Ministry for Finance. The agreements commit the companies to a preliminary environmental audit and mitigation plan for the exploration period, but environment impact assessments and management plans are not required until oil fields have been located and assessed and operations are shifting to production. And these provisions are said not to be integrated into a coherent legislative and regulatory framework.

Commentators have criticised the DRC’s PSAs for an absence of enforceable environmental safeguards and of applicable fines for environmental damage to land and water resources. (Internationally, fines are widely recognised as crucial to preventing regular large oil spills.) ‘Stabilisation clauses’ in current PSAs with oil companies mean that when new legislation or regulations are introduced they will not apply to these earlier agreements.

The DRC is a candidate country for the Extractive Industries Transparency Initiative (EITI; see below). If the DRC government wishes to be accepted as compliant with the EITI’s voluntary code it will be obliged to publish the revenues it receives from companies for oil production.

Under the existing PSAs, the oil companies must spend relatively small amounts of money each year during exploration and production on ‘education, public health and culture’ projects designed by the DRC Ministry of Energy.

To continue reading – source: Oil Extraction in Lake Albert – briefing booklet 8