[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                 TRANSPARENCY OF EXTRACTIVE INDUSTRIES:
                HIGH STAKES FOR RESOURCE-RICH COUNTRIES,
                  CITIZENS, AND INTERNATIONAL BUSINESS

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 25, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-75




















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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey              RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire         TOM PRICE, Georgia
KEITH ELLISON, Minnesota             GEOFF DAVIS, Kentucky
RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida                 JOHN CAMPBELL, California
CHARLES WILSON, Ohio                 ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut   PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana                KENNY MARCHANT, Texas
ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia                KEVIN McCARTHY, California
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 25, 2007.............................................     1
Appendix:
    October 25, 2007.............................................    27

                               WITNESSES
                       Thursday, October 25, 2007

Baker, David, Vice President for Environment and Social 
  Responsibility, Newmont Mining Corporation.....................    12
Gary, Ian, Senior Policy Advisor for Extractive Industries, Oxfam 
  America........................................................     6
Karl, Terry Lynn, Professor of Political Science, and Gildred 
  Professor of Latin American Studies, Stanford University.......     4
Lafon, Father Patrick, former Secretary General of the Catholic 
  Bishops Conference of Cameroon.................................     7
Mitchell, Paul, President, International Council on Mining and 
  Metals.........................................................     9

                                APPENDIX

Prepared statements:
    Waters, Hon. Maxine..........................................    28
    Gary, Ian....................................................    31
    Karl, Terry Lynn.............................................    40
    Lafon, Father Patrick........................................    58
    Mitchell, Paul...............................................    62

              Additional Material Submitted for the Record

Baker, Hon. Richard H.:
    Statement of the International Council on Mining and Metals..    70





























                       TRANSPARENCY OF EXTRACTIVE
                      INDUSTRIES: HIGH STAKES FOR
                   RESOURCE-RICH COUNTRIES, CITIZENS,
                       AND INTERNATIONAL BUSINESS

                              ----------                              


                       Thursday, October 25, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Waters, Watt, Scott, Green, 
Cleaver, Moore of Wisconsin; and Baker.
    The Chairman. The hearing will come to order. This 
committee has under its jurisdiction the American relationship 
with the international financial institutions. It has been a 
subject in which I have long had a very strong interest and the 
last time the Democrats were in power I chose to chair the 
subcommittee which had jurisdiction over the international 
financial institutions.
    For much of this year, we have been dealing with some 
housing issues and some other domestic issues which demanded 
attention, but this whole set of issues involving development 
and particularly our moral responsibility to try to reduce 
poverty in the world have been very much on our mind. We are 
now going to be focusing--we have already begun in the latter 
part of this year and next year--on development issues. And we 
will be dealing with such questions as debt relief.
    We had a hearing on the question of whether or not there 
is, in certain World Bank documents, a bias against improved 
social conditions for working people. We will have next year 
the request I believe for an increased allocation for the 
International Development Association, and we will be raising 
some policy concerns in conjunction with that. And we 
ultimately are supportive of that, many of us on the committee, 
but not without some policy considerations being addressed.
    This hearing today is on one of those subjects which is 
quite important, but not generally well known. It is one of 
those that is important to discuss because it is 
counterintuitive. Intuition says that if a particular country 
is lucky enough to have physical resources that are valuable in 
world commerce, that's a good thing, and it certainly ought to 
be. There is considerable evidence that this does not in 
practice work out as it should in many cases.
    Now this is an area where we do not have direct policy 
control as we do in the subprime area or in housing or 
securities regulation. But the United States is a major factor 
in the World Bank and the regional development banks in our own 
domestic--in our own bilateral foreign aid programs, and we 
think it is very important to focus attention on this issue, 
and it's important for this reason: Some problems are very 
difficult to resolve.
    Some things are intractable. If you have abject poverty and 
no source of revenue to alleviate it, that's a tough issue. 
Here we have a situation in which we are talking about 
countries when we deal with this by definition that are 
potentially quite wealthy, that are wealthy as entities, that 
have a great source of wealth. And the question is, how do we 
encourage policies that make sure that this resource is a 
positive rather than a negative? And as I said, it's 
counterintuitive, and I hope that people will be paying 
attention as we hear from our witnesses about how this has gone 
bad.
    And what is both discouraging and encouraging about this 
issue is that it is a case where people's mistakes are the 
problem. If you are dealing with inherent problems, that can be 
harder to deal with. If you are dealing with physical 
shortages, if you are dealing with terrible problems of 
climate, it's often hard to figure out how to deal with them. 
But when the problem is, as it is here, that human decisions 
are the source of the problem, and that's clearly the case, we 
have the resources. We have resources that by any rational 
reckoning ought to be a great boon for the people in the 
country in which these resources are located, but in many 
cases, bad public policy, i.e., lousy decisions, corrupt 
decisions, incompetent decisions by people in charge have had a 
counter effect. And our job is to try to talk about the 
policies that counteract that, and then, to the extent that the 
United States can, encourage their adoption.
    I would just close by saying this: This is particularly an 
area where this committee will be engaged in international 
cooperation. It is our intention to seek out members of 
parliaments in other countries who share our jurisdiction and 
our interest in fighting poverty. Several of the members are 
very interested in this. So this is part, it's still the early 
part, but it will become very much a part of this committee's 
agenda over the next year and beyond to do what we can to think 
about, help evolve and encourage the adoption of public 
policies that maximize our ability to reduce poverty. And this 
is one, as I said, where what ought to be a boon to people has 
in some cases been either neutral or, sadly, the opposite. And 
it's one that we think should be amenable to the kind of 
processes that we engage in.
    The gentleman from Texas wanted to make an opening 
statement.
    Mr. Green. Thank you, Mr. Chairman. I really do appreciate 
your having this hearing, and if I may, I'd like to compliment 
the staff. This three-page report is quite revealing and well 
put. It does not draw unnecessary conclusions, but it gives the 
reader an opportunity to really extrapolate and synthesize 
ideas with reference to how a blessing not properly utilized--
and these are my words--can become a curse.
    That has just--this phenomenon of resource curse and the 
paradox of plenty is in my opinion something that merits much 
more study. I assure you, Mr. Chairman, that I'm going to look 
closely into this. Because when I read this report and realized 
that having natural resources can in a sense--not properly 
utilized--can in a sense be a barrier to the democratic process 
developing properly in a country, because you don't have the 
tax base that you might ordinarily have, meaning the populace 
contributing to the taxes. As a result of their not 
contributing to the taxes, they don't show the interest in 
democracy that they might ordinarily show. And by not showing 
the interest in democracy that they ordinarily would show, 
authoritarianism has an opportunity to flourish.
    Now I'm not advocating that we increase taxes. I want to 
make that clear. But the connectivity that is made between 
taxes and democracy is quite interesting as it relates to this 
report. It also makes it clear to us that these natural 
resources can create a talent drain, which is most revealing in 
that the natural resources will tend to attract the talent 
from--that could go into other industries--agriculture, for 
example, and manufacturing. And when these industries lose that 
talent to the natural resource industry, then they don't 
flourish. They don't develop as they properly should. Workers 
are displaced. They are working only with these natural 
resources. Manufacturing is declining. Agriculture is 
declining. And it creates additional problems for workers. You 
get poor governance as a result.
    So I am exceedingly complimentary, hopefully, of the 
persons who put this together. And I am very much concerned 
about how we can effect policies that will create the 
transparency such that countries that have these great natural 
resources will use them efficaciously and hopefully democracy 
will have an opportunity to flourish.
    Mr. Chairman, I thank you for the opportunity, and I yield 
back the balance of my time.
    The Chairman. I thank the gentleman. I thank him 
particularly for correctly noting the high-quality work we have 
gotten from our staff here.
    We have to vote, and I apologize. I will explain. We are 
taking a very important vote today on a new version of the 
Children's Health Insurance Program. Sadly, the fires in 
California are raging, and some Members have gone back to the 
fires, and other Members think it's inappropriate for us to be 
having a vote on a day when people are back with the fire. So 
we will be harassed today. I apologize for this. We can't 
control that.
    Do either of the other members wish to make an opening 
statement? We would be able to accommodate that. If not, we 
will take our--well, I take it back. If you don't mind, we'll 
have time. We have 15 minutes. We can take the first opening 
statement. We will then recess and come back.
    So, Professor Karl, do you want to begin, please? This is 
our first witness. Professor Terry Lynn Karl, who is a 
Professor of Political Science, and the Gildred Professor of 
Latin American Studies at Stanford University. Professor, 
please begin.

 STATEMENT OF TERRY LYNN KARL, PROFESSOR OF POLITICAL SCIENCE, 
   AND GILDRED PROFESSOR OF LATIN AMERICAN STUDIES, STANFORD 
                           UNIVERSITY

    Ms. Karl. Thank you, Mr. Chairman, and members of the 
committee, for giving me this opportunity to speak with you. 
Twenty-five years ago, the Venezuelan founder of OPEC remarked 
to me that oil was the excrement of the devil--el excremento 
del Diablo. Perhaps he envisioned the resource curse at that 
time.
    Today we know that states that are dependent on extractive 
industries eventually become among the most economically 
troubled, the most authoritarian, and the most conflict-ridden 
in the world. While this is not the case for all extractive 
states, it is especially true for oil exporters. This holds 
across all regions--Asia, Africa, Latin America, and the Middle 
East.
    I would like to make four brief points to you. First, the 
lack of transparency in the extractive industries is a central 
explanation for the resource curse. Oil, gas, and mining are 
the most profitable but among the least transparent economic 
activities in the world. Simply stated, most companies do not 
publish what they pay governments, and most governments do not 
disclose what they earn and what they spend. This means that 
huge amounts of money are virtually untraceable and are not 
subject to any oversight at all, a perfect recipe for 
corruption. As one OPEC minister of finance explained to me, 
``People rob in my country because there's absolutely no reason 
not to.''
    For this reason, corruption in oil-exporting countries is 
significantly greater than the world average. Corruption raises 
the transaction costs of doing business. It negatively 
influences the foreign direct investment. It lowers the 
productivity of expenditures, and it perversely affects 
investment decisions. In this respect, it is absolutely 
devastating to poverty alleviation.
    Lack of transparency is also transmitted through the 
acceleration of price volatility, and especially oil price 
volatility. This has grown exponentially in the last decade. 
Today, the information available to companies, countries, and 
traders is so poor that responses to this information have 
little relationship to market fundamentals. Instead, as we saw 
this week, the mixture of rumors, inaccurate forecasts, 
currency changes, and geopolitical fears is what drives oil 
prices. A sound U.S. energy policy simply cannot be built on a 
shaky foundation like this, nor can sound economic policies to 
alleviate poverty be adopted in weak states experiencing these 
absolutely rapid fluctuations.
    Oil price volatility is twice as variable as all other 
commodities. This exerts a strong negative influence on 
countries that are dependent on petroleum. Few developed 
countries could successfully manage this kind of volatility in 
their central revenues, and developing states simply cannot.
    Second, building transparency to overcome the resource 
curse is difference, because both companies and governments 
have a short-term interest in opacity. For the companies, 
confidentiality shapes how they account for their costs, what 
profits they report to host governments, how much profit taxes 
they must pay, and whether they can offer large signature 
bonuses or side payments to enhance their competitive advantage 
over other companies.
    For exporting governments, secrecy also affects the kinds 
of contracts they're able to enter into and whether their 
revenues are ultimately traceable or not. Moreover, leaders in 
exporting countries gain all kinds of political advantage from 
an opaque, no-tax-and-spend state. Because revenues are not 
extracted from their own populations, their people feel no 
sense of ownership of the state's money. This leaves rulers 
especially free to turn the state into a honey pot, 
distributing riches to cronies, patronage networks, or the 
military. And this is much to the detriment of poverty 
alleviation.
    But this has a long-term cost. Because taxation encourages 
the flow of information as well as demands for representation 
and accountability, living from resource rents denies leaders 
the crucial knowledge they need for development, while building 
support only through the distribution of handouts.
    Fourth: While building transparency is not easy, it is the 
necessary starting place for overcoming the resource curse, 
because it is a prerequisite for other economic and 
technocratic solutions. Prescriptions for overcoming the 
resource curse, which includes sterilization of revenues 
through stabilization funds, diversification, privatization, 
and other polices rest on transparency. The examples of Norway 
and Alaska are especially popular. But such prescriptions are 
aimed solely at the policies of extractive states. Thus they 
fail to recognize that transparency is a two-way street. 
Furthermore, the success of all these policies rests on knowing 
what revenues are raised, how they are divided, and how they 
are to be spent.
    Finally, legislation aimed at escaping the resource curse 
must be conceived of as part of a larger social pact for change 
in the extractive industries. Pushed by a number of high-
profile energy scandals and the morally reprehensible prospect 
of devastating outcomes in the new exporters of West Africa, 
countries and companies are under increasing pressure to change 
their practices. But companies that see advantages in 
transparency are afraid of moving first, and they're afraid of 
being undercut by others. If disclosure requirements were 
mandatory for all companies registered in the United States, 
whether U.S. or foreign, this would level the playing field.
    Let me conclude by being clear. Transparency is not the 
solution to a looming fossil fuel crisis with its tremendous 
threats to world stability and peace. Nor can it alone resolve 
this paradox of plenty. This will require what I call a social 
fiscal pact, a coordinated big push by all stakeholders to 
design new laws, norms, and practices that put openness, order, 
and fairness into extractive industries. But if the brewing 
crisis over natural resources is not more justly and 
efficiently managed, the lives of millions of people, the 
stability of markets, and the health of our Earth will be 
further jeopardized. As the founder of OPEC would then say, he 
would unfortunately have been proved right.
    Thank you.
    [The prepared statement of Professor Karl can be found on 
page 40 of the appendix.]
    The Chairman. Thank you, Professor. We're going to break 
and vote and come back. I apologize for the interruption, but, 
you know, that's the way we live. And we will come right back. 
There's only the one vote, and then we will resume the 
testimony. Thank you.
    [Recess]
    The Chairman. We will reconvene. Our next witness is Mr. 
Ian Gary, a senior policy advisor for extractive industries at 
Oxfam America.

  STATEMENT OF IAN GARY, SENIOR POLICY ADVISOR FOR EXTRACTIVE 
                   INDUSTRIES, OXFAM AMERICA

    Mr. Gary. Thank you, Chairman Frank, and members of the 
committee. Thank you for the opportunity to address you today 
on the issue of transparency and the extractive industries. I 
speak today representing Oxfam America, an international 
development organization that supports poor communities facing 
the impacts of these projects around the world.
    We are also proud members of Publish What You Pay, a global 
campaign pushing for policy changes to end the secrecy that 
surrounds this sector. While some progress has been achieved, 
much more remains to be done, including the development of 
mandatory disclosure rules, as Professor Karl has mentioned.
    If you care about the poor, you should care about 
extractive industry transparency. Revenues from extractive 
industries are a significant source of government income for 
more than 50 developing countries. These countries are home to 
approximately 3.5 billion people, 1.5 billion of whom live on 
less than $2 a day. Too often, as has been noted, extractive 
industries' revenues are squandered, fueling corruption and 
social conflict. Secrecy exists despite the fact that we are 
speaking of public resources, nonrenewable resources that are 
sold by the government on behalf of the population. For 
example, I was recently in Cambodia, where new oil discoveries 
have raised the hopes that oil wealth will lift the country out 
of poverty. However, there is no public information about 
contracts the government has signed with Chevron and other 
investors, nor is there any information about payments the 
government may have already received.
    Of course, transparency alone will not solve all the 
problems of resource-rich states. Respect for human rights, an 
open and participatory budget process, independent media, and a 
vibrant civil society are all vital aspects of systems of 
government oversight. But easily accessible information on 
revenues and contracts is a necessary and achievable first step 
towards proper management of this mass of wealth.
    I would like to turn now to examine briefly the role of the 
international financial institutions, something I know is of 
particular relevance to this committee. For too long, the IFIs 
have been willing enablers of the system of secrecy. The World 
Bank and other regional development banks and export credit 
agencies have been instrumental in facilitating investment and 
directly financing projects in the developing world, and they 
have indicated they plan to increase funding in the sector. 
While these investments have been profitable for the corporate 
sponsors and the World Bank, too often they have had 
predictably regrettable outcomes for the poor.
    A 2004 independent review of the World Bank and extractive 
industries concluded that the Bank should not finance projects 
where good governance conditions are lacking. And in many 
countries, these basic conditions are lacking. In response to 
the review, the Bank pledged to undertake a limited set of 
reforms, including a new International Finance Corporation 
policy supported by the United States which requires from 
January 1st of this year disclosure by private sector clients 
of revenue payments to host governments.
    While this is a significant step forward, implementation 
has been poor, and there is very little information on what is 
being required of clients or where it can be found.
    The IMF has an important role to play in its surveillance 
of the fiscal affairs of member states, and has undertaken 
important research and standard-setting exercises on this 
issue. Its 2005 publication, updated this year, ``The Guide on 
Resource Revenue Transparency,'' has the IMF taking a strong 
public stand in favor of transparency. The good practices 
described in the guide are viewed as voluntary by the IMF, and 
the institution has not consistently highlighted these issues 
in surveillance programs and country dialogues. At the same 
time, there are examples, such as the case of debt relief 
conditions for Congo-Brazzaville, where the World Bank and IMF 
work together to condition debt relief on implementation of 
transparency reforms.
    Both the World Bank and IMF have been active supporters of 
the international effort known as the Extractive Industries 
Transparency Initiative, EITI. Fifteen countries are officially 
candidates implementing this program, but no country has yet 
published externally validated reports. EITI may make progress 
in some countries where political will to tackle the problem is 
strong and lasting, and requires the active involvement of 
civil society. But the initiative is weakened by its voluntary 
nature and will not capture many countries where problems are 
most severe. EITI also allows contracts to stay secret and 
allows lump sum reporting rather than individual company 
reporting, which is more desirable.
    Oxfam America believes we need to move beyond a voluntary 
approach to extractive industries transparency. All companies 
and the investment community would benefit from a level playing 
field created by mandatory disclosure regulations. Furthermore, 
it would enable companies to address the risk to reputation 
arising from the lack of transparency.
    This committee and Congress as a whole has a real 
opportunity to address the secrecy that is at the heart of the 
resource curse Terry Karl described. I commend the committee 
for organizing this hearing and would be happy to answer any 
questions you may have.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Gary can be found on page 31 
of the appendix.]
    The Chairman. Thank you very much. Next, Father Patrick 
Lafon, who is the former secretary general of the Catholic 
Bishops Conference of Cameroon.

STATEMENT OF FATHER PATRICK LAFON, FORMER SECRETARY GENERAL OF 
          THE CATHOLIC BISHOPS CONFERENCE OF CAMEROON

    Father Lafon. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I'd like to begin by 
thanking you for the opportunity to address you on a subject 
that is quite literally a life-and-death issue for hundreds of 
millions of Africans and others in the developing world. This 
issue is transparency in the extractive industries.
    The Catholic Church in Cameroon and in the West and Central 
African regions has been involved in issues of oil and poverty 
for more than a decade. We decided to adopt a hands-on approach 
in the 1990's when the Chad Cameroon oil and pipeline project 
was being planned. Before this, oil was a taboo subject in 
Cameroon, but when we realized that after 25 years of the 
exploitation of oil there wasn't much to show for it except the 
fat bank accounts of a few individuals, we as the Catholic 
Church decided to get involved not only in Cameroon but across 
the region. In 2002, all the Catholic bishops of the Central 
African region issued a statement calling on oil companies to 
``contribute to transparency and the fight against corruption 
by publishing oil revenues they pay to our national 
governments.''
    Beyond policy statements, we have taken practical measures 
to try to improve the outcomes of oil projects in favor of the 
poor. We decided to set up a monitoring program for the Chad 
Cameroon oil project to see whether the governments and the oil 
companies were doing what they said they would do. This 
particular oil project has not resulted in much improvement in 
the situation of the common man in Cameroon. Also, in the case 
of Cameroon, the World Bank did not use the leverage it had to 
require a revenue management law for the use of all oil 
revenues in Cameroon as it had done in Chad.
    The Church is answering the cries of the people of Central 
Africa for more justice in the use of oil revenues. Lack of 
transparency can breed corruption and has done so. Angola, 
Cameroon, Congo, Brazzaville, the Democratic Republic of the 
Congo, Equatorial Guinea, Gabon, Nigeria, Sao Tome Principe, 
and Chad are among some of the most promising oil, gas, and 
mining exploration areas. But they are also some of the world's 
most corrupt countries.
    One has only to consult the Transparency International 
Corruption Perceptions Index to verify that this is so. Since 
the mid-1990's, several countries in sub-Saharan Africa have 
experienced strong revenue growth from the petroleum industry. 
In most cases, however, this new wealth has not contributed to 
the economic development but has been used, as we mentioned, 
for the enrichment of the leaders of these countries as well 
the associated elite.
    Cameroon is a case in point. Not all of the oil revenue 
gets into the state budget. And according to the IMF, the state 
oil company, the SNH, finance extra budgetary spending. EITI 
audit data and analysis by the IMF highlights a difference of 
about $286 million in reported oil revenues from 2001 to 2004. 
The IMF and the World Bank have confirmed that such 
discrepancies never pass through the treasury into the budget. 
Money is distributed directly from the SNH, the state oil 
company, without any legislative control, to serve unclear 
priorities. In Cameroon and throughout the region, transparency 
is being hindered on account of contract opacity. 
Confidentiality clauses are seriously hampering the ability of 
the Church and of civil society in their desire to hold 
governments to account.
    Rampant corruption and poverty is leading increasingly to 
conflicts in the region which threaten the oil supplies that 
everyone needs. This means that the proper management of public 
affairs is in everyone's interest.
    Clearly, revenue disclosure and accountability in resource-
rich West and Central Africa still has some road to travel. The 
Catholic Church and its allies in the region stand ready to use 
information that is disclosed to foster government 
accountability. We have already been able to make some progress 
as the Church in the region. In Congo-Brazzaville, members of 
the Catholic Church's Justice and Peace Commission are leading 
the charge on revenue and contract transparency, and some 
information and contracts have been disclosed. At the same 
time, Brice Mackosso, a lay member of the Commission, and a 
human rights activist, Christian Mounzeo, were detained for 
months last year and falsely convicted of a crime for their 
activism on the issue.
    In order to complete the transparency agenda, we recommend 
that governments, oil and mining companies, and international 
financial institutions:
    One, opt for a mandatory rather than voluntary approach to 
transparency;
    Two, implement disaggregated--that is company-by-company 
reporting of revenues paid to governments;
    Three, ensure that all extractive industry revenues are 
part of national budges;
    Four, abolish confidentiality clauses in contracts;
    Five, publish information on the extractive industries on a 
regular basis; and
    Six, investigate questionable bank accounts belonging to 
third world dictators.
    Thank you for you kind attention, and I'll be happy to 
answer any questions.
    [The prepared statement of Father Lafon can be found on 
page 58 of the appendix.]
    The Chairman. Thank you, Father. Next, we are going to hear 
from Mr. Paul Mitchell, the president of the International 
Council on Mining and Metals.
    Mr. Mitchell, thank you.

STATEMENT OF PAUL MITCHELL, PRESIDENT, INTERNATIONAL COUNCIL ON 
                       MINING AND METALS

    Mr. Mitchell. Thank you, Mr. Chairman, and committee 
members for the opportunity to talk to you today on this very 
important topic. I should say two things in the opening: First, 
I represent the mining industry and not the oil and gas 
industry, so if you could make that distinction, please. But 
second, while being an international body, we also represent a 
number of important U.S.-based corporations: Alcoa, Freeport, 
McMoRan, and Newmont amongst them, as well as the National 
Mining Association.
    I want to cover in my remarks three topics if I could, 
please. First is to give you an overview of the socioeconomic 
performance of mining-dependent economies. Second, to cover 
what the key influencing factors are that influence the 
different outcomes. And third, to give you some points on 
actions that we believe would encourage more positive outcomes 
in a broader range of countries.
    In terms of the performance of mining economies, I am 
referring to some work that the International Council on Mining 
and Metals commenced: a research project that we commenced in 
2004 with the World Bank and the U.N. Commission on Trade and 
Development, to better understand the socioeconomic performance 
of mining-dependent economies.
    The purpose was to identify the more successful economies, 
so that policy lessons could be defined and, as I say, adopted 
more broadly. We identified, globally, 33 mineral-dependent 
economies. The chief criterion was that 20 percent or more of 
merchandise exports over a period of 38 years, up to 2003, were 
composed of minerals and ores.
    We then assessed the performance of those 33 economies 
using six variables, and compared the respective countries to 
their global income group and their region. So, for instance, 
Chile was compared to all upper-middle economies, and the Latin 
American region.
    The six factors that we used covered economic growth, non-
mineral gross domestic product growth--to assess the 
diversification of the economy, and four socioeconomic factors. 
Now, the most striking finding from that research was that the 
performance of these mineral-dependent economies was very, very 
mixed. Forty-five percent of them had done relatively well, but 
the remainder--a slight majority, right around 55 percent, had 
performed relatively weakly. The better performers included 
Chile, Botswana, and Malaysia, while the poorer performers 
included countries such as Bolivia, Liberia, and Papua New 
Guinea.
    I have outlined completely in my testimony, in table one, 
the respective performance in each of the 33 countries. It is 
important to recognize that at that time, unlike the present 
time--the period that we looked at, 1980 to 2003--was a period 
of generally very low mineral prices. It presents a different 
perspective.
    The key messages that come from this are that we believe, 
obviously, that there is plenty of room for improvement in the 
socioeconomic performance of resource-dependent economies, but 
the key variable is the quality of national governance. It is 
fundamentally important--it, not resource-dependency, is the 
greatest influence on socioeconomic outcomes of the countries 
concerned.
    So, then moving on to the second: what are the key success 
factors? The key single success factor is host countries' 
commitment to economic and institutional reform. Successful 
countries have progressively built adequate institutional 
policy frameworks, generally over a period of some decades, 
which have coincided with an increase in mineral investment in 
the countries concerned.
    An appropriate governance framework has three components: 
policies to encourage resource investment, and here a sound 
macro-economic and legal framework is of fundamental 
importance. Secondly, policies to encourage social cohesion and 
investment security, and here we agree with my colleagues that 
resource transparency and the extractive industry's 
transparency initiative are both important and positive steps.
    And then, generally, other policies to encourage effective 
and equitable use of increased economic activity. The final 
aspect is policies to foster effective use of resource 
revenues, which can be summarized, as a clear understanding of 
the priority development needs in countries and effective, 
coordinated and accountable use of development funds.
    So, what is the way forward? The modern world has changed 
dramatically in recent years, and there are a number of changes 
that are particularly relevant to reform. Developing countries 
are now much more important than they have been historically. 
They make up more of both 50 percent of metal production and 
the sources of minerals production from mines. The sources of 
investment has diversified substantially; major mining 
companies are now domiciled in China, India, Russia, Chile, and 
Kazakhstan amongst other developing countries, as well as 
traditional sources of investment, such as the United States.
    Demand has grown very, very rapidly in a context of 
constrained supply, and thus now there is a scramble for 
resources and host countries are able to choose their 
investment partner, whereas historically, they fought to 
attract any investment interest at all. This is a very 
challenging environment in which to foster governance reforms.
    Most research shows that reform is likely, under conditions 
of economic need, as distinct from the buoyant economic 
conditions that we are currently experiencing. Nevertheless, 
there is leverage because the public good and the good of 
corporations are generally served by positive economic outcomes 
in resource-dependent economies. The challenge is how to bring 
about reform. Here, the key leverage point is national 
governments in host countries. They decide who gets access to 
resources, and under what conditions.
    Those governments, those host governments, need support 
from two important groups: international agencies to develop 
capacity, and civil society to ensure accountability. In regard 
to the former, the World Bank has a crucial role. It is the 
development agency with the greatest experience in developing 
countries' mineral governance capacity. Therefore, we believe 
that it must be strongly encouraged to participate in the 
resources sector, because that sector is the only significant 
source of private investment in the world's poorest countries.
    In other words, all other major economic sectors ignore 
poor countries. So, the Bank's participation is essential, if 
it is to fulfill its poverty alleviation mandate. It is of 
great concern to us that many of the banks' country offices are 
shying away from participation in the extractive industries at 
the moment, because of political and other challenges that face 
them. Our final problem is that companies also have an 
important role.
    Their role is to make the case for good practice by 
demonstrating superior outcomes on the ground, and I am pleased 
to say that an example is the International Council on Mining 
and Minerals, which commits member companies to public 
disclosure of their performance in accordance with the global 
reporting initiative, and independent verification of that 
reporting. This is a significant step in improving public 
accountability and public trust.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Mitchell can be found on 
page 62 of the appendix.]
    The Chairman. Thank you, Mr. Mitchell. Finally you 
volunteered, Mr. Baker, and then we will have to go vote again. 
After the vote, we will come back and begin the questioning.
    David Baker is the vice president for environment and 
social responsibility for the Newmont Mining Corporation.
    Mr. Baker, please go ahead.

 STATEMENT OF DAVID BAKER, VICE PRESIDENT FOR ENVIRONMENT AND 
       SOCIAL RESPONSIBILITY, NEWMONT MINING CORPORATION

    Mr. Baker. Thank you, Mr. Chairman, and members of the 
committee. The Newmont Mining Corporation is a U.S.-based 
corporation with its headquarters in Denver, Colorado. We are 
the second largest gold producer in the world. We operate on 
five continents. We have operations in Ghana, in Peru, in 
Indonesia, in Australia, in New Zealand, and of course, in the 
United States. I am going to talk briefly about our experience 
with the Extractive Industries' Transparency Initiative.
    Established in 2003, the EITI, or the Extractive Industry 
Transparency Initiative supports improved governance in 
resource-rich countries through the verification and full 
publication of company payments and government revenues from 
oil, gas, and mining. The initiative works to build a multi-
stakeholder partnership in developing countries, in order to 
increase the accountability of governments. The activities of 
the EITI are premised on good governance being a pre-condition 
for converting large revenues form the extractive industries 
into economic growth and poverty reduction. When transparency 
and accountability are weak, the extractive industries may 
instead contribute to poverty, corruption, and conflict.
    As a founding participant, and a proud founding participant 
of the ``Publish What You Pay'' campaign, Newmont became a 
founding member of the Extractive Industry Transparency 
Initiative, along with Ghana in 2003. Prior to 2003, in 
Indonesia, Newmont had been publishing its payments to 
government through press releases in the local media. This was 
driven by the perception in the local communities that the 
company was not paying its royalties and taxes.
    The company continues to put out regular media releases 
stating what it has paid to the government. Public notification 
of tax and royalty payments to the government, using media 
releases, community newsletters, or Web sites is also a regular 
practice by Newmont in Peru and Bolivia. The practice of 
issuing media releases stating taxes and royalty payments to 
the governments was adopted by Newmont in Ghana in 2006, when 
our Ahafo mine went into production. We put out media releases 
in Ghana right now, on a quarterly basis. In addition, the 
investment agreement between the government in Ghana and 
Newmont is a public document, and this is so that any taxation 
arrangements that have been made between the company and the 
government are made available to the public.
    So, why does Newmont choose to do this? Well, aside from 
giving the company an opportunity to explain what we do and why 
we do it, and the amount of money that we do provide to the 
government, it has also provided an opportunity to support and 
encourage citizens to exercise their democratic rights and 
question the government's use of this money in these taxes and 
royalties.
    Aside from having published payments to Ghana, Newmont has 
been working with the government in Ghana and other mining 
companies to establish a local process of tracking and 
reporting the extractive sectors' payments to government, and 
the disbursements of these funds from the government. This has 
included several joint meetings between the Ghanaian ministers 
and the Ghanaian chamber of mines. The challenges that the 
Ghanaian government and the industry face are reflected in many 
countries around the world, in particular, mining communities 
often complain that there is mining happening in their 
``backyards,'' but don't feel they gain any substantive 
benefits from the mining company's presence. Newmont is also a 
member of the International Council on Mining and Metals, and 
Newmont has been involved in the development of the 
comprehensive understanding of this issue, that information and 
results of the work that Mr. Mitchell just provided.
    The question is how can the mining industry contribute to 
the reduction of poverty? This initiative found, and I think it 
is very, very important to make sure that we focus on this--
that the poorest country's mining can be an opportunity for an 
early stage, or to jump start or catalyze the development that 
other industries do not offer. Mining is often the only 
industry that will actually go into some of these countries, 
and it provides a unique opportunity because of that.
    And this is particularly true of gold mining, as it often 
requires relatively little in terms of physical infrastructure, 
and does not require a domestic market as the gold is mostly 
exported. But the most important finding of the study that Mr. 
Mitchell just talked about, from a mining perspective, is that 
the industry cannot achieve this by working alone. The key is 
to strengthen the focus on managing and utilizing the generated 
government revenues transparently and effectively at the 
national, regional and local levels, to achieve the full 
economic and social development potential of the resource 
development.
    Significant effort is required to strengthen economic 
management, governance and sound and participant institutions 
at the local and regional levels. Newmont is committed to 
continue to work with Ghanaian, and other governments, in 
instituting and implementing the Extractive Industry 
Transparency Initiative, and to encourage other governments to 
participate in the EITI.
    Thank you very much.
    The Chairman. We will reconvene--I think we will have at 
least an hour or so before a motion can again be made to 
adjourn. So, let's wait for Professor Karl. Why, thank you all. 
There are a couple of levels here. There are policies that 
people would like to see implemented at the World Bank. Let me 
set those aside.
    Let me ask our first three witnesses; I have asked the 
other two to comment: What specific policy changes would you 
like to see the U.S. Government adopt? Professor Karl?
    Ms. Karl. Well, I think I ended my testimony by saying that 
I actually think that there needs to be mandatory policies 
based on disclosure, and that we really need to know--
    The Chairman. And who should disclose what?
    Ms. Karl. Companies need to disclose what they are paying 
governments.
    The Chairman. Okay, let me stick with that one.
    Ms. Karl. The reason for that--
    The Chairman. I don't want to know the reasons. I want to 
know what the policies are. Some of us are persuaded by the 
reasons. What other specific policies would you recommend? Is 
that the only one? It is a big one, I don't mean--
    Ms. Karl. No, that is not the only one.
    The Chairman. Well, what else?
    Ms. Karl. There are other policies that are really 
important. I think the United States should use its leverage in 
international financial--
    The Chairman. Separate from that, though. Let me make the 
distinction. There are things we would like other people to do. 
At this point, we are a legislating committee. I want to begin 
with what I can pass out of this committee, and make people do 
it. We will get to our using our influence. We can mandate--it 
is debatable whether we should or shouldn't--greater 
disclosure. Are there other policy changes, wholly within the 
control of the U.S. Government, that you would recommend? Then 
I will get to the international influence issues.
    Ms. Karl. I think that we also should have a policy that 
the types of environmental and rights protections that we 
practice in the United States, should be practiced abroad.
    The Chairman. That we should require our--
    Ms. Karl. We should require that. I think that is 
particularly important right now in the case of Burma.
    The Chairman. Okay, let me move on. We have a limited 
amount of time. Mr. Gary, do you agree or disagree? Would you 
like to add that?
    Mr. Gary. Well, I would agree with those, and I would add 
that one important change that could be made is that the United 
States could require companies who want to be listed on the 
stock exchanges--
    The Chairman. That is very important.
    Mr. Gary. Or register in the United States, to disclose--
    The Chairman. Okay, that is very important, because we 
anticipate that one of the legitimate objections would be, ``If 
you do this unilaterally, you put others at a disadvantage.'' 
So that occurred to me, yes. We do have the ability to impose 
requirements on companies that are not American companies, but 
wish to do business in America. I would add that. Any others?
    Mr. Gary. Well, in addition to that, I think that there are 
ways that we could promote what we call ``a cocktail,'' or ``a 
big push,'' as Professor Karl described, requiring our own 
export credit agencies, such as the Overseas Private Investment 
Corporation and the Export-Import Bank, to have the same 
disclosure requirement that the International Finance 
Corporation has.
    The Chairman. Okay, fundamental policy changes. I 
understand there are difficulties as to how you do it, and how 
you don't put our people at a disadvantage, and if we are the 
only ones who do it, then we may not accomplish much if our 
people just get pushed out of the way. So disclosure is the 
posting of what these companies are paying to the government, 
and also adopting appropriate environmental policies. Is there 
anything else in disclosure?
    Mr. Gary. Well, I think from our point of view, the main 
elements of disclosure are regarding the financial flows that 
go to the governments--
    The Chairman. Okay, money to the government--
    Mr. Gary. Also, environmental impact information, social 
impact information is also valuable.
    The Chairman. We have to be specific. What are we 
requiring? Social impact information? But clearly, you would 
like to see a binding requirement, as much as we could extend 
it on the disclosure of financial flows.
    Mr. Gary. I think that is the most important thing.
    The Chairman. Father, any further--
    Father Lafon. Yes, I don't know if this is relevant here, 
but I ended my testimony by making an allusion to questionable 
bank accounts. Every time we have raised this question--
    The Chairman. In the United States, you mean?
    Father Lafon. Yes, in the United States. Every time we have 
raised this question in Europe, the answer has been, ``We have 
all kinds of laws that--
    The Chairman. So, that would be some amendment--
    Father Lafon. I don't think people should be allowed to 
take huge sums of money from their countries, and come and bank 
them here. The countries are suffering. If--
    The Chairman. Well, these are connected, because you have 
to run your sources. But that is a reasonable thing for us to 
look at too, it to try and better track the money. Let me now 
ask Mr. Mitchell and Mr. Baker. How would you respond in terms 
of those efforts?
    Mr. Mitchell. Mr. Chairman, the U.S. Government is already 
actively involved in the Extractive Industry Transparency 
Initiative. We think that is a good thing. Personally, we think 
that it would not make a lot of difference for that level of 
support to have legislative force.
    The Chairman. Would it do any harm?
    Mr. Mitchell. Well, it could. I will get to that if I 
could. The principle reason is because, as I tried to outline, 
to achieve positive outcomes requires concentration on a 
broader range of factors than just revenue transparency. Mr. 
Gary has mentioned a couple. Frankly, I am not sure that they 
are the ones that our research has found vehemently important 
by the characteristic aspects of economic and legal reform. 
They are difficult processes that most countries have required 
decades to achieve.
    The Chairman. I understand that, but there are also limits 
on what--
    Mr. Mitchell. There are--
    The Chairman. Mr. Mitchell, I am sorry, but we only have 5 
minutes.
    Mr. Mitchell. Okay, well--
    The Chairman. No, Mr. Mitchell, the rules are, I have to be 
able to direct you to the subject I want to talk about, and I 
don't want--
    Mr. Mitchell. The potential negative, if I could say this--
    The Chairman. Mr. Mitchell, repetition of your testimony 
won't be helpful. I am trying to go beyond it. Now the question 
is, what can our government directly do, as internal 
improvements in other countries are harder for us to do? What 
harm would come from what they are proposing?
    Mr. Mitchell. I would like to answer that. The range of 
sources of investment for the extractive industries has 
diversified greatly in recent years. Some of those sources of 
investment, some of those countries do not care about good 
economic outcomes in host countries, or revenue transparency, 
or human rights, or good environmental outcomes--or any of 
those things that the U.S. Government thinks is important. So, 
therefore, placing additional impediments on U.S.-based 
countries could disadvantage--
    The Chairman. Okay, that is what I thought. So--
    Mr. Mitchell. That would not only harm U.S.-based 
countries--
    The Chairman. Right.
    Mr. Mitchell. But it would harm the host--
    The Chairman. Okay, so here is the question.
    Mr. Mitchell. Yes.
    The Chairman. What we would then think about doing--I don't 
know if we would be successful, but that efforts to require 
complete disclosure should be part of an effort to have this 
down in a multi-national basis, and that would include the 
American Government, as suggested by Mr. Gary--people want to 
list on the stock exchange, or others. If we were able to do a 
multi-national ``push'' to get more disclosure, would that be 
harmful?
    Mr. Mitchell. That would certainly be beneficial.
    The Chairman. Thank you. Mr. Baker, anything to add to 
this?
    Mr. Baker. I don't have much in addition, but I just simply 
say that you have to be very cautious. I think the intent of 
the EITI is to actually get countries to publish, and to 
recognize those expenditures--
    The Chairman. The recipient countries--
    Mr. Baker. The recipient countries, not just the companies. 
I think an unintended consequence could be that the initiation 
of some of this reformation, which is done right now on a 
voluntary basis through the EITI and ``Publish What You Pay,'' 
may not have an opportunity to actually initiate that in some 
country.
    The Chairman. I don't understand, if they want to volunteer 
to do it, then--
    Mr. Baker. Well, there could be countries that, because if 
it was mandated for a company to report, countries could simply 
say, ``We are not going to have you do business in our 
country.''
    The Chairman. I understand that. That just gets back to the 
multi-national aspect, and I think that is fair. I do have to 
say that I see a conceptual difference between legally 
requiring the people who are paying the money to say that they 
are paying it, as opposed to having the recipients voluntarily 
announce that they are receiving it.
    The incentive voluntarily to announce you are receiving 
money from--that someone may think you shouldn't have received 
isn't overpowering. But I do agree, and I think that we will 
have to balance this, but clearly, there is going to be some 
effort, multi-nationally. Let me give myself another 30 seconds 
to pose a question and ask you in writing. If we are going to 
do it multi-nationally, who do we need? Is it Europe, is it 
Japan, is it China which would be more discouraging? I would be 
interested if you would follow up in writing, if we're going to 
do this multi-national effort--Professor, you wanted to say 
something?
    Ms. Karl. Well, I think that there is a great deal of 
support in Europe, and particularly in the European parliament, 
and other places, for mandatory disclosures in Europe as well, 
and I think we should lead in that effort, but I know that they 
would support it--
    The Chairman. I understand that you do. Please, let us not 
say things that we don't know. The question is not who is 
willing. If the U.S. and the E.U. would be together to do it, 
do we have to worry about China? Is there other major--
    Mr. Karl. That would be sufficient in--
    The Chairman. You think the United States--
    Ms. Karl. Yes, because China is registered in either the 
London Stock Exchange or--
    The Chairman. Oh, so the U.S. and the E.U.--
    Ms. Karl. Yes, so is Petrobrass, so are the larger foreign 
firms--
    The Chairman. If we were to require this of companies who 
were both U.S. or E.U. domiciled, but also companies that 
wanted substantially to be able to do business here, would that 
resolve it?
    The gentleman from Louisiana is recognized.
    Mr. Baker of Louisiana. Thank you, Mr. Chairman. Looking at 
the scope of the recommendations, where the government entity 
is natural resources dependent, where significant economic 
accomplishment is achieved by extraction or exportation of 
mineral resources and where infrastructure needs are deficient 
in light of current social environment; my first observation is 
that it must be talking about Louisiana, and it would be 
helpful to have some of these transparency provisions made 
applicable to us. On a more important note, in achieving the 
disclosure--which I understand is desirable in ferreting out 
inappropriate conduct--it is not going to be successful having 
a unilateral declaration on U.S. interests only.
    It is very clear to me that the recipients of this 
generosity are not likely to want to disclose--even from their 
own host state, or country, or political environment, for it to 
be made known that you are the recipient of millions of dollars 
of foreign assistance--to the detriment of your own 
constituents. It is not a helpful thing. So, I think all of the 
prejudices that exist toward reform can only be achieved if we 
do this through international exchange cooperation. The 
chairman indicated the New York/London marriage as an example. 
I think it must be broader in scope. NASDAQ is taking to Dubai, 
NYSE is with Euronext, the Hong Kong Exchange, at least in 
China.
    There needs to be, I think, a high-level exchange 
leadership led effort to bring about this level of discussion, 
which shortcuts--not to the purpose of this hearing or this 
report, but to national accounting convergence. I think there 
are grand opportunities for that to occur. Mr. Mitchell, would 
you care to respond to the suggestion started by the chair that 
I have amplified on? If the goal is to really make people sit 
up and fly right, isn't universal disclosure requirements 
coming at the listed exchange level--for the principal major 
exchanges of the world, a beneficial way to approach this?
    Mr. Mitchell. Thank you for the opportunity to respond. The 
answer is definitely, yes. There is no doubt that credit 
transparency and revenue flows, and a number of other aspects, 
would be beneficial in terms of public trust accountability and 
positive outcomes. If it were possible to get broad 
participation of the many sources of capital that you have 
mentioned, that would be a good thing as well. But the other 
thing that we need to all be mindful of is that many of these 
extractive industries, particularly in the oil and gas sector, 
or start-out enterprises, do not rely on the private capital 
markets for access to funds. That is also the case in the 
mining industry, in particular in relation to the Chinese 
interests, many of which are state-owned or state-financed. So, 
they would not be captured, and they need to be to make this 
thing workable.
    Mr. Baker of Louisiana. How would you remedy that?
    Mr. Mitchell. It is with great difficulty. It needs to 
become an international norm, in terms of the way that business 
is done. The key leverage point is national governments, is the 
host governments--
    Mr. Baker of Louisiana. Let me interrupt if I may. Would 
not the effect of listed corporations on a multi-national 
exchange list have a direct and adverse consequence, even to 
those who are self-funded in a state-owned venture? At some 
point, they are going to have to ask the international capital 
markets for equipment purchases, for expansion, for pipelines--
for whatever the resource might be. We may not get them up 
front, but at some point along this capital process, they will 
intersect us and have to disclose. It might not be as immediate 
as the effect on the exchange.
    Mr. Mitchell. As I said, I think it would be beneficial, 
but it would not capture all sources, because--
    Mr. Baker of Louisiana. Let me jump to one more point 
before my time expires. My question is regarding a suggestion I 
have not seen, but understand is being discussed, concerning 
contract disclosure. I am very concerned that if we go beyond 
the trail of cash, into the proprietary information of a 
contractual performance obligation, it would be extraordinarily 
detrimental to all business interests concerned. I am concerned 
because that would likely lead to the exclusion of high 
technology from the communities most in need of that type of 
assistance, and you would wind up getting something less than 
the world's best technology being deployed in your country, if 
you get it at all.
    Mr. Mitchell. I agree with you that propriety contracts are 
in a different category and should be treated as such, and 
there are things that are business intellectual property 
matters, and that should be rightly protected.
    Mr. Baker of Louisiana. Mr. Chairman, I have a unanimous 
consent request for a statement by the International Council on 
Mining and Metals, and a World Bank support group analysis to 
be included as part of the record.
    The Chairman. Without objection.
    Mr. Baker of Louisiana. Thank you.
    The Chairman. The gentlewoman from California is 
recognized.
    Ms. Waters. Thank you very much, Mr. Chairman. I'd like to 
thank you for holding this hearing. I'd like to thank all of 
the participants in initiating this effort. I see a whole list 
of organizations here who are involved in this transparency 
initiative.
    And I'm very grateful for it, because for years I have been 
terribly frustrated with the plight of Africa and the fact that 
the continent is so incredibly rich in resources and so 
incredibly poor.
    I have struggled through the civil wars of Angola where 
monies have been drained off in those wars--very rich country 
with diamonds, gold, and oil. I have served through the 
problems of Nigeria and, you're right, with Mr. Abacha's money 
being deposited here in American banks. And it goes on and on 
and on. At one time, I thought that what we needed was to 
develop expert teams that would make themselves available to 
the government to help negotiate the mining contracts and 
arrangements, and, also, have teams that would help to develop 
systems and support government in developing ways by which to 
manage the profits from the mining efforts.
    Well, you know, it sounds good. But it is just so very 
complicated and there are so many reasons why the inhabitants 
of these countries are not the beneficiaries of the vast 
resources of those countries, and, it does not simply lie with 
the fault of those who go there to mine. Yes, many of the 
mining operations do exploit, but it's not simply them, It's 
not simply the government that may be corrupt. It's just a 
combination of very complicated reasons why we have such riches 
in so many countries and the people are so poor. And it's very, 
very frustrating.
    So when my staff brought this to me, the transparency of 
extractive industries, high stakes for resource risk countries, 
citizens in international business, I was excited just to see 
something, anything, anything that would get us engaged in this 
discussion. So I will support any effort for disclosure. I will 
support any effort to get rid of the corruption. I will support 
any effort to try and find ways by which we can assist these 
governments in putting together the necessary systems to 
realize the benefits of those profits.
    So all I can say is thank you for being here and for 
initiating this possibility. Already I can see that my chairman 
is excited about the possibility of doing something with this. 
Since he has been the chairman, he has already developed good 
relationships with the European parliament. He has traveled 
there and he has an opportunity to talk with them about it. 
And, of course, if I can see anything done before I retire in 
this business, I will be eternally grateful to all of you.
    Thank you very much.
    The Chairman. I thank the gentlewoman.
    We will be back. I apologize, but I do think when we come 
back again, the way it works, we'll be able to finish the 
questioning. So, you'll have to give us another 15 minutes or 
so, and then we have our three members here. So you should be 
able to be done then and this is very important to us. It i's 
having a real impact, so we thank you for your patience.
    [Recess]
    The Chairman. I apologize. Presumably we'll wait for Mr. 
Mitchell, and we will be able to finish at this point.
    Thank you. The gentleman from Texas is recognized.
    Mr. Green. Thank you, Mr. Chairman. And I would like to 
extend my apologizes to the witnesses. I know you question how 
we can possibly get anything done in this environment, but 
believe it or not, we managed to do some things, and there are 
some folks who think that we do to much. So we have to balance 
it out, I suppose.
    I thank you again for being here. I am going to ask Mr. 
Baker and Mr. Mitchell to please address this concern because I 
appreciate the position you have of not wanting to see us go 
too far. The question becomes what would you recommend that we 
do, and I'd like you to start with the IMF/World Bank, IFC, if 
you have comments on those.
    What would we do to help to end some of this corruption?
    I made a note that opacity enables cupidity, and cupidity 
engenders corruption. So it's the opacity that is the genesis 
of this.
    What would you do to help us achieve the transparency that 
would end some of the cupidity that breeds the corruption?
    What would you recommend we do?
    Mr. Mitchell. Thank you for the question.
    The other important source of leverage or point of leverage 
in all of this apart from the stock exchanges around the world 
is national governments in host countries. The United States 
has a lot of influence there and can condition it to aid 
programs. It's development assistance and things of that nature 
contingent upon host countries adopting appropriate behavior. 
So that's an important point that the United States itself can 
do.
    But the second point is that the World Bank, in particular, 
in our view must be strongly encouraged to participate in 
government strengthening programs in resource-dependent 
economies. They are the major sources of investment in poor 
countries. It is absolutely viable in terms of the bank's 
poverty-reduction mandate that the bank be actively engaged in 
government strengthening in those countries.
    Mr. Green. Would you recommend that the World Bank require 
the transparency process?
    Mr. Mitchell. The World Bank does do that for the IFC's own 
investments, currently. But I agree with Mr. Gary.
    Mr. Green. Well, my notes indicate that they do it 
occasionally, not consistently.
    Mr. Mitchell. It's a policy that is meant to be applied 
universally, but he is correct that the manner in which it is 
done is not transparent in itself.
    Mr. Green. Would you encourage us to encourage the World 
Bank to develop the consistency that you seem to connote would 
be important?
    Mr. Mitchell. Yes. I would encourage the Bank to do that in 
terms of return investments, encourage the Bank to be 
strongly--
    Mr. Green. Let me do this, because we're going to have 
another vote. I want my colleague to have an opportunity to ask 
his questions so that we don't continue to hold you over. So 
let me go to Mr. Baker.
    Mr. Baker, your comments please in terms of the World Bank, 
IFC and the IMF.
    Mr. Baker. Well, I appreciate the opportunity, but I think 
Mr. Mitchell has really articulated quite well some of the 
things that could be done. I don't believe I can add anything 
material to that, but thank you.
    Mr. Green. Well, you are a business person and I assume you 
find it repugnant to know that there are business people who 
are engaging in processes that end up corrupting governments.
    Is that a fair statement?
    Mr. Baker. That's an absolutely fair statement, yes.
    Mr. Green. Okay, then tell me, as a business person, how 
would you have us address the businesses? The chairman 
mentioned in ``a universal fashion'' and I think he covered it 
quite well. But how would you have us address businesses such 
that there is a consequence for engaging in these practices in 
these foreign countries, maybe in our own country as well. I 
can see some room for improvement here. But tell me how would 
you as a business person want us to do it, such that we don't 
impede the flow of commerce, such that we don't create economic 
upheaval, but we do accomplish our goal.
    Mr. Baker. Well, that's a good question. I appreciate that. 
I think that one of the things that's important is the whole 
consequence you talked about of accountability and in making 
these companies accountable, because there are organizations 
that we see around the world that don't operate to the same 
level. And I think that one of the things that may be of 
benefit is to have a reward, possibly, for behaviors that are 
appropriate as opposed to punishment for behaviors that are 
inappropriate.
    Mr. Green. So, some sort of tax incentive, if you are doing 
the right thing then we'll give you a tax break. Is that an 
example, or would you want to give me a better example?
    Mr. Baker. No, I suppose that could be an example. I don't 
have any other really specific examples other than that I'm 
sure there are a number of ways that there could be some sort 
of reward or recognition of that. I suppose a tax could be one 
of those or some sort of tax modification. I know that would 
probably not be very popular, overall, but it's just one of the 
options.
    Mr. Green. Thank you. My time has expired.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. Thank you. We have to go out for a time. The 
gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman.
    The fact that some of the richest nations on earth are the 
poorest has always troubled me, but even if we are able to get 
greater transparency of extractive industries, my concern is in 
Tanzania, for example, where my family is; they live in and 
around Arusha.
    The truth of the matter is, even if there is transparency, 
there are very few computers, very few televisions, very few 
telephones, and even though it's not resource rich as is Kenya, 
for example, there are extractive industries there. And so, my 
concern is how can we, Mr. Gary, go into third world countries 
where technology is third world and get information out to the 
public, whereby they can make intelligent decisions on whether 
or not they support their government and whether or not they 
are being ripped off, which I believe they are in many, many 
ways.
    Mr. Gary. Thank you for the question.
    I think a key point to make is that just disclosing 
information in an incomprehensible and difficult to access 
manner is not going to achieve what we want. In some of these 
countries like Tanzania and other countries around the world, 
we are looking at ways to use radio and other popular 
communications.
    Father Lafon is here representing the Catholic Church. They 
had a statement on corruption read in every parish in Cameroon. 
Traditional ways of getting out the information and using those 
traditional structures, like the churches, is one of the key 
ways to do this. And that's why I mentioned the importance of 
an independent media. In countries that are closed, like 
Equatorial Guinea, just disclosing information will have no 
discernable effect, because there are no independent 
journalists. The church is harassed, etc.
    But, in countries like Ghana, Nigeria, and Tanzania, where 
you have a vibrant press and you have local radio in local 
languages, that kind of information can get out and we would 
encourage institutions like the companies as well as the 
international financial institutions when they do disclose to 
disclose it in a way that's comprehensible in local languages.
    Mr. Cleaver. Father Lafon, do you believe that there is a 
way, including what Mr. Gary has said, to get information to 
people in a place. Cameroon is far more advanced, 
technologically. People in the United States, Tanzania people 
there, call it Tanzania, but they get information to people. I 
mean, it would be infinitely easier in Cameroon than it is in 
Arusha or even Dar es Salaam.
    Father Lafon. Yes, thanks a lot. I'll just add one thing to 
what Mr. Gary has said.
    We as a church, as he said, we use our parishes to pass on 
information. We have in our church at the national level a 
national justice and peace commission dealing with these 
issues: oil; the democratization process; and so on. And these 
have offices also in dioceses all over the country. And through 
this means, we pass on information. And I believe these exist 
in other countries as well.
    As you mentioned, we have relatively free press in 
Cameroon. There is certainly a vibrant, independent press in 
terms of numerous newspapers which we use. In other countries 
where there is not possible, I guess they would have to start 
somewhere by using the churches, which is what we do in 
Cameroon in addition to the papers. But certainly it's 
necessary to get the information one way or the other out to 
the people.
    Mr. Cleaver. One final question: Do any of you consider 
flowers as an extractive industry? Or just minerals?
    Ms. Karl. Yes, extractive industries by their definition 
are non-renewable. And the reason we're focusing on extractive 
industries, I believe, is that once you spend the capital from 
oil, gas, or mining, it is gone. It can never come back and 
you've lost that opportunity to move into some poverty 
alleviation and development.
    With flowers, with coffee, with other things, you can 
replant. You have an ability to recreate that particular 
industry, so the argument is not that the only poor countries 
are extractive countries. That's not the argument at all. We 
all know that Haiti is the poorest country in the Americas and 
that there are no extractive industries there. But the argument 
is that these resources are gone, once they're used, and the 
development opportunity that they represent is gone, so that we 
need to focus much more on making sure that that development 
opportunity is used to alleviate poverty.
    Mr. Cleaver. I don't want to digress or take the hearing 
past where it's supposed to be.
    One of the things I would ask you to consider, because you 
are the intelligentsia on this issue, Professor, I think I 
agree with you for the most part, except that in some places in 
Africa, in Africa in particular, but it's also South and 
Central America, the flowers that we use in hotels every day 
that are grown in those countries use water, which is not 
renewable.
    As we are seeing in the United States, a crisis has 
developed. And I would suggest that a crisis is developing in 
Africa the same way. And so while you can plant flowers, it's 
difficult to sweet talk them into growing without water. And so 
it is not as renewable as it might sound. That's just a pet 
peeve of mine, because I've seen water in Africa shooting out 
of water hoses to water plants for people in the Western world, 
and the people there are walking miles, women are walking miles 
to get water to cook with, so that they can eat.
    Thank you, Mr. Chairman.
    Father Lafon. Sorry, just to add, one of the reasons that 
we focus also on the extractive industries is their capacity to 
generate quick money, and a lot of money, as well as because of 
that their capacity to generate conflict, civil wars in our 
countries.
    Mr. Cleaver. Pardon my digression.
    The Chairman. The gentlewoman from Wisconsin.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
    The Chairman. Let me note that the gentlewoman has been 
designated as our representative from this committee to a panel 
of members here who work with Paul Menteri for the World Bank, 
so she's particularly well-suited to be in that liaison 
position.
    Go ahead.
    Ms. Moore of Wisconsin. Thank you for that, Mr. Chairman.
    I am very interested and we've talked interested and we've 
talked a great deal about the role of transparency in terms of 
ameliorating the problems with these extractive industries. But 
I am wondering what role does transparency have, 
notwithstanding corruption and all the other problems, in 
ameliorating the so-called Dutch disease?
    These countries, even if there were transparency, even if 
there were proclamations about how much the governments are 
going to pay, even if there were not corruptions, even if they 
do or don't rely on the capital markets, the volatility of 
these minerals is such that the countries could still be poor. 
And so just sort of following in the vein of the chairman's 
questions, what specifically can we do? And I'm going to direct 
my questions first to Mr. Mitchell.
    What can we do specifically with the host countries to 
ensure that their oil industry doesn't crowd out other 
development?
    Mr. Mitchell. Thank you. The question I think in short the 
answer is--and my colleagues may disagree with me, I'll say 
that--but I don't believe the transparency of revenue flows has 
a significant role in controlling the Dutch disease. The Dutch 
disease is primarily the appreciation of exchange rates, which 
makes other tradable activities in the economy uncompetitive. 
This is a good illustration, though, of the fact that the 
reform process is much broader than transparency.
    Ms. Moore of Wisconsin. Okay, so what can we do?
    Mr. Mitchell. You need to encourage sound macro-economic 
management in the countries concerned.
    Ms. Moore of Wisconsin. Okay, now I'm going to give an 
example, Mr. Mitchell, of the Democratic Republic of Congo, the 
mining contract review process. Using that as an example, 
because I know that you know something about that, Freeport 
Marin is the parent company of Phelps Dodge, who has an 
ownership interest in the Timki mine. It is proceeding with 
operations, securing international financing, and the 
underlying contract is not providing a share of the profits to 
the Congolese people. I guess I'll let you respond. I won't 
make my judgment.
    Using that as an example, how could the Congolese 
government execute a contract with them to avoid the Dutch 
disease?
    Mr. Mitchell. They couldn't. At a contract specific level, 
you need a much broader approach to a macroeconomic management 
at a contract-specific level. But in response to that specific 
issue, the company should be paying a fair tax rate, that tax 
payment to the government should be disclosed. But most 
importantly the government should be using that money 
productively to address priority development needs within the 
country.
    And whether or not there is a ``profit-sharing element'' to 
the contract may be irrelevant, provided that the taxation is 
fair and internationally competitive. It is being paid, and as 
I said, importantly, it is being well used by the government 
agencies involved. Again, this is a good example. Many 
countries, taxes paid, taxes collected, but it is not well-used 
by the host governments. That's a key element as well.
    Ms. Moore of Wisconsin. Anybody else have any suggestion 
about what we can do with Wall Street and those folks that are 
registered on our stock exchange in terms of the volatility of 
these assets in stabilizing poor countries?
    Professor Karl.
    Ms. Karl. Yes, I think I see the Dutch disease and the 
volatility a bit differently than Mr. Mitchell. And that is 
that transparency is absolutely critical for good macro-
economic management. If you don't have transparency, if you 
don't have budgetary transparency, you cannot manage a macro-
economy. So that even though transparency won't deal with the 
exchange rate problem that he mentioned; and I do think that's 
correct, it will deal with a larger macro-economic issues.
    The second thing I would say is that volatility, which I 
believe you have rightly pointed to as an absolutely essential 
issue here, volatility is being fueled by the lack of 
transparency.
    Ms. Moore of Wisconsin. Okay.
    Ms. Karl. And this is very important, because these 
minerals and oil have always been more volatile, but what is 
happening in the recent period is that the volatility has 
exponentially increased. Because of the secrecy that surrounds 
these kinds of industries, and what that secrecy does is it 
makes it very difficult for market fundamentals to work for 
supply and demand to work. And it means that you get further 
and further away from market fundamentals.
    The example I gave in my testimony was the rise in the 
price of oil last week to $90 a barrel. That is actually not a 
rise in price driven by market fundamentals. It is a rise in 
prices driven by speculation, forecasting that I believe is 
incorrect, a number of other things that are related to the 
quality of information. When information is poor, markets 
cannot function well. And when information is poor, you cannot 
manage a macro-economic environment, which is why I actually 
believe the transparency is the first step for a variety of 
these problems, even though it won't specifically address the 
currency reevaluation.
    Ms. Moore of Wisconsin. Thank you.
    The Chairman. Let me follow up on that.
    Professor, maybe I didn't fully understand on the 
transparency. I was thinking of it perhaps too narrowly in 
terms of the payments, but when you talk about transparency, 
are you talking about the volume of work? Obviously, for it to 
be affecting volatility, are they hiding the amount that 
they're digging? What are we talking about here?
    Ms. Karl. Transparency in the industries is a problem 
across the board. So, for example, we have no idea what the 
real reserves are of OPEC countries. We don't know. We don't 
know what the reserves are really in Saudi Arabia. We don't 
know. My argument about transparency in terms of company 
payments is part of a larger concern I have with transparency 
in these industries in all kinds of ways.
    The Chairman. I understand our right to say, tell me how 
much you're paying, because we're worried about potential 
bribery. But, you know, what's the basis on which we demand 
that proprietary entities tell us what their reserves are.
    Ms. Karl. I don't think that is what I was suggesting. What 
I'm suggesting is that by starting with disclosure of payments, 
you are beginning to create a norm of transparency and rules 
and practices of transparency that I actually believe will 
spread.
    The Chairman. But what incentive?
    Ms. Karl. Where do they need to spread?
    The Chairman. No. I don't see the lack of transparency that 
contributes to volatility. The volatility issue is the 
reserves? Or is it the level of activity? What is it that 
they're not transparent about?
    Ms. Karl. The volatility and the price volatility means 
that any time you hear that there is a strike in Venezuela, or 
any time you hear that Turkey might invade north of Iraq which 
might interrupt a pipeline or supplies or something, then the 
price of oil flies up.
    The Chairman. I understand that, but I don't see a 
connection, certainly no connection between getting people to 
tell how much they might be bribing somebody and that. So, to 
get deeper, you would have to be talking about them disclosing 
what their reserves were. Well, there would be two levels: one, 
the reserves; and two, the level of actual activity. I mean, 
are they digging out more than they tell us or less than they 
tell us? I'm serious. Is that part of the problem?
    Ms. Karl. Well, I think the payments would tell us those 
kinds of things. If we see what payments are going to companies 
and we know what the price of oil was and the transparency of 
the payments is disclosed in a particular way so that we know 
what we know what fields they come from, what time they came 
from, etc., then we will know more.
    The Chairman. It may be though, because what we're assuming 
is at least to some extent now, the payments aren't just based 
on the actual price of oil, but there's some extra and some 
illegitimacy in those payments. But I still want to know, are 
you proposing that we require anything beyond the disclosure of 
the payments?
    Ms. Karl. No.
    The Chairman. Okay. I'm skeptical that we are going to get 
much in terms of volatility, but if it happens, it happens.
    Do any members have any further questions? If not, I will 
tell you that this has been very useful and you are going to 
see much of what you said reflected as we go forward. We will 
continue to be in touch.
    If anybody on the panel has any further thoughts they would 
like to contribute to us, please feel free to do so. And I 
think we will, after today, probably be constrained as we 
instruct these other countries as to how to do better. We will 
not instruct them on how to conduct their parliamentary 
procedures, based on today.
    This hearing is adjourned.
    [Whereupon, at 12:50 p.m., the hearing was adjourned.]










                            A P P E N D I X



                            October 25, 2007



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