[Senate Hearing 110-713]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-713
 
   RESOURCE CURSE OR BLESSING? AFRICA'S MANAGEMENT OF ITS EXTRACTIVE 
                               INDUSTRIES

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON AFRICAN AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 24, 2008

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
                   Antony J. Blinken, Staff Director
            Kenneth A. Myers, Jr., Republican Staff Director

                                 ------                                

                    SUBCOMMITTEE ON AFRICAN AFFAIRS

                RUSSELL D. FEINGOLD, Wisconsin, Chairman

BILL NELSON, Florida                 JOHNNY ISAKSON, Georgia
BARACK OBAMA, Illinois               NORM COLEMAN, Minnesota
BENJAMIN L. CARDIN, Maryland         DAVID VITTER, Louisiana
JIM WEBB, Virginia                   CHUCK HAGEL, Nebraska

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

Collier, Paul, director, Center for the Study of African 
  Economies, University of Oxford, Oxford, United Kingdom........    40
    Prepared statement...........................................    41
Feingold, Hon. Russell D., U.S. Senator from Wisconsin, opening 
  statement......................................................     1
Goldwyn, David, president, Goldwyn International Strategies, 
  Washington, DC.................................................    30
    Prepared statement...........................................    32
Isakson, Hon. Johnny, U.S. Senator from Georgia, statement.......     4
Lugar, Hon. Richard G., U.S. Senator from Indiana, statement.....     5
Moss, Todd, Deputy Assistant Secretary for African Affairs, 
  Department of State; accompanied by Stephen J. Gallogly, 
  Director, International Energy and Commodity Policy, Department 
  of State, Washington, DC.......................................     7
    Prepared statement...........................................    10
Taylor, Simon, director, Global Witness, London, United Kingdom..    21
    Prepared statement...........................................    23

              Additional Material Submitted for the Record

Schumer, Hon. Charles E., U.S. Senator from New York, prepared 
  statement......................................................    59
``Publish What You Pay'' United States coalition, statement of...    61
``Managing the Exploitation of Natural Assets'' by Paul Collier, 
  University of Oxford and Anthony J. Venables, University of 
  Oxford and CEPR................................................    62

                                 (iii)


   RESOURCE CURSE OR BLESSING? AFRICA'S MANAGEMENT OF ITS EXTRACTIVE 
                               INDUSTRIES

                              ----------                              


                     WEDNESDAY, SEPTEMBER 24, 2008

                               U.S. Senate,
                   Subcommittee on African Affairs,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:33 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Russell 
Feingold, chairman of the subcommittee, presiding.
    Present: Senators Feingold, Lugar, and Isakson.

        OPENING STATEMENT OF HON. RUSSELL D. FEINGOLD, 
                  U.S. SENATOR FROM WISCONSIN

    Senator Feingold. I call the hearing to order, and I'd like 
to welcome all of you to this hearing entitled ``Resource Curse 
Or Blessing? Africa's Management of Its Extractive 
Industries.'' I am of course honored to be joined by the 
ranking member of the subcommittee, Senator Isakson, and of 
course the ranking member of the full committee, Senator Lugar, 
and I would like each of them to deliver some opening remarks 
in just a moment.
    This is likely the last hearing of the subcommittee in the 
110th Congress and it closes out a busy 2 years. Prior to today 
we have held 10 hearings on both specific countries in crisis, 
including Kenya, Somalia, Sudan, and Zimbabwe, and also on 
emerging trends, such as the United States-Africa Command, 
democratization, and China role in Africa.
    Today's topic cuts across all those areas. Africa's 
abundance of natural resources holds great economic potential 
and the promise of pulling so many people out of poverty. Yet 
we have unfortunately seen the opposite, aptly described by 
some by the phrase ``resource curse,'' as competition for 
control of these resources has more often fueled corruption and 
inequality than growth and development. Even worse, that 
competition has frequently devolved into conflict.
    A decade ago we watched in horror as the trade in diamonds 
became intertwined with war, destruction, and displacement in 
places like Angola, Liberia, and Sierra Leone. Since that time 
much progress has been made to combat those so-called blood 
diamonds. In 2000 the Kimberley process was launched, leading 
to the establishment of an international certification scheme 
to ensure rough diamonds do not originate in conflict zones. 
Kimberley has been a tremendous success, even though it is 
unable to fix the problem completely and cannot, unfortunately, 
ensure that the citizens of each country receive the benefits 
they deserve. It does, however, provide a model that can be 
strengthened and expanded to address other natural resource 
concerns across the continent and do so in a way that decreases 
conflict and corruption, overriding tangible benefits to local 
communities.
    However, to date we have not had a Kimberley-like process 
for cassiterite, coltan, copper, gold, or timber. The 
mismanagement and exploitation of these resources continues to 
undermine stability in places such as Cote d'Ivoire, the 
Democratic Republic of Congo, and even Zimbabwe. The lack of 
mechanisms to regulate or at least scrutinize the trade in 
these resources handicaps diplomatic and humanitarian efforts 
to bring peace to these places.
    One of the goals of today's hearing is to recognize this 
gap and consider ways to address it. Similar challenges exist 
with oil and gas, output of which has skyrocketed in recent 
years in Angola, Chad, Equatorial Guinea, Nigeria, and Sudan. 
In fact, few people realize it, but more U.S. oil imports now 
come from Africa than the entire Persian Gulf.
    These extractive industries have provided massive revenues, 
but the growing production is not translated into reducing 
poverty. Despite their considerable wealth, Africa's leading 
oil-producing nations remain home to some of the worst poverty 
in the world and are consistently rated as some of the world's 
most corrupt places. In fact, just yesterday Transparency 
International released its corruption index, with African 
countries, many of them oil-producing, comprising 6 of the 10 
most corrupt: Somalia, Sudan, Chad, Guinea, Equatorial Guinea, 
and the Democratic Republic of Congo.
    Moreover, oil production has been central to the intense 
violence in Nigeria's Delta region as well as the conflicts 
throughout Sudan. These are examples of how the corruption that 
stems from resource mismanagement can undercut the rule of law, 
breeding weak and failing states.
    Failure to confront the competition for resources in these 
places undermines ongoing stabilization efforts and puts U.S. 
interests at risk. Examining the underlying dynamics and the 
risks of the resource curse is especially important when nearly 
a dozen African countries are beginning new oil and gas 
exploration. There is of course real excitement in these 
countries at the potential for extractive industries to 
stimulate economic growth. But it is essential that they avoid 
the problems that have plagued many of their resource-rich 
friends and neighbors across the continent.
    Considerable progress has been made over the last 5 years 
to identify mistakes and come up with the best practices for 
natural resources management. There have also emerged 
initiatives to support the implementation of those lessons, 
most notably the Extractive Industries Transparency Initiative, 
known as EITI. EITI facilitates technical expertise and 
reporting guidelines for countries to promote transparency in 
their oil, gas, and mining sectors. It is worth noting that, of 
the EITI's 23 current candidate countries, 16 are in Africa.
    EITI is a promising start, but it alone has been 
insufficient to ensure transparency and accountability in the 
extractive industries. First, targeted assistance is needed to 
support the capacity of governments to implement the EITI 
guidelines. Second, the World Bank has called for a more 
comprehensive approach that incorporates the range of 
activities from exploration of resources through to the 
spending of resource revenues by governments.
    Today's hearing will explore how the United States and 
international financial institutions are working to address 
these shortcomings of EITI and how we might do more. At the 
same time, though, we know that it is often a lack of will 
rather than capacity that ultimately hinders transparent and 
equitable resource management. Therefore we must also consider 
how the United States can leverage actors involved in Africa's 
extractive industries.
    One way is the Extractive Industry Transparency Disclosure 
Act, of which I am an original cosponsor. Legislation was 
introduced by my colleague Senator Schumer, who has submitted a 
statement on the bill for this hearing. The bill would require 
all companies registered with the SEC--and it covers 27 of the 
30 largest operating international organization companies--to 
file an annual report of all payments made to foreign 
governments for the extraction of natural resources. Requiring 
companies to provide that information can help public 
institutions here and in Africa to combat corruption.
    If there are no objections from my colleagues, I am pleased 
to submit Senator Schumer's statement into the record and I 
look forward to working with him to pass the bill.
    Regulating companies needs to be complemented by direct 
engagement with foreign governments on good government, respect 
for the environment, and protection of human rights. Sadly, 
under this current administration we have seen U.S. capacity to 
engage and advance these principles shrink in Africa. Certainly 
the growing role of China in the continent, as well as India, 
Russia, and others, has been a major factor beyond our control. 
But too often we have lacked high-level leadership and 
necessary interagency coordination to implement coherent and 
comprehensive strategies in Africa.
    As our sights turn to the next administration and a new 
Congress, this will need to change, not only to help reverse 
the stubborn resource curse in Africa, but also to build stable 
long-term relationships. I hope today's hearing will help us 
assess how we might move in that direction.
    Now let me quickly introduce our two distinguished panels 
so we can begin that discussion. First we will hear from Deputy 
Assistant Secretary for African Affairs, Todd Moss, who has an 
extensive background in issues of financial and economic 
development in Africa. I realize that this issue cuts across 
several Bureaus at the State Department, so I really appreciate 
your willingness to testify today on State's current approach 
to these issues and the challenges involved.
    We also sent an invitation to the Treasury Department. They 
were unable to send a representative today, which is 
unfortunate given their important role in this discussion.
    Our second panel features an all-star lineup, beginning 
with Professor Paul Collier, the director of the Center for the 
Study of African Economies at Oxford University. Dr. Collier is 
known--widely known these days, for his award-winning book 
entitled ``The Bottom Billion: While the Poorest Countries Are 
Failing, What Can Be Done About It?'' He was one of the first 
to identify the intersection between the resource curse and 
civil wars in Africa. Both as an academic and World Bank 
adviser, he's been a leading voice over the last decade on 
issues of conflict and development. So it is an honor to have 
him joining us today to give us his latest policy 
recommendations for how African governments, international 
financial institutions, and the United States can help reverse 
this resource curse.
    We also hear from David Goldwyn, president of the energy 
consulting firm Goldwyn International Strategies. Mr. Goldwyn 
brings a wealth of experience on these issues as well, not only 
from the private sector through his current position, but also 
as a senior associate of the Center for Strategic and 
International Studies and from his previous work and leadership 
roles within the Departments of Energy and State. So I look 
forward to Mr. Goldwyn's assessment of what is needed both 
institutionally and operationally to enable the United States 
to better leverage Africa's extractive industries to promote 
good governance and stability.
    Finally, we will hear from Simon Taylor, the cofounder and 
director of Global Witness. Global Witness has worked for the 
last 15 years through hard-hitting investigations and civil 
society advocacy to break the links between natural resources, 
conflict, and corruption. They and their NGO colleagues have 
been instrumental to many of the successes I described earlier. 
In fact, the very holding of this hearing and Senator Durbin's 
Judiciary hearing later this morning on corporate 
responsibility is a testament to the many years NGOs have spent 
trying to raise awareness of these issues. I hope Mr. Taylor 
will give us the perspective of civil society on what progress 
has been made and what gaps still exist in international 
efforts to combat conflict resources and ensure transparency in 
Africa's extractive industries.
    So thank you to all our witnesses for being here and I look 
forward to your testimony and our subsequent discussion. Thank 
you for your patience, my colleagues. I wanted to set the stage 
for this. But I now turn to my distinguished ranking member, 
Senator Isakson, for his opening remarks.

  STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM GEORGIA

    Senator Isakson. Well, thank you, Chairman Feingold. I was 
thinking last night as I prepared for this hearing, 17 years 
ago my oldest son wrote his master's thesis at University of 
Georgia on the subject of the Dutch disease and its impact of 
the Middle East. The Dutch disease economically is when a 
country is rich in a natural resource, but doesn't reinvest the 
proceeds from its extraction into its people in terms of 
education, manufacturing, economic development, health care, 
and the like. What happens is you end up with a region of the 
world, just like we have in the Middle East now, where the 
countries are wealthy, but the people basically have to 
purchase all of their expertise, medicine, health care, things 
like that, from outside the country because money was never 
reinvested within the country itself.
    Africa is on the doorstep of having the opportunity to take 
the wealth from these extractive industries, invest it in its 
people and education and health care and training and economic 
development, to where it can be a shining star on the world 
globe and the world stage.
    In January I visited Equatorial Guinea and saw both the 
evidence of the start of that as well as the need for 
improvement in a number of areas. President Obiang and his 
country discovered natural gas a few years ago. Marathon Oil 
and Hess went in on a joint venture with them, built a billion 
dollar gas liquification facility in the Gulf of Guinea, where 
they now export around the world, including occasionally into 
Elba Island in the State of Georgia.
    I went and saw firsthand where they're building a huge 
hospital in Malabo, one of the finest hospitals, quite frankly, 
I've ever seen. They have contracted with Israel to build that 
hospital. I went and saw the development of roads and streets 
and infrastructure that are a significant sign of investment of 
funds in the country.
    But I also know education is at a low level as are many of 
the other resources that help a country and a people to 
improve. So, Mr. Chairman, I think your desire and wisdom in 
calling this hearing today on extractive industries and the 
value of the wealth of Africa, but the importance of seeing to 
it that the proceeds are reinvested in the best interests of 
the African people and obviously democracy is most appropriate 
at this time.
    I look forward to hearing from our other witnesses and I'm 
pleased to share the minority side with the distinguished 
ranking member, Senator Lugar.
    Senator Feingold. Thank you, Senator Isakson. I want to 
thank you not only for your comments, but for your diligent 
involvement in the subcommittee throughout this Congress as 
long as you've been on here. It's been really appreciated how 
serious you've taken this and how you've taken a lot of time 
out of your busy schedule to be involved in these hearings.
    I thank you.
    Senator Isakson. Thank you.
    Senator Feingold. Senator Lugar.

 STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM INDIANA

    Senator Lugar. Thank you very much, Mr. Chairman. Let me 
just take this opportunity to thank you again for your 
leadership, not only this year with the subcommittee, but for 
many years. It's really been a passionate interest in Africa, 
which all the committee members appreciate.
    I thank, likewise, Senator Isakson for being such an 
excellent ranking member on our side, because the two of you 
have conducted the 10 hearings that you've mentioned. They've 
been extensive in a year in which in some other areas of the 
committee activity there has not been the same due diligence 
perhaps. But it has been wonderful to work with you.
    Let me just say I thank the chairman for holding this 
hearing on a topic that is clearly very timely. This summer I 
commissioned the minority staff of our Foreign Relations 
Committee to assess the impact of the so-called resource curse 
and to evaluate the effectiveness of current United States and 
international efforts to remedy the problem. Staff examined 
more than 20 resource-rich developing countries, including five 
in Africa--Angola, Chad, Equatorial Guinea, Ghana, and Nigeria.
    The resulting report, entitled ``The Petroleum and Poverty 
Paradox,'' has gone to print and will be available in hard copy 
in the next few days. An electronic copy is available now on my 
Senate Web site.
    Observers have long known that finding large deposits of 
oil and gas does not necessarily improve the quality of life 
for a developing country that is unprepared to handle a sudden 
windfall of resource wealth. It can often lead to corruption, 
setbacks in progress toward democracy, enrichment of elites, 
political instability, and a failure to invest in education, 
agriculture, and industry as they create jobs and produce 
exports.
    Countries as diverse as The Netherlands, which discovered 
oil and gas in the 1960s, and Nigeria, which has been a major 
oil exporter for a quarter of a century, have suffered this 
resource curse in one way or another. The problem has come into 
sharp focus lately because oil discoveries in developing 
countries and the soaring price of petroleum and other key 
commodities have produced sudden new riches for many poor 
countries.
    But the impact of this curse is not limited to the 
resource-rich countries themselves. The United States and other 
developed countries are also affected. As I noted in the 
introduction to the forthcoming staff report, it exacerbates 
global poverty, which can be a seedbed for terrorism. It dulls 
the effect of our foreign assistance. It empowers autocrats and 
dictators and it can crimp world petroleum supplies by breeding 
instability. The ongoing rebel attacks on Nigeria's oil 
facilities, for example, are a factor in today's record high 
crude prices.
    Because the resource curse affects our economic, security, 
and humanitarian interests, it should assume a more prominent 
place in our foreign and development policy. On this score, my 
staff found that, while there have been some positive steps, 
progress has been uneven. Concentrated effort is necessary 
because once a country discovers oil the United States and 
other international donors quickly lose leverage. In Africa, 
staff found the United States programs intended to help 
countries manage their oil money wisely could only succeed when 
there is sufficient political will to fight corruption and to 
make other difficult choices on the part of the country.
    In these countries, the international community should work 
to improve the institutional capacity to handle large capital 
flows and to address their pressing development needs. Staff 
concluded that U.S. policy in these African countries should 
work to build trust in long-term relationships and that this 
requires a strengthened United States Embassy presence.
    The report also found that where national leaders are 
willing to face the problem outside experts can help promote 
stronger antigraft and transparency policies to make it harder 
for government officials to hide corruption and easier for 
citizens to follow the money to make sure it isn't wasted.
    The Extractive Industries Transparency Initiative is one of 
several international efforts to fight the resource curse. The 
report urges the administration to give the EITI more vigorous 
support. It also urges the oil, gas, and mining companies, 
which often express support for transparency, to do more to 
encourage it in the countries where they operate.
    I look forward along with you, Mr. Chairman, to the 
insights of our witnesses.
    Senator Feingold. I thank my colleagues for their comments.
    Now we can turn to Mr. Moss for the first panel.

STATEMENT OF TODD MOSS, DEPUTY ASSISTANT SECRETARY FOR AFRICAN 
    AFFAIRS, DEPARTMENT OF STATE; ACCOMPANIED BY STEPHEN J. 
GALLOGLY, DIRECTOR, INTERNATIONAL ENERGY AND COMMODITY POLICY, 
              DEPARTMENT OF STATE, WASHINGTON, DC

    Mr. Moss. Mr. Chairman, members of the committee, thank you 
for inviting me here to testify on Africa's resources. I want 
to thank the committee for their interest in this critical 
subject. I also want to note it's highly appropriate that we're 
here today to have a hearing on corruption in Africa in a room 
numbered 4-1-9.
    Conflict resolution and the promotion of good governance 
are hallmarks of this administration's policy in Africa. Since 
2000 we've seen seven major conflicts on the continent come to 
an end. U.S. policy in Africa has emphasized helping African 
countries build economies that generate prosperity and create a 
middle class that is the bedrock of democracy. The United 
States actively works to build partnerships with capable 
governments who can be allies in the fight against 21st century 
transnational threats such as crime, drugs, disease, and 
treatment.
    To do this effectively, we've ramped up our cooperation and 
assistance. With the support of Congress, total U.S. aid to 
Africa reached an all-time high of $5.7 billion in 2007. But we 
also recognize that for these partnerships to grow and to be 
sustainable we must help countries develop the capacity to use 
their own resources more wisely. Managing the continent's 
resource wealth in a way that brings broad benefits to 
populations and reduces poverty is a key priority for both the 
United States and for Africa.
    Unfortunately, too many countries have failed to leverage 
their natural resource wealth into strong economies and strong 
states. The good fortune of having valuable commodities in the 
ground should provide countries with an opportunity to make 
lives and societies much better, but the opposite often occurs. 
In too many countries oil, gas, and mineral wealth have instead 
become associated with high poverty rates, weak state 
institutions, corruption, and war.
    Although the resource curse is not a uniquely African 
problem, Africa has many economies that rely on just one or two 
extractive exports. What explains this paradox? Economists tend 
to point to Dutch disease, whereby higher prices for a dominant 
export commodity crowd out the development of other industries, 
typically through the appreciation of the exchange rate. We see 
this in Nigeria, where high oil prices drive up the value of 
the naira and harm the competitiveness of Nigerian industry and 
agriculture and also manage to turn the focus of politics to 
controlling the oil wealth.
    A second concern is the reinforcement of weak and 
unaccountable state institutions. When a government gains its 
income from the activities of a few oil or mining companies, 
rather than from taxing its own population, there are few 
incentives to be responsive to the people's needs. In Nigeria, 
more than three-quarters of government revenue comes from the 
oil and gas sector, so there is little incentive, especially at 
a time of high international energy prices, to build a broader 
tax base or to deliver public services.
    The most devastating effect is the vulnerability to 
conflict. It's no coincidence that some of the most vicious 
civil and regional conflicts have been sustained by competition 
over diamonds and minerals.
    So the question is how to break this downward resource-
governance cycle and create a virtuous one? Well, when possible 
we try to get in front of the problem. A recent oil find 
offshore Ghana is still some years away from production. Before 
the money flows, the Government of Ghana is actively seeking 
mechanisms to manage future oil wealth and to ensure that 
revenues are used in a transparent and productive way that 
bolsters its democracy. We are collaborating with the 
government, with oil companies, civil society, and relevant 
international organizations as the Government of Ghana develops 
the best model to achieve these goals.
    In countries where the resource curse has already set in, 
we must encourage transparency and find other ways to create 
accountability. The Extractive Industries Transparency 
Initiative is one important part of this effort. EITI 
establishes accounting and reporting norms for revenues from 
natural resources. As the chairman noted, of the 23 candidate 
countries 16 are from sub-Saharan Africa. The United States 
fully supports EITI and has committed $3 million for fiscal 
year 2008 to a multidonor EITI trust fund. We've also supported 
through USAID specific EITI implementation projects in Nigeria 
and the Democratic Republic of the Congo.
    But it is worth keeping in mind that EITI focuses on only 
one link of the chain that can turn oil and gold into roads and 
schools. The Kimberley process monitors and controls the rough 
diamond trade to prevent the use of so-called blood diamonds to 
finance wars and to enrich warlords. This initiative now 
encompasses 73 countries, has tracked $38 billion in 
international diamond trade, and covers virtually the entire 
international market.
    Special arrangements have been implemented in extreme cases 
to put extra international oversight on key sectors to try to 
prevent revenues from leaking or being misused. In Liberia the 
Governance and Economic Management Assistance Program, or 
GEMAP, provides intensive external oversight on key ministries. 
GEMAP has been critical in allowing the trade in diamonds and 
timber to resume in Liberia. So far GEMAP has been highly 
successful in building confidence and improving fiscal 
management in Liberia.
    I'll just note, the Liberia Forestry Initiative is one 
component of this. This includes a state-of-the-art chain of 
custody system where there are bar codes literally on every log 
that is cut down, and it's supported by a member of the U.S. 
Forestry Service, an expert that is based in the Embassy in 
Monrovia.
    In Chad, on the other hand, a high-profile effort to 
sequester oil revenues offshore now appears to be failing. The 
different outcomes between Chad and Liberia and other cases 
highlight that donor-supported activities to strengthen revenue 
management are likely only to succeed where there is strong 
country ownership.
    While these efforts are helpful, much of what is necessary 
to beat the resource curse are not necessarily new, high 
profile initiatives, but rather the solid footings of sound 
economic management. Publishing detailed budgets, independent 
auditing, expenditure tracking, and other practices that are 
the norm in the United States are still not prevalent in many 
countries. Technical assistance from AID and the U.S. Treasury 
in these practices have been helpful in Nigeria, Guinea, 
Liberia, Zambia, and elsewhere. In other countries, the U.S. 
works with the World Bank and other partners to promote budget 
management.
    In spite of some progress thus far, we face continued 
challenges. There are severe limits to the influence of the 
international community when powerful or corrupt local 
politicians thrive by defending opacity instead of 
transparency. The emergence of new investors and donors who are 
less concerned about transparency and accountability can 
undermine voluntary schemes like EITI. High commodity prices 
similarly can reduce government incentives to seek reform.
    One approach is to support reform from within by aiding 
those who are confronting entrenched interests. A more 
challenging avenue is to convince governments that the gains of 
transparency are greater in a political sense than the threat 
to rent-seeking. One key to this effort is to generate public 
awareness and demand for transparency, which is one reason that 
the EITI is such a valuable effort.
    Stronger anticorruption efforts are also vital by both 
developing and developed countries. The United States is 
aggressively enforcing our own laws against foreign bribery. 
Other countries must do so as well. This year, at U.S. urging, 
the G-8 prepared for the first time an accountability report on 
actions taken by each G-8 country to implement anticorruption 
commitments.
    Let me end on a positive note about how current global 
trends can be helpful in beating the resource curse. More and 
more African countries genuinely want to attract private 
investment outside of the extractive sectors and, fortunately, 
there is now greater investor appetite for Africa. As 
governments shift strategy from squeezing mining and oil to try 
to attract new companies in new sectors, they recognize that 
they need to make the business environment more attractive. 
This means better and more open economic policies and 
compliance with international business norms.
    This shift also has political and governance benefits. By 
creating an independent business class, countries broaden the 
tax base and create a constituency for even more reform. The 
line between the future winners and losers in Africa will be 
drawn between the governments that recognize and seize upon 
this shift and those that cling stubbornly to the past. The 
policy of the United States is to help more countries make the 
right choice.
    I'm happy to take your questions. Thank you.
    [The prepared statement of Mr. Moss follows:]

Prepared Statement of Todd Moss, Deputy Assistant Secretary, Bureau of 
          African Affairs, Department of State, Washington, DC

    Mr. Chairman and members of the committee, thank you for inviting 
me here today to testify on Africa's resources. Conflict resolution and 
the promotion of good governance are hallmarks of this administration's 
policy in Africa. Since 2000, seven major conflicts on the continent 
have ended.
    U.S. policy in Africa has emphasized helping African countries 
build economies that generate prosperity and create a middle class that 
is the bedrock of democracy. The United States actively works to build 
partnerships with capable governments who can be allies in the fight 
against the 21st century transnational threats of crime, drugs, 
disease, and terrorism. To do this effectively, we have ramped up our 
cooperation and assistance. With the support of Congress, total U.S. 
aid to Africa reached an all time high of $5.7 billion in 2007--$4.5 
billion in bilateral assistance and $1.2 billion in multilateral. But, 
we also recognize that for these partnerships to grow and be 
sustainable, we must help countries develop the capacity to use their 
own resources more wisely.
     Managing the continent's resource wealth in a way that brings 
broad benefits to populations and reduces poverty is a key priority for 
Africa and the United States. Unfortunately, too many countries have 
failed to leverage their natural resource wealth into strong economies 
and strong states. The luck of having valuable commodities in the 
ground should provide countries with the opportunity to make lives and 
societies better, but the opposite often occurs. In too many countries, 
oil, gas, and mineral wealth have instead become associated with high 
poverty rates, weak state institutions, corruption, and war. Although 
the ``resource curse'' is not a uniquely African problem, Africa has 
many economies that rely on one or two extractive exports.
    What explains this paradox? Economists point to ``Dutch disease,'' 
whereby higher prices for a dominant export commodity crowd out the 
development of other industries, typically through appreciation of the 
exchange rate. We see this in Nigeria where high oil prices drive up 
the value of the naira, harm the competitiveness of Nigerian industry 
and agriculture, and turn the focus of politics to controlling oil 
wealth.
    A second concern is the reinforcement of weak and unaccountable 
state institutions. When a government gains its income from the 
activities of a few oil or mining companies rather than taxing its 
population, there are few incentives to be responsive to the people's 
needs or wishes. In Nigeria, more than three-quarters of government 
revenue comes from the oil and gas sector, so there is little 
incentive--especially in a time of high energy prices--to build a 
broader tax base or to deliver public services.
    The most devastating effect is the vulnerability to conflict. It is 
no coincidence that some of the most vicious civil and regional wars 
have been sustained by competition over diamonds and minerals.
    How to break the downward resource-governance cycle, and create a 
virtuous one? When possible, get in front of the problem. A recent oil 
find offshore Ghana is still some years away from production. Before 
the money flows, the Government of Ghana is actively seeking mechanisms 
to manage future oil wealth and to ensure revenues are used in a 
transparent and productive way that bolsters its democracy. We are 
collaborating with the government, oil companies, civil society, and 
international organizations as they develop the best model to achieve 
these goals.
    In countries where the resource curse has already set in, we must 
encourage transparency and find other ways to create accountability.
    The Extractive Industries Transparency Initiative (EITI) is one 
important part of this effort. EITI establishes accounting and 
reporting norms for revenues from natural resources. EITI now has 23 
candidate countries, 16 of which are in sub-Saharan Africa. The United 
States supports EITI as part of larger efforts to enhance transparency 
and accountability, and has committed $3 million for FY08 to a 
multidonor EITI trust fund. We have also supported through USAID 
specific EITI implementation projects in Nigeria and the Democratic 
Republic of the Congo. But it is worth keeping in mind that EITI 
focuses on only one link of the chain that can turn oil and gold into 
roads and schools.
    The Kimberley Process monitors and controls the rough diamond trade 
to prevent the use of so-called blood diamonds to finance wars and to 
enrich warlords. This initiative now encompasses 73 countries, has 
tracked $38 billion in the diamond trade, and covers virtually the 
entire international market.
    Special arrangements have been implemented in extreme cases to put 
extra international oversight on key sectors to try to prevent revenues 
from leaking or being misused. In Liberia, the Governance and Economic 
Management Assistance Program (GEMAP) provides intensive external 
oversight on key ministries, allowing the trade in diamonds and timber 
to resume. So far this has been highly successful in building 
confidence and improving fiscal management. In Chad, on the other hand, 
an effort to sequester oil revenues offshore appears to be failing. The 
different outcomes in these cases highlight that the donor-supported 
activities to strengthen extractive industries revenue management are 
likely only to succeed where there is strong country ownership.
    While these efforts are helpful, much of what is necessary to beat 
the resource curse are not necessarily new high-profile initiatives, 
but rather the solid footings of sound economic management. Publishing 
detailed budgets, independent auditing, expenditure tracking, and other 
practices that are the norm in the United States are still not 
prevalent in many countries. Technical assistance from USAID and the 
U.S. Treasury in these practices has been helpful in Nigeria, Guinea, 
Liberia, and Zambia. In other countries, the U.S. works with the World 
Bank and other partners to promote budget management.
    In spite of some progress thus far, we face continued challenges. 
There are severe limits to the influence of the international community 
when powerful, corrupt, or greedy local politicians thrive by defending 
opacity instead of transparency. The emergence of new investors and 
donors who are less concerned about transparency and accountability can 
undermine voluntary schemes like EITI. High commodity prices similarly 
can often reduce government incentives for reform.
    One approach is to support reform from within by aiding those who 
are confronting entrenched interests. A more challenging avenue is to 
convince governments that the gains of transparency are greater, in a 
political sense, than the threat to rent-seeking. One key to this 
effort is to generate public awareness and demand for transparency, 
which is one reason the EITI is a valuable effort.
    Stronger anticorruption efforts are also vital. Developing 
countries must take sustained efforts to investigate, prosecute, and 
punish corrupt officials and those who corrupt them. Our G-8 partners 
and other developed and emerging countries need to do more to go after 
businesses and individuals from their countries who bribe public and 
political party officials. The United States is aggressively enforcing 
our laws against foreign bribery; others must do so, too. Commitments 
to deny safe havens to corrupt officials and their assets need to be 
implemented.
    Ultimately, there must be greater accountability by both developed 
countries and partner governments to follow through on commitments 
undertaken in this area. This year, at U.S. urging, the G-8 prepared 
for the first time an accountability report on actions taken by each G-
8 country to implement anticorruption commitments. At their summit in 
July, G-8 leaders pledged to update this report annually. This effort 
complements peer review work done in the Organization for Economic 
Cooperation and Development and emerging efforts under the United 
Nations Convention Against Corruption.
    Let me end on a positive note about how current global trends can 
be helpful in beating the resource curse. More and more African 
countries genuinely want to attract private investment outside of the 
extractive sectors. And fortunately, there is now greater investor 
appetite for Africa. As governments shift strategy from squeezing 
mining and oil to trying to attract new companies in new sectors, they 
recognize that they need to make the business environment more 
attractive. This means better and more open economic policies and 
compliance with international business norms. This shift also has 
political and governance benefits. By building an independent business 
class, countries broaden the tax base and create a constituency for 
more reform.
    The line between the future winners and losers in Africa will be 
drawn between the governments that recognize and seize upon this shift 
and those that cling stubbornly to the past. The policy of the United 
States is to help more countries make the right choice.

    Senator Feingold. Thank you very much, Mr. Moss, and I will 
begin--we'll begin with 7-minute rounds for questions.
    As you know, the EITI is approaching a critical stage with 
its first tranche of candidate countries soon to reach the 
deadline at which their progress toward implementation will be 
evaluated. This will be a major test for this program's 
credibility. What specifically is the United States doing to 
support African candidate countries in EITI implementation, as 
well as to provide high-level support for the broader 
initiative?
    Mr. Moss. As I mentioned, we have made a--we have committed 
to make a contribution for the trust fund. Then at the country 
level, the candidate countries, several of them have made 
proposals, mostly through USAID, for implementation technical 
assistance. The biggest programs there are in Nigeria and DRC.
    I have Steve Gallogly, who is the State Department's point 
person on EITI. I'll invite him to add any additional details.
    Senator Feingold. If you could give me a sense of how much 
we're giving to the EITI and what kind of help we're giving to 
these countries that are doing these applications.
    Mr. Gallogly. We're committing $3 million to the multidonor 
trust fund in fiscal year 2008. That will be transferred 
shortly, in the next week or two. And we've committed in the 
last 2 fiscal years $2 million helping, as you mentioned, DRC 
and Nigeria, as well as Peru.
    In addition to that--that's specific programs--all 
embassies are involved. We have contacts all the time with the 
EITI secretariat. They reach out to us. We reach out to our 
embassies and engage when little issues come up involving civil 
society or the government or providing assistance. So we're 
there around the world in all these countries, and not just, of 
course, in the countries involved in EITI. Good governance and 
transparency are important everywhere.
    Senator Feingold. Mr. Moss, how has the State Department 
integrated support for EITI and its principles into its own aid 
program? Has there been any consideration of making U.S. 
nonessential assistance contingent on EITI principles, 
especially for countries such as Angola that are not even 
members of EITI?
    Mr. Moss. I think that when we're looking at country 
strategies transparency, promoting transparency and 
accountability, is absolutely a central focus. I'm not sure 
that's always reflected in the budget, partly because, as you 
know, a lot of our resources are directed to health and 
education sectors, but also because this kind of activity is 
not necessarily very capital-intensive. A lot of it is through 
encouraging governments to try to see the management and 
economic benefits of pursuing certain policies. These technical 
assistance programs tend to be just a very small number of 
people that are involved, and when you compare that to, say, a 
very large ARV delivery program, which is very costly, with 
lots of large budgets, it may look like it's very 
disproportionate. But that's partly the nature of the problem 
and the nature of the cost of trying to engage on these issues.
    Senator Feingold. But what about the contingency on EITI 
for countries like Angola?
    Mr. Moss. Well, with Angola, the Angolans have actually 
made some progress in transparency in their accounts. They are 
starting to publish a lot of their financial figures. The 
Angolans have expressed that they have political sensitivities 
to formally joining the EITI and they've opted not to do so at 
this time, but they're continuing to make the argument to us, 
to the IMF, and to the international community that they're 
still committed to those principles, even if they remain 
outside.
    I think one thing I've noticed in my interactions with the 
Government of Angola is that it's actually looking to improve 
management, and when it's presented in a manner of this is a 
way to help you manage your own resources better, they're very 
open to that. However, for historical reasons they're very 
sensitive to any idea that outside forces are coming in and 
forcing them to do anything.
    Senator Feingold. Where natural resources are intertwined 
with ongoing violence, how does the State Department seek to 
address that and integrate economic regulatory measures into 
conflict resolution, prevention, stabilization efforts? For 
example, it's widely known that the plundering of resources 
such as gold underpins the continued violence in the eastern 
Democratic Republic of Congo. What efforts are being made or 
could be made by the United States to regulate that trade?
    Mr. Moss. I think the violence that we're seeing, that we 
have seen, in eastern Congo is, of course, extremely worrying, 
and making sure that the peace in eastern DRC sticks is a very 
high priority of the State Department. The presence of so many 
lootable items in that region--mines, coltan, and different 
things that can be lifted out that are quite high value--have 
clearly been a factor in sustaining those conflicts and have 
allowed a proliferation of fragmented militias that can self-
finance.
    I think that we have tried to put a huge effort on 
political dialog in the east and on bolstering the peacekeeping 
forces that are there now and helping to build capacity of the 
Congolese forces to repel some of the insurgent forces 
operating there. I think it's important to recognize that the 
conflicts that we saw flare up this week in eastern DRC is 
really a continuation of some of the unfinished business from 
the Rwanda genocide of 1994, in this extremely complex problem 
that's going to, unfortunately, be with us for some time. 
Trying to find ways of squeezing those warlords so that they 
don't have the finances to continue is obviously an area that 
we take very, very seriously.
    Senator Feingold. In this discussion, of course, it's 
impossible to overlook the oil-rich Niger Delta, which is home 
to continuing unrest and insurgency, increasingly attacking oil 
installations. The United States obviously has a role in this 
situation, with Nigeria being the fifth biggest source of U.S. 
oil imports. What steps has the administration taken to address 
this growing unrest and what points of leverage do we actually 
have with the Government of Nigeria?
    Mr. Moss. Thank you for that question. I was actually in 
the Niger Delta earlier this year. I was able to go to Scravos 
and Kwa-ibo to see the issues firsthand. It is a very, very 
complicated situation down there. We have now, because the 
problem of the Delta has festered for so long, we've now seen 
what had been legitimate political grievances evolve into 
mostly criminal activity, and those criminal links have gone 
right into the government and into the military, making 
resolution of that difficult.
    The new government that's been in place in Nigeria about 18 
months came to power saying that the Niger Delta was one of 
their top priorities, resolving that issue. We took their word 
on that and we have had repeated dialog with them in a number 
of areas where the United States can help the Government of 
Nigeria deal with that problem. We've actually worked quite 
closely with the British Government in formulating these offers 
and the strategy. It looks at helping to promote political 
dialog, helping to promote budget management, looking at what 
kinds of development projects could get started quite quickly 
so that there's visible progress, so that people feel that 
they're starting to gain some benefits, and last, to help deal 
with the security situation, to help promote responsible 
anticriminal and antimilitant security activity.
    As you probably have seen, the Nigerian Government has gone 
through a period of uncertainty. The responsibility for Delta 
strategy has passed from different ministries. There is now 
supposed to be a Niger Delta ministry created. We don't yet 
know who will lead that. But several previous efforts to come 
up with a strategy have fallen by the wayside.
    So we have continued, and we're doing so this week with the 
Nigerians at UNA in New York, continuing to dialog with them on 
the need to push the political dialog, to get projects started, 
and to work on transparency and budget management in the 
region.
    Two things I'll note. One is that in Nigeria a lot of the 
power rests with the Governors, so we are actively reaching out 
to deal with some of the key states, because dealing with the 
revenue streams at those levels is now important. Many of the 
budget issues in Nigeria have seen great improvements from the 
previous Nigerian administration and now the problem is at the 
state level.
    Senator Feingold. Mr. Moss, I'm going to cut you off here 
because I'm way over my time. But I will return to this in the 
next round. But we want to give Senator Isakson a chance.
    Senator Isakson. Is the United States the sponsor of EITI? 
Is that our initiative or is that a World Bank initiative?
    Mr. Moss. Well, it was started, if I remember correctly, it 
was started as a United Kingdom initiative, but the United 
States has been a firm supporter from the beginning.
    Senator Isakson. I think you said 16 sub-Saharan countries 
are participating in EITI; is that correct?
    Mr. Moss. There are 16 African countries that are currently 
candidate countries, which gives them a window of several years 
to meet full compliance. There are no countries of the 23 that 
have been rated fully compliant yet.
    Senator Isakson. But to help me understand it, is 
Equatorial Guinea one of those 16?
    Mr. Moss. Yes, it is.
    Senator Isakson. When they were fully compliant, what would 
they be doing in terms of transparency and disclosure under 
EITI with regard to their natural gas liquification production?
    Mr. Moss. I'm going to ask Steve if he could detail the 
exact criteria for full compliance.
    Mr. Gallogly. Full compliance would be they would be 
reporting their revenues that they receive from companies, 
including for natural gas and oil production and from the LNG 
facility, and companies would be reporting to the validators 
system that the EITI secretariat is setting up, independent 
validators. They would be reporting the same set of revenues 
that they paid to the government. The validators will look at 
reconciling that these match up, that they total up and they 
match up with what the government reported they received and 
the companies said they paid. Then there's a long procedure to 
make sure that this is done, that civil society is involved and 
other elements of the society are involved. Then they would be 
considered compliant based on the finding from the validators, 
the independent validators.
    Senator Isakson. I would hope that the end result is that 
transparency and sunshine is the best cure for corruption.
    Mr. Gallogly. The idea is that this would be public, how 
much revenues that they have received from this, and so this 
would bring pressure on the governments from the people to 
say--the governments could say, well, a lot went to costs and 
this. So they have a number, what they received, and then 
people--the strong theory, I believe the people would say, What 
are we getting from these revenues? And the government would 
have to answer for these revenues. That's the fundamental 
basis.
    Senator Isakson. In something like this, the carrot-and-
stick approach always seems to work. What's the carrot for 
these 16 countries that are trying to become compliant?
    Mr. Gallogly. The carrot is their image for investment. 
Foreign companies would be more interested in investing there 
because it tends to be more stable. There's a certain benefit 
in status among their competing countries. It's something the 
U.S. raises in meetings with all of these countries as an ask, 
something that we press for them to be involved actively in 
EITI. We press other countries that would be investing 
countries to support the process.
    So it is a sense of developing a better reputation in terms 
of politically, geopolitically, but also as a place to invest.
    Senator Isakson. And I presume the stick would be the 
absence of that investment because they weren't.
    Mr. Gallogly. The main stick is the absence, and also it 
would affect the assessment, the U.S. assessment of that 
country's efforts. When they're saying, well, they ask us for 
certain things, we say, well, we're asking you to make 
progress. So it affects our assessment of that country, their 
engagement, their positive engagement. It's a plus in terms of 
dealing with the U.S. and other countries like the United 
States.
    Mr. Moss. If I may, the additional carrot--and quite 
frankly, the larger carrot--is and should be legitimacy with 
their own population, that then feels--many countries, the 
average person on the street feels that the government steals 
almost all the money. Nobody has any idea what's coming in or 
what's going out. But just this, even this small amount of 
disclosure, can actually have quite a big impact in helping to 
legitimize a government in the eyes of their own people.
    Senator Isakson. Does China recognize EITI or in any way 
encourage countries to be compliant with EITI?
    Mr. Gallogly. Well, when China invests in a country that is 
implementing EITI they're covered by the EITI voluntary rules 
just like anybody else. When we engage with China, we encourage 
them to encourage their companies to be as cooperative as 
possible, and we point out that it's in their interest because 
countries that use their revenues wisely are more reliable 
producers. We're all in this together. China needs oil as much 
as we do and they need reliable suppliers. So it's not in their 
interest to have unstable oil producers around the world. More 
stability in oil-producing states is better for China as well 
as for the United States.
    Senator Isakson. I just wanted to echo what Secretary Moss 
said about the increased emphasis or interest in investment in 
Africa. Former Ambassador Andrew Young, who's a good friend of 
mine, a native of Georgia, runs Good Works, which is a major 
company in promoting African investment by United States 
companies into Africa. We've now started direct flights to 
South Africa from Atlanta because of the commerce that's 
increasing there.
    So I think this program is a tremendous program that lets 
sunshine in as a kind of deterrent to corruption and as a 
positive reward to the people of Africa to ultimately get some 
of those revenues going into their economic and educational 
infrastructure within the country. So I commend you on what 
you're doing, and that's all the questions I have.
    Senator Feingold. Thank you, Senator Isakson.
    Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman.
    Mr. Moss, the chairman mentioned in his opening statement 
that there currently is legislation before the House and the 
Senate that would require United States listed companies to 
provide significant information regarding their financial 
contracts with natural resource-rich countries. Let me ask, 
what is the view of the administration on this legislation that 
would require this listing on the stock exchanges, and do you 
have a further comment as to the efficacy of that legislation, 
how it would work, and what the implications might be in the 
countries involved?
    Mr. Moss. We are aware of this legislation and we're 
supportive of additional efforts to put pressure on all the 
actors for greater disclosure. I think, however, comment on 
pending legislation, I think we probably wouldn't do that at 
this time.
    Senator Lugar. Well, why not? In other words, we are having 
a hearing today on this general subject and I'm just curious as 
to where we all stand on this.
    Mr. Moss. I think this would take--quite frankly, I think 
this would take a larger interagency discussion, and I 
certainly wouldn't want to speak for my Treasury and other 
interagency colleagues about where they stood on this.
    Senator Lugar. Well, let me then pursue a subject that 
you've just touched upon in response to my colleagues. In 
Nigeria, for example, for the moment our U.S. assistance level, 
I am advised, is about $490 million this year. Of that, $10.6 
million comes for the program called U.S. Governing Justly and 
Democratically. Now, whether the $490 million covers much in 
terms of health and education--at least that is where much of 
it is aimed--what kind of dialog do we have with the Government 
of Nigeria with regard to our joint efforts, let's say 
budgetwise?
    If Nigeria is receiving considerable resources from 
extractive industries and thus much better able to provide 
health, education, and welfare benefits for the citizens, 
conceivably our aid ought to go somewhere else, or be 
coordinated in a way in which we are not simply doing the work 
that Nigeria might do if it were in fact having this 
transparency, this dialog with all citizens, as to their 
welfare.
    So describe in a sophisticated way really the intermeshing 
of these funds, the $490 million or whatever may be our 
contribution this year--it may be more in the future--with this 
business of the new wealth, huge wealth, the ability to do very 
different levels of service, things that could not have been 
done before?
    Mr. Moss. Well, you're absolutely right that Nigeria has a 
lot of its own resources. Their foreign reserves now are north 
of $70 billion at the central bank. So the problem in Nigeria 
is not now nor really has it ever been a shortage of cash. The 
vast majority of--the vast, vast bulk of U.S. assistance 
program is PEPFAR-related. That is because Nigeria is such a 
critical country in the region and dealing with AIDS and other 
communicable disease there is of critical nature of making sure 
that it doesn't spread.
    So again, this gets back to my point that it appears 
there's this large budget imbalance there, but that's because 
the transparency issues are not big ticket money items.
    Our discussions with the Nigerians on budget issues, I 
think at the Federal level--the Government in Nigeria is 
different from other countries in Africa in that the states 
really have a very, very large portion of the budget and a lot 
of financial autonomy there. So I think our discussions at the 
Federal level have been quite good. The government, certainly 
in their reform period of roughly 2003 to 2005, put in place 
some quite good measures, including publishing details of the 
budget in the newspaper, which sounds small but actually had 
quite a big impact in Nigeria.
    I think that that dialog is still ongoing, goes quite well. 
Those discussions will continue at the bank-fund annual 
meetings in a couple weeks time. Where we've tried to ramp that 
up is looking again at the state level. That's where the 
transparency is the least obviously, and quite frankly that's 
where the big problem is on the budget side. That is especially 
true in the Niger Delta, where 13 percent of total national 
revenue is spent in those core oil-producing states.
    Again, this is a relatively slow process, helping to build 
capacity there and getting politicians to understand and to 
start to see that better management of these revenues can be in 
their benefit, rather than just seen as attacking a slush fund 
that they may be using for political purposes.
    Senator Lugar. Let me just ask, you mentioned there's maybe 
$70 billion of reserves now that have come largely from these 
extractive industries. This is at the central government level, 
presumably. Does each of the Governors have a different budget 
for health or welfare or what have you? Does not the 
government, the central government holding all these reserves, 
have something to say about the quality of care?
    What I'm trying to get to is there clearly must be a 
budgetary implication of holding $70 billion in the bank in 
what you can do out on the hustings.
    Mr. Moss. Sure, sure. Well, we've certainly taken the view 
that their ability to spend--to save, excuse me--to save during 
an oil boom, which has really never happened before in Nigeria, 
is a positive sign of prudent management. One thing that the 
government has done that I think has been very positive is this 
year--in the past they had these fiscal responsibility bills at 
the Federal level--this year the government said, in exchange 
for getting additional cash out of a different account, not the 
reserves but the excess crude account, you at the states have 
to pass your own fiscal responsibility bills. This year all 
states will do that. We'll see how it goes. It's the very first 
year and for many of these states it's the first time that they 
will publish a budget, that they will have really any level of 
open scrutiny. So I don't think it will be a pretty process, 
but it's the beginning of what will be a long-term road.
    Senator Lugar. It's a step forward. Congratulations to you 
if you've helped to induce that.
    I yield the floor, Mr. Chairman.
    Senator Feingold. Thank you, Senator Lugar.
    Back to the legislation that's been introduced. It would be 
extremely helpful if we could get the administration's view on 
this, either support or neutral or negative, some time in the 
near future, certainly before the end of the administration. I 
understand there's going to be a new administration, but we'd 
like the view of this administration, because I'd like to be 
able to argue, as I think others would, that there is a 
bipartisan interest in this and that it's a useful piece of 
legislation.
    So please, as soon as possible if you could get us a more 
definite answer than we got. We do understand this bill was 
only introduced in July, but I think all of us would like to 
know the view.
    I would like to clarify, since it was noted that the United 
States supports EITI, but we're not a member, are we, of EITI? 
And why is that?
    Mr. Gallogly. We're not an implementing country in the 
sense that we implement the rules of EITI. We're a supporting 
country of the EITI and we're on the board of EITI. So it's not 
a legal international organization, but we're referred to as a 
member, and I think legitimately so since we're--other 
supporting countries are not implementing. The only supporting 
country that is implementing the EITI rules is Norway, and the 
other investor countries are not, that are perceived as not 
having the problem.
    I think with this process it would complicate it much too 
much early if it was just focused on a global issue rather than 
some of the countries that face unique challenges separate from 
the challenges faced in Canada and the United States or 
Australia.
    Senator Feingold. Mr. Moss, back to the situation in 
Nigeria and the Niger Delta. Isn't it true that the United 
States is severely handicapped by our lack of presence in the 
Delta region and our inconsistent diplomatic approach? I have 
been to this region and that area in particular in the river 
and I recognize the insecurity in the Delta makes it very hard 
for U.S. Embassy officials, who are doing great work in an 
already tough posting, to travel there. But how do we collect 
information and develop our analysis of the situation?
    Mr. Moss. Sure. First, we do travel down to the Delta when 
it's possible for security reasons. As I mentioned, I was down 
there. Under Secretary Jeffrey was just down there about 2 
months ago. Ambassador Sanders has been down a couple of times 
and she's continuing to try to work with diplomatic security to 
allow her greater freedom to go down there.
    I think for the most part, the vast majority of the 
interaction with people in the Delta is done elsewhere in 
Nigeria, in Lagos. A lot of the political leaders and 
influential power brokers from the Delta actually spend most of 
their time in Lagos. So it's actually quite easy to have access 
to them. So it's not as difficult as it seems, although we 
agree that we would like to get down there a lot more than we 
are able.
    I know that it's not just the United States. All the 
diplomatic missions have problems getting their security people 
to allow them to go down there. But it's certainly something 
that I know that the current Ambassador is trying to push very 
strongly.
    Senator Feingold. We've already talked a good bit about 
this, but despite launching its own national version of the 
EITI and saying all the right things, reports suggest that the 
Nigerian Government is complicit in the illegal trade of oil 
and corruption, which as you've certainly suggested, remains 
rampant. How are we addressing these serious allegations and 
what impact do they have on our bilateral relationship with the 
Nigerian Government?
    Mr. Moss. It is clear that illegal oil bunkering--there are 
people complicit in different levels of government, starting at 
the very local level and working its way up. It does, quite 
frankly, affect our bilateral relationship quite seriously. I 
think that we have--we've been disappointed with the lack of 
movement, particularly with the economic and financial crimes 
commission, which had been built under the previous 
administration as a credible agency tackling probably Nigeria's 
No. 1 issue--corruption--and we haven't seen that momentum 
sustained and it has affected our bilateral relationship.
    I think that what we've tried to do is to maintain an open 
dialog with the government wherever possible and try to find 
windows of opportunity where we can engage with them. But a 
critical part of that is getting the Nigerian Government to 
recognize that the Niger Delta is not just a domestic problem, 
that it is an international problem. For about the first year 
of the administration of the new Yar'adua administration, they 
were insisting it was a domestic issue and they did not want to 
internationalize it. I think we've successfully convinced them 
that that's no longer the case, particularly working with the 
British and other governments.
    One point I would make on this, and this is partly sparked 
by some of the comments of Prime Minister Brown recently, is 
that there have been proposals, because Nigeria is important to 
U.S. energy security, that we should have increased U.S. 
military engagement in Nigeria. I think that further 
militarizing the Niger Delta would be highly unlikely to be 
constructive to enhancing our energy security.
    It's something that we often hear proposed and it's 
something that I know the Nigerians are very sensitive about, 
and certainly we've taken the view that that would be 
counterproductive.
    Senator Feingold. In August 2006 President Bush launched an 
antikleptocracy initiative to hold foreign government officials 
accountable for high-level corruption. Following on this, 
Congress passed legislation in 2007 requiring the Secretary of 
State to investigate and ban foreign government officials 
involved in natural resource corruption from entering the 
United States.
    What specific actions is the State Department carrying out 
to support the President's initiative and fulfill this 
requirement?
    Mr. Moss. Yes. Proclamation 7750 I think is a very welcome 
change that allows us to deny visas to the United States by 
folks that are involved in corruption. I think that it's 
something that we need to probably wield more liberally than we 
do now. I know that there's a hesitancy to become--to be used 
in what may be political tit for tat in a local country, where 
corruption allegations are quite easy to make and quite 
difficult to prove, and that we don't want to get drawn into 
that.
    But I think that, especially officials that seek to be 
international influence peddlers or international statesmen 
certainly like to come to the United States, and I think that 
more aggressive use of the visa ban is something that we should 
certainly be looking at using more aggressively.
    Senator Feingold. Thank you.
    Senator Isakson, do you have further questions?
    Senator Isakson. No further questions, Mr. Chairman.
    Senator Feingold. Senator Lugar.
    Senator Lugar. Thank you, Mr. Chairman.
    I just want to follow up for a moment on my questioning 
about the legislation that Senator Feingold had offered, and 
which, in fact, was offered in the House of Representatives, I 
understand it, the year before last. So it's been around for a 
while.
    Without getting you into difficulty with your brothers over 
in the Department of the Treasury, who are unhappily absent 
today, apparently there have been some questions raised over in 
that area with regard to this legislation. I have no idea where 
the State Department may be. I just simply ask this as a matter 
of curiosity. How within the administration are questions of 
this sort resolved, or is there any attempt to do so? Because 
very clearly we're asking for transparency from African 
countries, and others for that matter--it doesn't necessarily 
apply just to Africa--but at the same time there seems to be 
some reticence on the part of our own officialdom and our own 
business community to come forward with this sort of 
information.
    Do you have any further comment on this predicament?
    Mr. Moss. Well, I think that there are always concerns 
about U.S. competitiveness. But I do think that the U.S., 
because of the Foreign Corrupt Practices Act, quite frankly, 
has been at the forefront of the international community, well 
ahead of almost all other countries in terms of making sure 
that our own companies comply and don't contribute to these 
kinds of problems.
    I will absolutely take your questions back to our 
colleagues and we'll have that discussion. I think that the 
possibility that this will be passed will help to galvanize 
minds and get them in the room to think a little bit harder 
about that.
    Senator Lugar. Let me also inquire, sort of, in the fine 
points of the EITI situation. Now, here we, the United States, 
as your colleague, Mr. Gallogly, has pointed out, has not 
become a member of EITI. Yet we are participating and helping 
out other countries. But what's the hangup here? In other 
words, why aren't we across the finish line, as a member? Is 
this once again a Treasury-State Department or a problem within 
State? What is the dilemma?
    Mr. Moss. I think that we are members. I think what Mr. 
Gallogly was trying to say is that we're not implementing the 
EITI because the United States does not--is, first of all, not 
a resource--it wouldn't fall under the category that we have 
extractive exports above a certain threshold. So I think that 
in that sense, that's why Norway is the only OECD country 
that's implementing it, because of its significant oil exports.
    Senator Lugar. In other words, you have to have exports as 
a part of your GNP that are more significant than whatever ours 
are as a part of ours?
    Mr. Moss. I think the normal threshold is 25 percent of 
exports, is that right?
    Mr. Gallogly. I'm not sure there's a technical number. I'll 
check that.
    Mr. Moss. I think it's more of a question of whether 
exports of extractive industries are so dominant to your 
economy that it's having a potentially harmful effect. Whether 
the U.S. would qualify in that manner, I think probably not. 
But I'll leave that to others to decide.
    Senator Lugar. I just raise the issue because clearly a 
good part of our questioning of you today has been about this 
issue of transparency and advocacy to other countries to adopt 
all sorts of reports and so forth that are alien perhaps to 
their cultures, but not unknown to ours.
    Now, if, in fact, our problem is simply reticence on the 
part of those in government, business, or whatever, that they 
don't want to be troubled with all of this, or as a matter of 
fact they're all above it--these other countries though are now 
sort of developing themselves, as opposed to our institutions--
this doesn't really set the right tone. I appreciate your 
candidness in addressing this, but also this forum for raising 
these issues that at least some of us are concerned about and 
will continue to raise questions about it with whichever 
administration happens to come along.
    Thank you very much, Mr. Chairman.
    Senator Feingold. Thank you so much, Senator Lugar.
    Mr. Moss, thank you for your testimony, your patience in 
answering our questions.
    We'll now turn to the second panel.
    Thank you, gentlemen. We'll ask that you limit your remarks 
to 5 minutes each and we'll certainly put your full statements 
in the record, and we'll begin with Mr. Taylor.

 STATEMENT OF SIMON TAYLOR, DIRECTOR, GLOBAL WITNESS, LONDON, 
                         UNITED KINGDOM

    Mr. Taylor. Thank you, Mr. Chairman. Thank you, members of 
the subcommittee. I'm very honored to be able to give you our 
opinions on these matters. Thank you very much for including 
our statement in the record. I'll briefly refer to a number of 
bits as we go through.
    I want to focus a little bit on Angola because I quite 
categorically, I think, disagree with the description of Angola 
in terms of its performance that was given earlier. Angola sold 
roughly $43 billion worth of oil last year. We're now 6 years 
after the end of the fourth civil war. It still has the highest 
infant mortality rate in the world and one in four children 
don't make their fifth birthday, which I think really by 
anyone's description is a travesty.
    We have to ask where the money has gone. This is one of the 
key reasons why we launched the ``Publish What You Pay'' 
campaign, of which EITI was a response to that initiative. 
Unfortunately, we can trace the story of Angola across the rest 
of the Gulf of Guinea to a greater or lesser extent for 
different reasons in different countries. The situation is 
pretty dire in Equatorial Guinea, in Congo-Brazzaville. We 
refer to a number of examples to illustrate that in our 
testimony.
    What do we have to do with this? I think just to summarize, 
what we need to address these problems is actually a cocktail 
of mechanisms, of which EITI we've heard lots of very good 
things about it today and we continue to support it. We're also 
a member of the board and will continue to do so. We think that 
EITI is an excellent initiative. We want to see it progress 
further.
    With that in mind, I also want to particularly thank 
Senators Leahy and Lugar for providing the additional funding 
for the EITI process coming from the United States. I think 
that's excellent. We'd like to see that continue.
    I think a key thing for the new administration is that the 
next big EITI meeting is taking place in February, so we need 
to see the new administration very early on getting its act 
together, pardon the expression. But we need to see the new 
administration landing on its feet at that meeting, able to 
ramp up the U.S.'s participation in the process.
    What could that be? I think more outreach. A question was 
asked earlier about China. Let's see China take part in the 
process.
    With regard to the comments just now about U.S. 
participation, I think one of the key aspects of the EITI is 
that it's not a corruption club. It's a process of best 
performance. I think one of the best ways to bring that out 
would be to have participation by all the participants, and I 
include the United States. I include my country, the United 
Kingdom. Norway has shown a lead by doing so. But let's see the 
rest. Let's make this the good governance way to be, the global 
standard club. Really, I think we would like to see 
participation on that basis from the U.S.
    Just one sort of correction fact. I don't think EITI is 
about participation on the basis of the amount of exports you 
have. It's about the governance associated with revenue 
streams. I'd just like to separate that out.
    So what's missing? A couple of things on a positive note I 
think are an increased use of FCPA. We've seen an increased 
number of prosecutions. There's a glaring absence from the 
followup from the Riggs Bank scandal. We'd like to see that 
carried forward because there are serious questions to be asked 
there.
    That brings the issue that this issue's not just about 
despotic leaders. It's also about company accountability, 
company performance in these matters. We've seen lots of 
examples. I won't cite them now because we've referred to some 
of them in the testimony. But I think it's very important to 
stress that. EITI deals with this from the government 
participation process and it rides over the way in which 
companies have to a greater or lesser extent been also 
complicit in the process.
    With that in mind, what can we do about the countries for 
which the people in those countries simply don't have time to 
hold their breath? I'm particularly thinking again of Angola 
here. How long do we have to wait with those circumstances in 
Angola before Angola might just volunteer?
    With that in mind, I absolutely commend the EITD bill. We 
from our point of view do not accept some of the criticisms 
that have been levied by the industry side in terms of the 
addressing competitiveness aspect. Of the 15 world's biggest 
oil and gas companies, 14 would be included, most of which are 
not American companies. So the issue of competitiveness between 
U.S. and foreign companies, I just simply don't accept that. 
There are further statistics we cite in here.
    But I think one of the beauties of the act is in one fell 
swoop in a country like Angola you would force disclosure on 30 
of the 33 participants in country. That's not happened. The 
excuse that Angola has to sit there, as it sat in the first 
EITI meeting, oh, we're just going to sit on the fence, is just 
not acceptable with those kind of standards and conditions in-
country.
    So we really commend you, Mr. Chairman, for supporting that 
bill and we'd really like to see that go forward in the next 
process.
    The last thing I wanted to talk about is the followup to 
the kleptocracy provision from last year. Thanks to Senator 
Leahy, through an amendment in the consolidated appropriations 
act, we've had a focus on the visa ban, which is clearly 
technically an issue that's caused difficulty, I should say, 
within the administration. It's mostly about resources. It's 
very hard if you've got hardly any staff available and not much 
in the way of financial resources to do this work, to really 
follow through.
    So we think it's very necessary as time goes forward and we 
see a continuance of this process to add serious resources to 
look at this. If you look at the case of Angola, a country 
which is really, I would describe, as Dos Santos Inc., how can 
we create the disincentives from asset stripping? I think the 
real answer to that is to exclude nice places to go shopping. 
You know, if you want to steal tens of billions of dollars, as 
these people have, you don't want to spend it in Malabo or in 
Luanda. You want to go to Fifth Avenue or the Champs-Elysees, 
you want to go to nice places where you can buy luxury goods, 
as we found through the credit card statements of Dennis 
Chrystal and Sasu Engessu last year. Nice shopping in Spain and 
so on.
    We need to seriously disincentivize that.
    Senator Feingold. Mr. Taylor, I'm going to ask you to 
conclude your remarks if you would.
    Mr. Taylor. Just my concluding remark is I think we need to 
look at a mechanism that works, which needs resources to focus 
around the issue of asset freezing. I know that's complicated, 
but it needs to be seriously thought through, and we'd really 
like to work with members and also the administration when it 
comes in to address this problem.
    [The prepared statement of Mr. Taylor follows:]


  Prepared Statement of Simon Taylor, Director and Cofounder, Global 
                    Witness, London, United Kingdom

    Thank you, Mr. Chairman and members of this esteemed subcommittee, 
for the opportunity to share my views on the critical issue of Africa's 
extractive industries and how we can help make those resources benefit 
the people in Africa rather than fuel corruption and conflict.
    To be succinct, we are currently very far from a situation where 
the majority of Africa's oil and minerals are benefiting African 
people. Moreover, some natural resources continue to fuel armed 
conflict in Africa, as our recent research on the Democratic Republic 
of Congo and tin and coltan has revealed. However, the two most 
potentially far-reaching policies that I have witnessed in 10 years of 
working on this issue are currently under debate. If they go forward, 
these U.S.-led initiatives on natural resource transparency and 
accountability would have a very tangible impact in transforming 
incentives for corruption in Africa's natural resources. These 
initiatives would also be important for U.S. national interests in 
promoting stable business environments and strengthening U.S. energy 
security. I strongly commend you for holding this hearing today, Mr. 
Chairman, so we can discuss these important policy options.
   1. african oil--lots in our gas tanks, but where are the revenues 
                                 going?
    To illustrate both the problems and the solutions, let's start 
right at the gas pump. I would like to trace the supply chain from the 
gas pump backward through each step, highlighting exactly where the 
problems lie and how we can address each of those through concrete 
policy solutions.
    Although few people realize it, more oil from Africa now goes into 
gasoline in the U.S. than from the Persian Gulf. According to the U.S. 
Energy Information Administration, 23 percent of U.S. oil imports 
currently come from Africa--more than the combined U.S. imports from 
the Persian Gulf, which are 18 percent.\1\ The largest oil producing 
nation in Africa is now Angola, which now ranks as the seventh largest 
oil exporter to the U.S.--ahead of Kuwait, Russia, and Colombia 
combined.\2\ So nearly one-quarter of American gasoline comes from 
Africa, and Angola is Africa's largest oil producing country. All told, 
Africa exported $249 billion in oil and minerals in 2006, nearly six 
times the value of international aid to the continent.\3\
    Yet the enormous wealth generated from the oil and minerals has not 
trickled down to Africans, and in some areas these resources continue 
to fuel armed conflict. Global Witness field research in July and 
August 2008 uncovered substantial evidence of the involvement of armed 
groups, such as Rwandan Hutu Forces Democratiques pour la Liberation du 
Rwanda (FDLR), as well as units and commanders of the Congolese 
national army, in the exploitation and trade of minerals and metals in 
North and South Kivu. These economic activities are perpetuating 
instability in the region.
    To continue with the Angolan example on oil, Angola exported an 
enormous $43 billion in oil last year, and its economy grew 21 
percent.\4\ Yet U.N. figures show that over two-thirds of Angolans 
still live on less than $2 a day, despite skyrocketing costs in the 
country: Rent for a modest apartment in the capital, for example, costs 
$1,500 a month.\5\ Try affording that on $2 a day. Oil wealth has also 
not improved the horrific health care system in the country: Angola 
still has the highest infant mortality rate in the world.\6\ Not 
surprisingly, our research and IMF figures uncovered that Angola could 
not account for an average of US$1.7 billion per year from 1997-2001, 
which is more money than the government spent on health and education 
during that period.\7\ A lack of transparency has meant that billions 
of dollars cannot be accounted for, from Angola to Equatorial Guinea.
            2. the supply chain and how we can influence it
    So what exactly is the supply chain for African oil coming to the 
U.S., and how can we influence it to help reverse the resource curse?
Step 1: Awarding of concessions
    Much of the corruption associated with oil and minerals happens at 
the beginning of the process--right when contracts are awarded to oil 
companies, or the oil services companies that increasingly construct 
and run oil infrastructure in Africa.
    As former Halliburton executive Albert Jack Stanley admitted just 3 
weeks ago in a guilty plea to a Houston federal court, Halliburton's 
engineering subsidiary Kellogg, Brown, and Root paid over $180 million 
in bribes to the Nigerian Government to win a natural gas plant 
contract.\8\ Sadly, this is only the tip of the iceberg. Oil services 
company Baker Hughes plead guilty to violating the Foreign Corrupt 
Practices Act in Angola, Nigeria, Kazakhstan, Russia, Indonesia, and 
Uzbekistan; the Angolagate scandal is about to go to trial in France, 
in which the French Government lined up the French oil company Elf to 
gain oil concessions in Angola and involved illegal arms shipments; the 
list goes on.
    So transparency has to start with the award of rights to explore 
for oil and minerals, and with the award of contracts to build oil 
infrastructure. The U.S. has an exemplary record amongst major oil-
consuming countries for prosecuting corrupt acts by its own companies, 
and of course the FCPA was groundbreaking in its time. Still, there are 
a couple of big unresolved FCPA cases where we are rather surprised at 
the lack of progress--notably the SEC investigation into the Riggs Bank 
affair, which I will talk about shortly.
    Aside from this question of law enforcement, the U.S. should lead 
other donor governments to encourage resource-rich countries to ensure 
that oil and mining concessions are awarded in a transparent way, with 
independent oversight to ensure there's no corruption. U.S. companies 
would clearly gain from such a policy: Since their technical expertise 
is superior to companies from many other countries, they have most to 
gain from licensing processes which are free from corruption.
    That said, of course there is a risk that people will say that the 
U.S. is simply lobbying for its own companies to get preferential 
access to the oil. But that's easily avoided if these reforms to 
licensing are presented as a global standard which should apply to all 
companies, including the Chinese and the Russians and the Indians, as 
well as the Europeans and the United States.
    So how to enact such reforms? Well, the U.S. has influence in some 
countries via its aid programs. In others, the governments themselves 
may be supportive if they feel that transparency will enable them to 
get a better long-term deal for the country. There are also such 
initiatives as the World Bank's new project, launched earlier this year 
by Bank President Robert Zoellick, to provide resource-rich countries 
in Africa with more technical support to resource governance across the 
value chain. We feel that the U.S. should support that process as far 
as it can.
Step 2: Revenue payments for oil, gas, and minerals
    The next step in the supply chain is equally critical: Revenue 
payments by extractive industry companies to governments. When 
ExxonMobil or BP pays Angola for its oil, it does so in the form of 
taxes, royalties, and signature bonuses. Oil companies typically 
operate under production-sharing agreements which means that they are 
also providing the government with a share of oil from the field: This 
is often a huge source of earnings for the country.
    But in the majority of resource-rich countries in Africa and around 
the world, these payments are still kept secret. Citizens who demand 
for better services from their governments in Africa are often met with 
the response, ``Well, the oil companies didn't pay us enough, they are 
exploiting us.'' These citizens have no way of verifying how much the 
companies do actually pay, because it is not made a matter of public 
record. Oil companies do not disclose the payments in their annual 
reports, and governments do not disclose receipt of the payments in 
their budget reports. And so the cycle continues--no transparency about 
the billions of dollars exchanged for oil and minerals, and no 
accountability for these revenues because no one knows how much 
actually exchanged hands.
    The secrecy that results from this opacity is bad for American 
consumers and bad for Africans, and it makes it much easier for 
corruption to take place. Equatorial Guinea, for example--one of the 
top 20 oil exporting countries to the U.S.--keeps over $2 billion of 
its government revenues in private offshore banks, according to the 
IMF.\9\ When it deposited $700 million of this money into Riggs Bank 
here in Washington, DC, the Senate Permanent Subcommittee on 
Investigations found dozens of irregular payments, multiple individual 
signatories to the accounts, and little due diligence paid to the 
accounts. Riggs shut down as a result in 2004, but the corruption in 
Equatorial Guinea continued. Two years later in 2006, the son of the 
President of Equatorial Guinea bought a mansion in Malibu, California, 
worth $35 million, which includes an 8-bedroom house, a 9-hole golf 
course, swimming pool, and 15-acre beach-view property, despite his 
official salary of just over $60,000 a year as a government 
minister.\10\
    This story is not confined to Equatorial Guinea alone. Whilst 
acting as an Angolan Government official, arms dealer Pierre Falcone 
reportedly bought the most expensive home ever purchased at the time in 
Arizona for $10.6 million, becoming a neighbor to Chicago Bulls owner 
Jerry Reinsdorf in Paradise Valley.\11\ The list goes on.
    In order to help address the revenue payments issue, an 
international initiative was launched in 2002 by the British 
Government, the Extractive Industries Transparency Initiative (EITI). 
Global Witness sits on the board of EITI, strongly supports the 
initiative, and has made every effort to strengthen it since its 
launch. Last year, Congress voted to finally give the U.S. an important 
voice on EITI implementation by upping its contribution to the EITI 
Trust Fund to $3 million, thanks to efforts in the Senate by Senators 
Lugar and Leahy.
    The reality is that EITI is an impressive effort, particularly in 
the way that it brings together different stakeholders: Governments, 
companies, and civil society groups. Where else would you find a 
representatives from ExxonMobil and Chevron sitting at the same table 
as civil society activists from some of the poorest countries in 
Africa? To buttress current efforts on EITI, the U.S. Government should 
elevate EITI to a higher priority and do more outreach at a high 
diplomatic level to ensure proper implementation and integrate EITI as 
a requirement through AGOA and the MCC. EITI will be at a critical 
juncture for implementation over the next year, and so State Department 
engagement will be important.
    But EITI is not a golden key, so to speak, mainly because it is 
voluntary for countries to join. As a result, the world's biggest oil 
producers are simply not joining. Only one of the world's top ten oil-
producing countries--Norway--has committed to implement the EITI. Only 
one OPEC member country, Nigeria, is a member. Most of the other 
members are small to mid-ranking producers. These countries deserve 
credit for their reform efforts, but the fact is that they account for 
a small fraction of world oil supply. The country which gave rise to 
the whole oil transparency movement, Angola, is not a member of EITI 
and shows little appetite for joining the initiative.
    The problem of transparency is urgent because a number of countries 
already having hit or soon hitting their peak of oil production, 
meaning that the windfall of oil revenues will start to diminish and 
eventually come to an end. For example, Gabon's production peaked over 
10 years ago in 1997. So these countries don't have that much time to 
ensure that the revenues are really used to develop their economies for 
the time when they can no longer rely on oil. EITI is an excellent 
tool, but it is not sufficient.
                3. a historic opportunity: the eitd act
    Thankfully, today we have a historic opportunity to be a part of 
that solution, starting right here in Congress. Introduced in the 
Senate by Senator Chuck Schumer and cosponsored by Senators Feingold, 
Leahy, Lieberman, Durbin, and Cantwell, and introduced in the House by 
Financial Services Committee Chairman Barney Frank, the Extractive 
Industries Transparency Disclosure Act, the EITD Act, provides exactly 
that opportunity. The bill, S. 3389, provides for a low-cost, high 
impact SEC rule change requiring the disclosure of payments to foreign 
governments by oil, gas, and mining companies. Under the bill, all 
extractive industry companies that are listed on U.S. capital markets--
including foreign corporations--would publish their revenue payments to 
all foreign governments on a country-by-country basis through their 
regular annual filing reports to the SEC.
    The EITD Act is critical for establishing freedom of information 
and a global standard for transparency in the oil sector, at a time 
when oil company profits are reaching record levels. It would promote 
U.S. interests by combating corruption and improving the stability of 
U.S. investments abroad through improved governance in oil-producing 
countries. Importantly, the bill is a powerful tool for poverty 
reduction, as the transparency will enable oil revenues to be managed 
in a more accountable manner.
    The importance of this bill lies in its global coverage; with one 
swoop, 14 out of the world's 15 largest oil and gas companies that are 
publicly traded would be covered by the bill, and 27 of the top 30 
companies if the list is expanded. The overwhelming majority of these 
corporations are non-U.S. companies, with the bill requiring disclosure 
from foreign corporations including the three major Chinese oil 
companies, Russia's Lukoil, and Brazil's Petrobras.

   WORLD'S TOP 14 PUBLICLY TRADED OIL CORPORATIONS COVERED BY THE BILL
------------------------------------------------------------------------

------------------------------------------------------------------------
Petrochina (China)                 Lukoil (Russia)
China Petroleum (China)            ENI (Italy)
BP (U.K.)                          Repsol (Spain)
Petrobras (Brazil)                 ExxonMobil (U.S.)
Royal Dutch Shell (Netherlands)    Chevron (U.S.)
Total (France)                     ConocoPhillips (U.S.)
StatoilHydro (Norway)              3Marathon Oil (U.S.)
------------------------------------------------------------------------

    U.S. companies would not be put at a competitive disadvantage to 
foreign corporations because of the bill. While the EITD Act would not 
cover all National Oil Companies (NOCs)--state-owned companies that 
predominately operate solely within their home countries and do not 
compete internationally with U.S. oil companies--the vast majority of 
the internationally competitive companies (including NOCs that operate 
internationally, such as Petrochina, Petrobras, and StatoilHydro) would 
have to report payments, and so a level playing field would ensue for 
all extractive industry companies. Back to our example of Angola, 30 
out of the 33 operating oil companies in Angola would be subject to 
disclosure under the bill. Armed with real numbers from real oil 
companies, civil society groups in Angola could finally put some muscle 
in their fight for social services and accountability for the country's 
oil wealth.
    Transparency is not the silver bullet to solving the resource 
curse, but it creates a critical underlying business environment that 
makes it more difficult to engage in corruption. If all payments are 
transparent, opaque money transfers will be harder to hide, secret bank 
accounts will be harder to open, and company and government finances 
will be more open to public scrutiny.
                      4. accountability: the fcpa
    If transparency creates an important enabling environment for 
improved resource governance, then accountability is the critical next 
step to make it happen. Going back to the supply chain for our 
gasoline, if revenues for the oil to produce the gasoline went astray, 
what accountability is there for those funds and the individuals, 
officials, and/or companies involved in those transactions? For 
example, now that Halliburton's subsidiary has plead guilty of paying 
$180 million in bribes, what accountability is there for Halliburton, 
what accountability is there for the Nigerian officials who took the 
bribes, and what mechanisms are there to return the stolen moneys? What 
about future such cases elsewhere in Africa and more globally?
    For the first question, Congress created a very important first 
step in accountability 31 years ago with the passage of the Foreign 
Corrupt Practices Act (FCPA). This law, which makes it illegal for U.S. 
companies to pay bribes to foreign government officials, is far-
reaching. The law affects American and foreign corporations alike, as 
Norwegian oil company Statoil and the British firm Vetco have been 
found guilty of making illegal payments under the law to Iran and 
Nigeria, respectively.
    FCPA enforcement has stepped up dramatically in recent years, 
thanks to much more rigorous scrutiny by the U.S. Department of Justice 
and the SEC. The two agencies prosecuted a record 38 cases last year, 
more than double the number of prosecutions in 2006 (15 cases).\12\ 
This has resulted in a high percentage of convictions, including prison 
sentences for several former senior executives. An overwhelming 91 
percent of the individuals to resolve their charges have plead guilty 
or been convicted.\13\ This thorough FCPA enforcement amounts to 
serious corporate accountability, and we welcome Congress's foresight 
with the FCPA, as well as the DOJ and SEC's skyrocketing efforts in 
applying the law. However, the FCPA investigation on Equatorial Guinea 
that was reported on following the Riggs Bank Senate investigation has 
never been followed up, and we urge the enforcement agencies to follow 
up this case. In addition, other countries--particularly our European 
allies--must follow suit and take more robust action to strengthen 
their corporate accountability frameworks. The OECD Anti-Bribery 
Convention remains very poorly enforced, particularly in the wake of 
the multimillion dollar BAE bribery scandal in the U.K.\14\ We urge 
Congress to work with the new administration to work with the U.K. and 
other European countries to clean up their acts.
 5. accountability ii: a critical new opportunity for congress and the 
            administration through anti-kleptocracy policies
    But what about the other key element of accountability--holding 
government officials to account for stolen funds? Unless these two 
tools work in tandem, there will still be enormous incentives for 
continued corruption relating to natural resources in Africa and 
elsewhere.
    Unfortunately, accountability of government officials still needs 
to go further. Officials from Equatorial Guinea to Kazakhstan to Angola 
who have been named in prosecutions relating to the siphoning off of 
funds from their country's oil wealth remain in office today.
    The good news is that some groundwork has been laid to begin 
changing this culture of impunity, and that the U.S. Congress and the 
administration can be at the forefront of this global fight. The bad 
news is that there is a very long way to go. Last year for the first 
time ever, Congress passed an Anti-Kleptocracy provision in the 
Consolidated Appropriations Act (section 699L), thanks to an amendment 
by Senator Leahy. This provision denies entry to the U.S. to all 
foreign government officials whom the Secretary of State believes there 
to be credible evidence that they were involved in corruption relating 
to natural resources.
    This builds on President Bush's announcement of a ``National 
Strategy to Internationalize Efforts against Kleptocracy'' in August 
2006, and Presidential Proclamation 7750 before that. The President 
stated in 2006 that:

          High-level corruption by senior government officials, or 
        kleptocracy, is a grave and corrosive abuse of power and 
        represents the most invidious type of public corruption. It 
        impedes our efforts to promote freedom and democracy, end 
        poverty, and combat international crime and terrorism. 
        Promoting transparent, accountable governance is a critical 
        component of our freedom agenda. Today, I am announcing a new 
        element in my administration's plan to fight kleptocracy . . . 
        which sets forth a framework to deter, prevent, and address 
        high-level, public corruption. It identifies critical tools to 
        detect and prosecute corrupt officials around the world, so 
        that the promise of economic assistance and growth reaches the 
        people.\15\

    Despite worthy efforts of some dedicated bureaus, overall 
enforcement of this agenda has been very limited. A small number of 
cases were brought under Proclamation 7750, and while some dozen cases 
reportedly are in the pipeline, it is our understanding that no cases 
for the Anti-Kleptocracy provision have been brought forward to date 
since the provision's passage 9 months ago. Funding and staffing 
constraints for the enforcement agencies are a serious consideration 
here. But more is at stake. According to numerous informed sources, 
some U.S. ambassadors are still shocked at the idea that corruption and 
kleptocracy should be raised with foreign governments. This was not on 
the U.S. foreign policy agenda for years, and these ambassadors do not 
understand why it should be. We would urge Congress to work with the 
administration to change this culture as a matter of priority.
    Congress currently has an important window of opportunity to 
strengthen the accountability agenda on natural resources. A new Anti-
Kleptocracy provision in the draft Senate version of the State and 
Foreign Operations bill, section 744, adds to the visa ban with an 
asset freeze on foreign officials found to be engaging in corruption.
    From my many years of working on this issue, this provision, if 
implemented properly, has the potential to have a very wide-ranging 
impact on resource-related corruption in Africa and elsewhere. Leaders 
involved in corruption do not want to spend their money in Kinshasa or 
Luanda, they want to come to Fifth Avenue, put their money in U.S. or 
European banks, and buy luxury cars to drive up the California coast.
    For example, the President of the Republic of Congo-Brazzaville and 
his 50-person entourage that included several members of his family and 
his wife's hairdresser, spent $295,000 during an 8-night stay in New 
York's Waldorf-Astoria Hotel, including $13,000 in room service and 
bottles of Cristal champagne.\16\ Interestingly, this spending spree 
took place exactly 1 month after the World Bank and IMF granted the 
country debt relief under the Highly Indebted Poor Countries Initiative 
(HIPC) for being too poor to pay off its international debts, and the 
hotel bill totaled more than the U.K.'s total humanitarian aid to the 
Republic of Congo for the same year.\17\ The Republic of Congo is 
another important African oil exporting country to the U.S., producing 
247,000 barrels of oil per day.\18\ Last year, Global Witness published 
documents that showed that the President's son, Denis Christel Sassou-
Nguesso, paid off personal credit card bills for Louis Vuitton and 
Christian Dior luxury items totaling several hundred thousand dollars 
with funds from his own shell companies. These funds appear to have 
derived from the proceeds of the state oil marketing company, Cotrade, 
which Mr. Christel heads.\19\
    In other words, if an Anti-Kleptocracy provision with a travel ban 
and asset freeze becomes law and is as rigorously enforced as the FCPA, 
it will create a serious disincentive for corruption among African and 
other foreign government officials. Just as we use all the financial 
and diplomatic tools available to us for antiterrorism efforts, we must 
equally use all foreign policy instruments in the fight against 
corruption. I urge Congress to pass section 744 of the Appropriations 
bill and to provide additional funding to operationalize the visa ban 
and asset provisions to the enforcement agencies.
    Furthermore, the Regional Bureaus of the State Department should 
thoroughly sensitize U.S. ambassadors on the Anti-Kleptocracy strategy 
and Appropriations provisions.
                             6. conclusion
    As I conclude, Mr. Chairman, let me go back to the gas pump here in 
the U.S. We now know that nearly a quarter of the imported oil that 
goes into the gasoline that goes into our cars comes from Africa, and 
the road that that oil travels takes us through secret financial 
payments, financing of ill-gotten mansions in Malibu and luxurious 
hotel bills in New York, bribes paid by American and foreign companies, 
and very little improvement in the day-to-day lives of most Africans.
    In sum, we are still far from eradicating the disease known as the 
``resource curse'' in Africa. But there is now growing attention to 
this issue, from your holding this hearing today and a related hearing 
chaired by Senator Durbin down the hall to Bob Zoellick's new 
initiatives at the World Bank.
    But more importantly, Mr. Chairman, Congress now has two critical 
legislative opportunities--one on transparency and the other on 
accountability--to make a real impact on reducing incentives for 
natural resource corruption. The EITD Act and the Anti-Kleptocracy 
provision are the most serious pieces of legislation I have seen on 
this issue in over a decade. These initiatives will not only help 
Africans but will benefit U.S. energy security through better 
governance in oil-rich countries. The next time we stand at the gas 
pump, let us not forget where that gas comes from and what we can do to 
change the corruption that accompanies it.

----------------
    \1\ Energy Information Administration statistics on U.S. oil 
imports from 2007. Available at http://tonto.eia.doe.gov/dnav/pet/
pet_move_neti_a_ep00_IMN_mbblpd_a.htm.
    \2\ Angola produced 1.9 million barrels of crude oil per day in 
June 2008, ahead of Nigeria's 1.74 million. In terms of U.S. imports of 
crude oil, Angola totaled 636,000 barrels, while Kuwait stood at 
179,000 barrels, Russia was at 228,000 barrels, and Colombia exported 
177,000 barrels. ``Angolan Oil Exports Expected To Rise 14% in 
October,'' African Oil Journal, August 25, 2008. Available at http://
www.africanoiljournal.com/08-25-2008_angola.htm. For U.S. oil import 
statistics, see U.S. Energy Information Administration, http://
www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/
company_level_imports/current/import.html.
    \3\ Total international aid was $43 billion. OECD Statistical Data, 
available at www.oecd.org.
    \4\ OPEC Revenues Fact Sheet, U.S. Energy Information 
Administration, 2008. Available at http://www.eia.doe.gov/emeu/cabs/
OPEC_Revenues/Factsheet.html; the IMF estimates that the Angola's GDP 
grew 21.130 percent in 2007. IMF World Economic Outlook Database. 
Available at www.imf.org.
    \5\ ``Angola's Poor Left Out of Oil Bonanza,'' AFP. September 3, 
2008. Available at http://afp.google.com/article/
ALeqM5hA8pYy2PEMsj5tOj4lpuR7BgWVuQ.
    \6\ This is 184 out of 1,000. CIA World Factbook, June 2007: 
https://www.cia.gov/library/publications/the-world-factbook/index.html.
    \7\ That spending totaled $4.27 bn. ``Time for Transparency,'' 
Global Witness, March 25, 2004: http://www.globalwitness.org/
media_library_detail.php/115/en/time_for_transparency.
    \8\ ``Halliburton Ex-Official Pleads Guilty in Bribe Case,'' Wall 
Street Journal, September 4, 2008.
    \9\ In 2006, Equatorial Guinea kept $2.099 billion of its 
government revenues in private banks abroad, and in 2007 the IMF 
estimates that this figure jumped to $2.893 billion. IMF Article IV 
Consultation Staff report, May 2008. Available at https://www.imf.org/
external/pubs/ft/scr/2008/cr08156.pdf, p. 33.
    \10\ Global Witness, ``African Minister Buys Multi-Million Dollar 
California Mansion,'' 8 November 2006, available at http://
www.globalwitness.org/media_library_detail.php/468/en/african_
minister_buys_multi_million_dollar_califor.
    \11\ Ken Silverstein, ``The Arms Dealer Next Door,'' In These 
Times, December 2001. Available at http://www.inthesetimes.com/issue/
26/04/feature4.shtml.
    \12\ Gibson, Dunn, and Crutcher LLP, ``2008 Mid-Year FCPA Update.'' 
Available at http://www.gibsondunn.com/Publications/Pages/2008Mid-
YearFCPAUpdate.aspx.
    \13\ Ibid.
    \14\ http://www.iht.com/articles/2008/07/30/business/30bae.php.
    \15\ ``President's Statement on Kleptocracy,'' August 10, 2006. 
Available at http://www.whitehouse.gov/news/releases/2006/08/
20060810.html.
    \16\ http://www.timesonline.co.uk/tol/news/world/article729928.ece.
    \17\ Ibid.
    \18\ This was in 2006. Energy Information Administration data for 
Congo (Brazzaville), available at http://tonto.eia.doe.gov/country/
country_energy_data.cfm?fips=CF.
    \19\ Global Witness, ``Congo: Is President's Son Paying for 
Designer Shopping Sprees With Country's Oil Money?'' Available at 
www.globalwitness.org.

    Senator Feingold. Thank you, Mr. Taylor, and I appreciate 
your highlighting Angola. I was first basically exposed to 
Africa in Angola in 1994, and in particular this issue, and 
returned again in 1999. We have this tendency, because we have 
so many difficulties with our situation domestically and 
internationally, to say, well, Angola's getting better, and 
then you don't apply the kinds of tests and strength that you 
have to.
    I want to assure you that I as chairman of this committee 
will continue to focus in particular on Angola because of my 
longstanding concern about the resource problems there.
    Thank you.
    Mr. Goldwyn.

 STATEMENT OF DAVID GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL 
                   STRATEGIES, WASHINGTON, DC

    Mr. Goldwyn. Thank you, Mr. Chairman, members of the 
committee, for holding this hearing.
    In my view there has been some real important progress on 
the resource curse over the last 5 years, but there have been 
major changes in Africa as well in the energy sector and our 
policy hasn't kept up with it. The reality is that, despite 
this progress, we really haven't made much of a dent in this 
problem, and the United States in particular has not been a 
player in this issue, not a material player, and I think we 
need to get ourselves organized and deploy resources in a 
different way, because we can make a difference.
    It's worth noting the progress because when you work this 
long on something and there's been progress you want to note 
it. EITI has gone from being a British initiative to being 
internationalized. Twenty-three countries have stood up to be 
graded--some may pass and some may fail. That's real progress.
    On the IMF side, they have now mainstreamed fiscal 
responsibility, fiscal monitoring, into their doctrine. They're 
giving a lot of countries help by helping the finance 
ministries learn how to manage the sector. They're trying to 
spy on their own national oil companies so they can figure out 
where the money is. That's progress.
    The World Bank is giving technical assistance in this area 
and EITI Plus Plus--I think they're coming up with a different 
name--is going to help countries look at how the sector is 
managed. That's very important.
    International oil companies have figured out that 
transparency is a way they can have a level playing field and 
they can enhance their reputations by showing they're not the 
ones with the hand in the till. For some national oil 
companies, they've learned that transparency pays. Particularly 
in North Africa, they're using tenders and things like that. 
They find out they can make an incredible amount of money by 
being transparent.
    That's all great, but in terms of poverty reduction we 
really haven't made much of a dent, and there are a lot of new 
challenges. The first one is political will, and that is really 
critical. Even in Nigeria, where I helped lead a very extensive 
effort to monitor physical and financial and the process of the 
business, without government buy-in, without government 
leadership, you really can't solve problems, you can't make 
progress. That's the biggest challenge.
    Capacity. A lot of governments that are now doing 
exploration don't have the ability to negotiate the deals, much 
less manage the money. The number of countries has skyrocketed. 
Every country in Africa with a coastline has exploration going 
on right now.
    The focus really should be on business operations. I'm an 
EITI validator and I hope to validate some countries soon. EITI 
is important, but the real corruption is not hands in the till 
for the most part. The real corruption in the industry is how 
the business is done, who gets the acreage, how do you trade 
oil for product. It's how it's operated. So a reconciliation of 
dollars and cents is important for spreading sunshine and you 
need to do it, but it doesn't get at the heart of the problem. 
So we need to have a much more expansive view of what's going 
on.
    Certainly in terms of social investment, the expenditure 
side, we're really not doing enough as a U.S. Government, as 
others, to figure out once you know how much money is there, 
how is it being spent; is it being spent in the right sector.
    For the U.S., we have not kept up with the changes in the 
market in a lot of different ways. Part of this--Senator 
Feingold, in your Georgetown speech you looked at this--there 
are crises in other areas. Diplomats get drawn away. Iraq, 
things like that. The Africa Bureau is a crisis bureau. They 
have five crises on their hands and that's what they do. They 
don't build relationships.
    But the United States has lost influence in Africa in a 
dramatic way. We have first disengaged diplomatically. Eight 
years ago we had a United States-Nigeria working group, we had 
a United States-Africa energy ministers partnership, we had a 
dialog with Angola. We used to have a relationship with these 
people to talk about the things we disagreed on. Those were all 
dismantled. There are governments there we hardly even talk to 
except to scold them.
    So we only have a modest diplomatic presence in northern 
Nigeria and places like that, so we're not really on the 
ground. And we spend a lot of money in Africa, mostly on 
health, but a minuscule amount in governance, and particularly 
on transparency. In our system it's up to the regional or the 
country manager in every country to decide how they want to 
spend the money. It's not driven from the center. So there's no 
coordination, no focus. Security is a problem now. And the 
Niger Delta. The Niger Delta is important for strategic 
reasons, but primarily if we don't deal with Nigeria, which is 
the biggest case there, then we're not making a material 
difference on transparency.
    So I think what the United States needs to do is get 
organized in a different way. First we need a policy, in which 
security, stability, and energy stability are all part of one 
whole. We need resources. We need somebody on the seventh floor 
of the State Department whose job it is to lead this policy. We 
need to have diplomats and we need to have untied technical 
assistance for things like EITI.
    We need respectful engagement with these countries. Our 
people need to go to those countries and talk to them, not only 
about what we're interested in, but what they're interested in, 
because if we talk to them about development, about power 
generation, about water, then they have a stake in the 
relationship. We're not just going over there to tell them how 
we think they ought to do their business, which requires 
diplomatic resources.
    We need to integrate security into the political calculus, 
because security is what a lot of these countries are 
interested in. Not giving weapons without any conditions about 
human rights, but if we talk to them about their security, 
improving Coast Guards, protecting assets, we're having a 
conversation about something in which they have a stake.
    In the Niger Delta, we have not been materially engaged, 
not effectively engaged. We have to be humble. It is incredibly 
complex. But the fact is if we don't help quietly on how they 
can do the development, and at a high level on doing the 
diplomacy, we're not making much of a difference. We need to 
play well with others on assistance. The U.K. spends a lot of 
money. We need to work together. And we need to engage China 
and the EU on their issues.
    We can only do so much with policy papers and State 
Department wiring diagrams. The main thing we need is 
leadership, people in positions who are willing to make a 
difference. In this case I thank the committee for your 
leadership on this. Your oversight makes a difference to the 
executive branch and hopefully with your continued interest in 
this we'll have a policy which can get some results.
    Thank you.
    [The prepared statement of Mr. Goldwyn follows:]

      Prepared Statement of David L. Goldwyn, President, Goldwyn 
                International Strategies, Washington, DC

                    the challenge to u.s. influence
    Chairman and members of the committee, it is an honor to speak with 
you today about Arica's extractive industries in a time of record 
commodity prices. My testimony derives from the energy chapter of an 
upcoming book, to be titled ``Africa Policy in the George W. Bush 
Years: Critical Choices for the Next Administration.'' The book will be 
published by the Center for Strategic and International Studies (CSIS) 
in January 2009. My own perspective derives from my experience serving 
the U.S. Government in the State and Energy Departments, as a leader in 
the extractive industry transparency movement, and as a senior 
associate in the CSIS energy program. Today, I will discuss the 
implications of the changes in the global energy market for Africa and 
the U.S., Africa's role in U.S. energy security, current trends on the 
continent, challenges for the new administration, and recommendations 
for U.S. policy.
Changes in the Global Energy Market
    There have been major changes in the global energy market since 
2001--a spike in global demand, led by developing Asia; a 340 percent 
\1\ increase in nominal prices, a vast increase in the number of 
African countries undergoing exploration and development, and an 
increase in competition for access from China and India, with help in 
many cases from their governments. High prices have led to resource 
nationalism in some countries with reduced access and harsher terms for 
the access that remains. Exploration has moved offshore, which has 
moved investment away from land-based risk but left thinly protected 
offshore platforms exposed to maritime risk. Angola has grown 
dramatically as a producer and joined OPEC. Nigeria's production has 
risen, but it has also produced one of the global economy's greatest 
supply shocks: As of fall 2008 between 500,000 and 800,000 barrels per 
day of oil have been shut in at times due to violence in the Niger 
Delta. Equatorial Guinea has become a major oil and methanol producer 
and is a significant LNG provider to the Atlantic Basin market. Despite 
conflict and sanctions, Sudan's production has grown since 2001. Chad 
has grown as well.
---------------------------------------------------------------------------
    \1\ GIS calculation based on EIA Prices for Cushing, OK, WTI Spot 
Prices FOB. (Dollars per Barrel)
---------------------------------------------------------------------------
    These dramatic changes in the global energy market have been 
associated with the diminution of U.S. influence in the region, and 
with that loss, an erosion in the ability of the U.S. to promote good 
governance, conflict resolution, environmental standards and reduced 
corruption. While U.S. influence has diminished, there is now 
acceptance in principle by companies and host governments that good 
governance, respect for human rights and transparency are the 
cornerstones of political stability, a level playing field for 
commercial competition and long-term security of investment and energy 
supply. The World Bank has begun to engage countries systematically on 
reforming the process of energy production--how acreage is allocated, 
how products are sold, how refineries are supplied--both to help them 
preserve value and reduce corruption. The United States which at one 
time led the promotion of voluntary standards on environmental 
protection and respect for human rights in security protection, has 
become in recent years a marginal player in this international 
promotion of good governance and transparency in the extractive 
industries.
    On critical energy sector issues, U.S. engagement with the 
continent has been drastically reduced over the past 8 years. A 
continental U.S.-Africa Energy Ministers Partnership has languished. 
Binational commissions and policy dialogues with Angola and Nigeria 
lapsed. Engagement on the Niger Delta has been episodic and 
ineffectual. Engagement of China and Europe--the other two largest 
investors in and consumers of energy in Africa--on the impact of 
instability and insecurity on global energy markets has been 
negligible. The U.S. did not contribute to the international Extractive 
Industry Transparency Initiative (EITI) until forced to do so by a 2007 
congressional earmark.
    As a result, the risks of instability, which were foreseen in 2001 
and foreseeable for new energy producers, have not been adequately 
addressed. The conflict in the Niger Delta has grown in intensity and 
lethality. Angola does not engage with the U.S. on governance and 
transparency. Contact with Algeria, Libya, Chad, and Equatorial Guinea, 
which was negligible or nonexistent in early 2001, has advanced 
significantly, but serious engagement on bilateral or energy issues is 
still very modest for countries which comprise four of the top five 
suppliers of energy on the African Continent. The potential risk to 
Africa's growing list of new energy producers of managing potentially 
enormous revenue flows has not yet been considered. There is at present 
no policy mechanism structure for the United States to engage Africa's 
leading or emerging energy producers in a systematic way.
    If the U.S. sees stability in Africa as a national security 
priority for multiple reasons--reduction of conflict, counterterrorism, 
combating grand crime, eradicating disease, and promoting economic 
prosperity in Africa and at home--then it must recognize the need for a 
strategic energy security policy in Africa. The challenge for a new 
administration is to draw together the many agencies of the U.S. 
Government that engage on energy-related issues (State, Energy, 
Commerce, TDA, USAID, Defense, Treasury) behind a coherent, cohesive, 
and strategic policy and create a central bureaucratic locus of 
responsibility capable of identifying the connection between mismanaged 
oil and gas revenues and instability. This policy must identify U.S. 
energy security interests in Africa, take account of the emerging 
trends in the region and the role of other actors, consider what 
policies have and have not worked over the past 8 years and earlier, 
acknowledge the serious challenges to U.S. interests that loom ahead, 
and deploy the human and financial resources to meet this challenge.
II. Africa's Role in U.S. Energy Security
    Africa plays a strategic role in meeting global and U.S. energy 
security. African producers supply light sweet crude to U.S., European, 
and Asian markets. Africa's role in energy security has risen 
dramatically since 2001. Sub-Saharan Africa's share of global oil 
production has risen from 5 percent in 2001 to 7 percent \2\ in 2007, 
while production in the North Sea and other OECD areas has declined. 
This growth has come from the dramatic increase in offshore, especially 
deepwater, oil production. In sub-Saharan Africa today, the key oil 
producers are Nigeria, Angola, Equatorial Guinea, Gabon and Congo 
Brazzaville. Sub-Saharan Africa holds 6 percent of global reserves and 
3 percent \3\ of global gas reserves. By 2020, 95 percent of regional 
oil production will be offshore, and 85 percent of this production will 
come from Angola and Nigeria.\4\ Of the 12 top producers of oil on the 
African Continent, four are members of OPEC (Algeria, Angola, Libya, 
and Nigeria), but all welcome foreign investment.
---------------------------------------------------------------------------
    \2\ EIA World Production of Crude Oil, NGPL, and Other Liquids and 
Refinery Processing Gains, Most Recent Annual Estimates 1980-2007, 
Posted August 22, 2008.
    \3\ PFC Energy estimation.
    \4\ PFC Energy estimation.
    
    
    Africa's share of U.S. imports of oil has risen from 15 percent in 
2001 to 24 percent in 2007, providing a key source of diversification 
of U.S. imports. Nineteen percent of U.S. oil imports from Africa came 
from sub-Saharan countries. U.S. imports of natural gas from Africa 
have increased nine fold since 2000, from 13 tcf to 113 tcf. The vast 
majority of U.S. LNG shipments from Sub-Saharan Africa are from 
Nigeria, while most imports from North Africa originate from Egypt and 
Algeria.


III. Emergent Trends on the Continent
    The global oil market has undergone dramatic changes in the past 8 
years, and the impact in Africa has been significant. The rise in oil 
prices from an average of $26 per barrel WTI in 2001 to an average of 
$114 a barrel for the first 7 months of 2008 \5\ has changed the terms 
of producing oil. There has been a reduction in the willingness of many 
global producers to expand production. Governments of producing 
countries have increased demand for majority control of operations or a 
larger share of profits and have come to expect higher earnings from 
resource rents. Escalated prices have also led to a rush of new market 
entrants competing for access as well as a dramatic increase in the 
cost of production as demand for steel rigs and skilled workers has 
risen steeply.
---------------------------------------------------------------------------
    \5\ EIA Petroleum Navigator, Cushing, OK, WTI Spot Price (FOB) 
http://tonto.eia.doe.gov/dnav/pet/hist/rwtcm.htm.
---------------------------------------------------------------------------
    Africa has been impacted positively and negatively by the changes 
in the market. The amount of investment and profile of investors has 
expanded, revenue has increased, the number of producers has grown, and 
the continent's infrastructure for transporting energy has expanded. 
New international voluntary standards for addressing revenue 
management, security, and environmental protection have evolved. But 
there has also been a rise in expectations of the transformation oil 
wealth should bring that has not been met, a failure to address the 
security implications of increasingly offshore oil and gas production, 
and a real challenge for host governments and competitors in assessing 
how to view the nonmarket competition of new entrants to the market 
like China and India.
    Rising Investment. In a global market where access is increasingly 
restricted, Africa is a uniquely open market: Nearly 50 percent of 
African production came from international companies \6\ (UNCTAD 2007 
Report/Olsen). Nearly every country in Africa with a coast has licensed 
some acreage for exploration. While Nigeria and Angola, traditional 
large producers, have grown, new major players have emerged: Equatorial 
Guinea, which produced just 168,000 bpd in 2000, is now the third 
largest producer in sub-Saharan Africa. Exploration has moved from West 
Africa to East Africa, with new discoveries in Uganda and Tanzania. 
Exploration is under way in Madagascar, and licensing or exploration is 
being conducted in Mali, Cote D'Ivoire, Gambia, Guinea, Liberia, Niger, 
Rwanda, Gambia, and the Puntland region of Somalia.
---------------------------------------------------------------------------
    \6\ UNCTAD 2007 Report/Olsen.
---------------------------------------------------------------------------
    Investment levels are rising and moving offshore. According to PFC 
Energy, 95 percent of all regional production will be offshore, with 85 
percent of total production coming from Nigeria and Angola. Over the 
next decade firms may invest as much as $485 billion in regional 
exploration and production between 2005 and 2030.\7\ Forty-five percent 
of the gross amount of capital expenditures for deepwater oil 
development worldwide is likely to be spent in West Africa. Gross 
Deepwater Capex expenditure in West Africa between 2008-2015 will 
exceed that spent in Latin America, Gulf of Mexico, North Atlantic and 
Asia-Pacific.
---------------------------------------------------------------------------
    \7\ IEA World Energy Outlook 2006, p. 77.
---------------------------------------------------------------------------
    Africa's natural gas sector is positioned to expand in the coming 
years, particularly through the expansion of liquefied natural gas 
(LNG) capabilities and facilities. Africa has 211 trillion cubic feet 
(tcf) of natural gas reserves. Investments in LNG have been made in 
Algeria, Libya, Egypt, Equatorial Guinea, Angola, and Nigeria. 
Advancements in LNG will enable the continent to serve as a welcomed 
alternative supplier of gas to Europe, the U.S., and the Asia-Pacific 
region; as well as to meet gas flaring reduction objectives. However, 
proposed projects are expected to face multiple delays due to cost 
increases; security, social and environmental concerns; feedstock 
uncertainty; rising domestic demand and negotiations over project 
terms.
    New Investors. As global demand for oil and gas have grown, 
competition in Africa's energy sector has expanded from U.S. and 
European firms to new competitors. Africa is no longer the province of 
major international oil companies; literally hundreds of smaller 
companies, mostly private, are exploring the new energy frontier 
nations and taking over mature properties.
    The Asian Presence. The presence of Asian. investors and energy 
companies on the continent has risen dramatically, in tandem with 
rapidly growing demand for oil and gas in developing Asia. The major 
Chinese national oil companies (CNOOC, CNPC and Sinopec), Malaysia's 
Petronas, and India's ONGC have all purchased equity shares and bid for 
new licenses in Africa. On an economic level, fear of Asia's domination 
of the African energy sector is highly premature. The real concern over 
the rise of Asian NOCs therefore stems from anxiety over a number of 
their business practices that negatively impact competition and the 
long-term stability of producing countries. So far, Asian NOCs have 
placed commercial concerns over humanitarian concerns and have failed 
to incorporate into the norms of their overseas operation the long-term 
risks of disregarding governance, environmental and human rights 
concerns. These investments have enabled Sudan to grow its production, 
enjoy substantial oil revenues, and withstand robust international 
pressure to end the genocide in Darfur and fulfill its obligations 
under the North-South peace accords. Western companies are growing 
distressed at the way Chinese NOCs compete. Their ability to draw on 
nonmarket tools such as government funds to finance acquisitions, and 
to offer package deals involving construction of roads, soccer 
stadiums, or railways as a sweetener make competition for acreage 
unfair from a Western point of view. (From an African point of view, 
these projects address their own lack of administrative capacity.) When 
companies are able to acquire acreage without a tender that meets 
international standards, the nascent trend toward enforcing these 
standards in countries like Nigeria and Congo Brazzaville is 
undermined.
    No Asian NOC yet participates in any of the voluntary standards 
created by Western governments to foster improved governance, 
consideration of environmental impacts, and respect for human rights in 
oil and gas investments. Moreover, the ability of other nations, such 
as Angola, to decline to participate in those standards and maintain 
opaque financial practices is reinforced. From the perspective of U.S. 
interests, the need for these standards is fundamental to the long-term 
security of these nations, and also to energy security. These concerns 
should be of much interest to China as they are to the U.S.
    Emergent Risks. With the prospects of enormous investment, 
production, and revenue come major risks. In oil resource rich 
countries in Africa, the emerging and largely unaddressed risks 
originate from: Unattainable expectations, rent seeking, corruption, 
the erosion of nascent good governance efforts, the lack of capacity to 
manage such large revenues effectively, security threats to operations, 
rising resource nationalism and political instability.
    With the promise of high oil and gas revenues comes rising 
expectations of poverty reduction and prosperity. In frontier countries 
these expectations are almost always unfulfilled, as 8 years or more 
can elapse between the first exploration agreement and a profit return 
to the overnment when hydrocarbon production commences. In cases like 
Sao Tome and Principe, where prospects for production attracted 
enormous press attention, one major coup attempt, and robust program of 
bilateral advice on revenue management; actual exploration produced 
disappointing results. The recurrent issues of whether the field will 
deliver and whether the government will put revenue management measures 
in place before the revenue comes in will evitably surface in Ghana and 
as well as other frontier states unless these issues are properly 
addressed.
    For established players like Nigeria and Angola, Equatorial Guinea, 
Gabon and Congo Brazzaville, the question is whether the flood of 
revenues will be put to good use, or whether rent-seeking by members of 
the government will foster corruption and kill even nascent efforts to 
prove governance. In Nigeria, trends are rapidly on the downslide. Even 
in the waning days of the reformist Obasanjo administration, which 
introduced landmark reforms in revenue transparency, procurement, and 
civil service reform, questionable licensing rounds were offered here 
technically unqualified bidders won access to acreage. Blatant defects 
in sector management, from the failure to meter oil to the failure to 
measure the match between refinery inputs and outputs, were left 
unaddressed. The Yar'adua government did not constitute the NEITI 
Board, as required by the country's NEITI law, until January 2008 and 
it has already failed to comply with the legal requirements to audit 
2006 and 2007 extractive industry revenues. The country is in a deep 
political crisis and the prospects for implementing procurement, 
transparency, or energy sector reforms are negligible. The Niger Delta 
crisis has become an international crisis, and efforts within Nigeria 
to even strategize a solution are nearly paralyzed.
    Equatorial Guinea is making nascent efforts to constitute an EITI 
program and to obtain outside help for identifying social investment 
projects. It has also been cooperating with the IMF and publishing 
results of its annual IMF article IV reports. Time will tell whether 
Equatorial Guinea will move from candidate to compliant status under 
EITI, whether social investment projects will be implemented, and if 
efforts to foster a civil society in Equatorial Guinea capable of 
participating in governance efforts will evolve. U.S. industry, NGOs, 
and the World Bank are all engaged.
    Angola is a mixed case. While Angola does not participate in 
voluntary initiatives, driven by its motivation to soon access 
international capital markets, Sonangol publishes its production with 
regularity. The Angolan Finance Ministry has accepted a program with 
the IMF to monitor and manage oil revenues, and Angola's tender system 
is viewed as transparent and fair. But the Angolan model raises 
concerns for future caution. As Angola grows its own private sector 
with companies who will create value in Angola by providing oil sector 
services and other related enterprises, there are reports that the 
companies themselves are owned by current members of the Angolan 
Government or Sonangol, raising concerns for U.S. companies under the 
Foreign Corrupt Practices Act.
    Security risks are on the rise as well. The most acute and obvious 
is Nigeria. The continued failure of Nigerian governments to 
effectively address the Niger Delta crisis has led to an unprecedented 
level of lethality and disruption. Attacks on offshore facilities, 
thought to be beyond the range of the Niger Delta militants, took place 
in June 2008. Kidnappings and murder continue. Cameroon and Equatorial 
Guinea both suffered bank heists liked to Niger Delta crime 
organizations and EG faced at least three coup attempts in 5 years, 
including one major foiled attempt led by Simon Mann and Mark Thatcher. 
While investment is moving offshore, none of the littoral states have 
effective navies or coast guards with which they can even identify, 
much less deter or repel pirates or attackers.
    Rising resource nationalism also raises risks that investment 
levels will be below expectations and revenues will fall as a result. 
While the nation's motives are understandable, they can produce 
unwelcome results. In Nigeria attempts to define local content by who 
owns a local service company, rather than how much value is created 
locally, have simply led to shell companies of mysterious ownership who 
transfer their service obligations to other companies or simply do not 
perform the work.
    The broader risk is the instability that the confluence of the 
above factors can produce. Unprecedented oil and gas revenues across 
the continent have not yet produced the investments in physical 
capital--roads, power stations, schools and hospitals--or human 
capital--primary and secondary education, vocational training, 
enterprise management, and development of civil society--that will be 
required for social peace. Some countries, like Libya, Equatorial 
Guinea, and Ghana, are at the beginning of major investment programs. 
Their progress will be measured soon. But more mature producers, like 
Nigeria, Algeria, Angola, Congo, Gabon and Chad, face impatient 
populations with expectations of better results. This opens the door to 
external adventurism, as we now see with al-Qaeda in the Maghreb in 
Algeria, and internal conflict as we have seen in Chad, Mauritania, and 
Nigeria.
IV. Challenges for a New Administration
    A new administration will face several challenges in the Africa 
energy space: The crisis of corruption in Nigeria, diminished U.S. 
influence on the development path of current and emerging producing 
countries, the need to secure offshore investments and the competition 
over investment values and standards.
    Nigeria. The most critical challenge to U.S. policy will be how to 
engage Nigeria. Nigeria's size, its role as an energy producer of 
global stature, its cultural ties and its potential to be the economic 
engine of West Africa should put it at the top tier of U.S. foreign 
policy priorities. Multiple issues must be addressed. The Niger Delta 
conflict poses physical risk to U.S. and Nigerian citizens in the 
Delta. The militants are well armed and are reportedly exporting 
weapons and crime to neighboring countries including Cote D'Ivoire, 
Cameroon, and Equatorial Guinea. If Nigeria's shut-in oil production 
were restored, it could add up to 650,000 barrels per day of oil to the 
global market, dropping prices nearly $17 on its own. Nigeria could be 
a major source of LNG supply to Europe, Asia, and the U.S. But 
unaddressed, the Niger Delta conflict will lead to sustained shut-in of 
onshore production. The deep corruption in Nigeria overall must be 
addressed as well. Investment will fall in Nigeria as it appears that 
every aspect of the energy procurement process, from the leasing of 
acreage, to local content mandates, to the sale of crude for product 
risks engagement with Nigerian Government officials.
    Declining U.S. Influence. If the U.S. is to influence the 
development path of current producers like Angola, Chad, Nigeria, 
Equatorial Guinea, and emerging producers such as Ghana and Madagascar, 
we must have a respected voice in those countries. The U.S. has left 
the field in many of these countries entirely, and in countries where 
we do engage, we do not engage them on their own economic agenda. We 
will not be heard on the issues of investing resource revenues in 
physical and human capital or avoiding the management of overinflating 
economies if we do not have relationships of respect with the countries 
we wish to influence. U.S. advocacy for access to acreage, conducted at 
the head-of-state level by most U.S. competitors but rarely a priority 
for U.S. administrations, is best affected not by a demand for access, 
but by a relationship of mutuality between the U.S. and the host 
country. Traditionally, the U.S. and international institutions have 
effectively used their financial clout as leverage to compel developing 
countries to implement policies aimed at sustainability and stability. 
But new centers of wealth in Asia and the Middle East combined with 
unprecedented windfall profits in producing countries have diminished 
the influence of loans and foreign aid. The U.S. will need a more 
nuanced approach to engagement since resource rich countries now have 
ample funding on their own or through unconditional loans from China.
    Security of the Offshore. If 95 percent of all energy production in 
West Africa will be offshore by 2010, there will be a need both for the 
U.S. to monitor international waters, and for countries to have the 
wherewithal to see who is in their water, interdict pirates and 
criminals, and deter attacks on facilities to protect the lives of 
workers. An investment both of time and revenues will be required to 
attract those countries that will create security forces with respect 
for human rights.
    The Competition for Values. The U.S. will compete with China, and 
possibly Russia, for influence in Africa. U.S. companies will come with 
a package of values attached to their operations: Compliance with 
anticorruption laws, participation in voluntary standards on human 
rights security and transparency, and investment in health, safety, and 
environmental practice. Their competition may not have these values or 
these conditions attached to their investment. Indeed, the great 
challenge that China poses to U.S. and European investment in Africa is 
not domination of acreage (their share remains minimal) but the refusal 
so far to participate in international standards, which erodes the 
incorporation of these standards into host country practice. Russia has 
now made its bid for access to Nigeria's gas to further increase its 
dominance of Europe's gas supply. Protection of these values will 
require engaging China, Malaysia, Russia, and others on both the need 
for these standards and their contribution to global energy security. 
The U.S. will need to also engage Africa on these issues and make it 
clear that it is a priority of the U.S. Government to advocate these 
values and, where it is welcome, to provide assistance to countries 
adopting and implementing these standards.
V. Recommendations
    Our preliminary recommendations for addressing these challenges 
are:
    1. Promulgate a Policy Decision Directive on African energy 
security. There must be a policy directive from the President that 
explicates U.S. interests and priorities and directs agencies to 
coordinate and support it. This policy must include the role of 
diplomacy, security assistance, governance and transparency promotion, 
human rights, and development assistance.
    2. Provide White House leadership. The coordination of energy 
security policy must come from the White House to muster the disparate 
agencies behind a policy. While this person might usefully coordinate 
energy security policy in other regions as well, there must be a person 
with the rank, status, and mission to ensure the implementation of the 
President's policy. In addition, most African energy producers either 
manage or reform energy policy at the head-of-state level. There must 
be a counterpart level of engagement from the U.S.
    3. Apply State Department diplomatic resources to energy security. 
The State Department must play a key role in engaging countries both on 
access and reform. While major companies do not always request advocacy 
from the U.S. Government, in today's market, heads of state of their 
competitors advocate vigorously. Small and mid-size U.S. companies 
would welcome a restoration of the U.S. Government's role as commercial 
advocate where appropriate. Engagement on reform must be at high levels 
and with multiple ministries. U.S. diplomatic resources must be applied 
at both a senior level, to engage other ministers, and at the bureau 
level, to provide programmatic support. The U.S. needs more diplomats 
on the ground in developing countries, more eyes and ears in the 
producing regions, and more high-level diplomats focused on energy 
issues. Historically the State Department denotes this priority by 
appointment of a special ambassador, as it has for the Caspian region, 
or by directing an Under Secretary (in this case the Under Secretary of 
State for Economic Affairs) to place a priority on promotion of a 
policy. This kind of issue is better addressed by recruitment of 
officials who have the mission to promote the policy than by changes in 
the State Department's organizational structure, but with respect to 
energy security policy one of these options should be considered. In 
addition, the Department needs to collect more data on energy 
developments, as well as political developments, in producing areas.
    4. Give governance and transparency policy a bureaucratic home. At 
this time there is no office with dedicated responsibility for the 
promotion of good governance and transparency in energy producing 
countries. The Democracy and Human Rights bureau owns some policies, 
such as the voluntary principles on energy and security. The Economics 
and Business Bureau has at times staffed the EITI at a junior level, 
but so has the Policy Planning Office. In the sprit of integrating 
economic and governance issues rather than stovepiping them, we should 
place this responsibility in the Economics and Business Bureau.
    5. Engage Africa on its own energy and economic agenda, not just 
ours. The best way to enhance U.S. influence with Africa's energy 
producers, and to promote U.S. interests in both access and governance, 
is to engage governments on what interests them, not just what 
interests us. Most producers want to create jobs, promote economic 
development and enjoy a respectful, mutual relationship with the U.S. 
Nearly every country is trying to find ways to increase power 
generation and distribution in an affordable, sustainable way. Many of 
them struggle with ways to target subsidies for fuel or power for the 
poor rather than the entire economy. The U.S. could use a range of 
tools to engage different countries, depending on our interests and 
their needs. These could include reviving the U.S. Africa Energy 
Ministers Partnership; reviving or creating bilateral multiagency 
economic working groups with Nigeria, Angola, Algeria, and Libya; and 
creating an electric power policy partnership--``Power for the 
People''--to engage countries on power pooling and smart policies. The 
prudent use of development aid to provide technical assistance to those 
who seek help in redesigning their procurement systems, or auditing 
their national and international oil companies, or designing systems 
for metering production, should be helped.
    6. Focus development and technical assistance on governance. U.S. 
investment in governance in general and energy governance in particular 
is modest. USAID, in coordination with the World Bank and other 
development agencies, should be directed, with a $500 million fund to 
back its commitments, to support EITI in countries which are 
candidates, to consider assistance to countries interested in reforming 
the governance of their energy sector from procurement to local content 
to regulation, and to support civil society groups in general, in a way 
that helps these groups and their media understand the extractive 
industries and participate in indigenous reform efforts.
    7. Sustain efforts to promote maritime security. Led by NAVEUR, one 
of the most successful efforts of the Bush administration has been the 
engagement of African nations on enhancing their own capacity to 
identify ships in their waters and police them to protect their 
fisheries, deter crime, and protect investment in their waters. This 
engagement has been tempered by a requirement that countries be willing 
to engage on NAVEUR's terms, which call for improvement of policy, not 
unconditioned security assistance. With the advent of Africom, this 
effort can be the key to securing energy investment abroad. If Nigeria 
reaches a point where it will seriously engage on this issue, it could 
lead to the containment of oil bunkering as well.
    8. Procure a National Intelligence Estimate on African Energy 
Security. U.S. policymakers rarely see the linkages between energy 
production, instability, conflict and stability of supply. An NIE of 
African energy would identify these linkages and provide a common 
understanding of the potential for conflict that rising prices (or 
sharply falling prices) and new exploration might pose for the 
continent.
    9. Engage Europe and Asia on Africa issues. Europe and Asia have as 
great a stake in African development, stability, and energy security as 
the U.S. does. We need to revive conversations on these issues in 
general through a transatlantic dialogue and high level U.S.-China and 
Asia-Pacific cooperation.
    10. Engage on the Niger Delta. The U.S., EU, and China must engage 
Nigeria on the crisis in the Delta. The key to the crisis is the lack 
of political legitimacy of the leadership in Nigeria itself. But as 
friends and partners the U.S. must make clear that the conflict has 
become an internal as well as an international crisis. Crime is 
spreading. Nigeria's democracy is under attack. Money is not the core 
of the problem, as there are ample funds at the federal and state level 
for a development plan. But without a serious political dialogue, 
perhaps supported quietly by external partners, no progress will be 
made. No serious political progress is possible unless corruption is 
addressed. To date, Nigeria has taken greater steps on transparency and 
reform than any other African nation. But if it does not fulfill its 
nascent commitments, efforts to get smaller countries to adhere to 
stricter standards are destined to fail.

VI. Conclusion
    Mr. Chairman, as you can see from this lengthy analysis, there is 
much to be done regarding U.S. energy policy toward producing states in 
Africa and to address the problem of the resource curse. It will 
require new approaches to energy and foreign policy. It will require 
fresh policy approaches, money, and creative diplomacy. But more than 
anything it will require leadership. As a citizen, I thank the 
committee for its leadership on this critical issue.

    Senator Feingold. Mr. Goldwyn, thank you for your excellent 
testimony.
    Before I turn to Professor Collier, I try to be careful not 
to repeat old war stories from foreign trips, but when I was in 
President Dos Santos' office in 1994, I talked to him about his 
rating on the Transparency International index, which of course 
was abysmal. He listened and I thought that would be the end of 
that. I came back 5 years later. He brought up to me--somehow 
they had done the job and kept the notes--that they had gone up 
6 points. It's still pretty bad. But think about the power, 
that that's the one thing he wanted to impress upon me, whether 
people believe that these indexes really work and so on. I was 
really struck that EITI presents a very dramatic opportunity to 
engage countries in trying to get their reputation to improve. 
So I thank you for that.
    Professor, it's a delight to have you here. You may 
proceed.

 STATEMENT OF PAUL COLLIER, DIRECTOR, CENTER FOR THE STUDY OF 
 AFRICAN ECONOMIES, UNVERSITY OF OXFORD, OXFORD, UNITED KINGDOM

    Mr. Collier. Thank you very much for inviting me.
    To state the obvious, the present commodity boom is the 
biggest opportunity for transformative development that parts 
of Africa have ever had. There are also big potential risks. 
Just to elaborate on those two points, the global evidence on 
the link between sort of commodity revenues and economic 
development is that the normal pattern is in the first few 
years of higher commodity prices countries grow faster. They 
grow faster whether they're well governed or badly governed. 
They grow faster. You can't help but grow.
    But if you come back in 20 years, usually what's gone up 
has come back down. Not always. It seems to depend 
statistically upon the initial levels of governance. Governance 
really seems to matter.
    The old concerns of Dutch disease, which were very much 
macrotechnocratic, we now as economists tend to think it's more 
of a political story. It's not an inevitable process, as Dutch 
disease. It's an optional process depending on governance.
    When we focus not on economic development, but on conflict, 
we get a similar pattern. Higher commodity prices do seem to 
increase the risk of violent conflict, unless there's good 
governance. If there's good enough governance, you don't get 
that effect.
    It's vital that history does not repeat itself. The 
commodity booms of the 1970s led to little in the way of 
sustained development and quite a bit extra conflict. So we 
must do what we can to avoid history repeating itself.
    What we can do is quite limited because we don't have 
anything like hard power in these situations. So conditionality 
won't work, precisely because these governments have lots of 
money. So the only approach I think is to see what the 
international community can do to strengthen the capacity of 
the societies within these countries to get what they 
themselves want. It's their money ultimately.
    The approach that I think is entirely the right approach is 
voluntary international standards, which then guide societies 
into what provides information for them and guidance on what 
matters. EITI was exactly the right place to start: Get the 
basic information to the society on what money is coming in. 
Without that, what can society do? So EITI was the right place 
to start.
    The success of the EITI--and it has been remarkably 
successful--demonstrates that that approach works, but it will 
be the wrong place to stop. That's why we've got EITI Plus 
Plus. What are the ``plus plusses''? Well, what is governance 
here? I said governance matters and the natural tendency is to 
think that what governance means is corruption. In part that's 
right, but there's much more to good economic governance than 
avoiding corruption. You've actually got to take sensible 
economic decisions as well as honest ones.
    In harnessing the commodity boom for sustained development, 
there are a lot of difficult economic decisions. There are 
upstream issues, there are downstream issues.
    I'll just close with one upstream and one downstream. 
Upstream, how do you sell the rights to the discovery process 
and the extraction process? My own belief is that we need to 
use auctions much more than we have done in the past. Auctions 
address two problems. One is the problem of agency, which is a 
corruption problem.
    But the other is they address the problem of information. 
Governments are pretty clueless on what these things are worth. 
Companies have an informational advantage. The attraction of 
auctions is the government doesn't need to know. The true value 
is revealed by bidding amongst informed competitors. So the 
auction solves the asymmetric information problem.
    If we go downstream, the key decisions are how much of the 
revenues should be saved relative to consumed--the answer is a 
lot should be saved, but by no means all of it. So neither the 
Norwegian model, which is far too high a savings rate for low-
income countries, nor to throw a consumption party are the 
right answer.
    Finally, of the savings, what should you do with those 
savings? Definitely not the Norwegian model--give them to your 
wise New York banks--and that is not a comment on the wisdom of 
the banks. It's that the African governments--unlike African 
countries, unlike Norway, are desperately short of capital in 
their own societies. So they need a process of domestic 
investment. The key issue in harnessing these booms is to get a 
good domestic investment process going. It's very easy for that 
domestic investment process to be both corrupt and foolish. So 
raising the quality of domestic investment is the heartland of 
the issue.
    Thank you very much.

 Prepared Statement of Paul Collier, Director, Center for the Study of 
    African Economies, University of Oxford, Oxford, United Kingdom

               Laws and Codes for the ``Resource Curse''

                            1. introduction
    The international community assigns a high priority to helping 
impoverished societies, yet its efforts are currently lopsided. While 
it spends around $100bn on aid and provides over 100,000 U.N. 
peacekeepers, to date it has largely neglected the potential of 
international codes and laws to raise standards of economic governance. 
This paper analyzes the potential contribution of such codes and laws 
to increase the development impact of natural resource revenues. The 
current commodity booms make this a critical opportunity for 
assistance.
    Resource-exporting developing countries are currently in the thraws 
of booms that were last seen in the 1970s. Many of these countries have 
been impoverished and economically stagnant for decades and the booms 
constitute extraordinary opportunities for development. The revenues 
are often large enough to finance transformation, dwarfing aid flows. 
However, the last global commodity boom of the 1970s largely failed to 
deliver transformational development. On the contrary, on the whole its 
long-term economic consequences were highly adverse. The failure to 
harness the booms of the 1970s was the result of wrong decisions on the 
part of governments. In part, these wrong decisions were mistakes: The 
decision-takers would have arrived at different decisions had they 
realized their consequences. In part, however, they reflected 
divergences between the interests of the society and of the decision-
taker: The incentives facing the decision-taker were misaligned with 
the social interest that the decision-taker was empowered to represent. 
This distinction between mistakes and misaligned incentives is 
fundamental as a guide to the actions that can prevent history 
repeating itself. Mistakes are to an extent self-correcting through 
learning, whereas misaligned incentives require changed incentives.
    Even where past decisions were mistakes, international codes can be 
helpful. The typical low-income commodity exporter has remained prone 
to mistakes in economic policy because the cadre of well-trained 
decision-takers within the society is still tiny. Adult populations are 
small, few people get international graduate education, and few of 
these people return to their country: Globalization is accelerating the 
emigration of the highly skilled. Even among this limited pool, few are 
in positions of influence: The salaries of senior civil servants have 
been radically eroded. Further, because the adverse consequences of 
mistakes in managing commodity booms occur only long after the 
decisions, it is easy for a society to misdiagnose its problems. The 
typical mistake of the 1970s booms was to gear them up by borrowing and 
consume the proceeds. When commodity prices crashed this led to a phase 
of crisis management termed ``structural adjustment.'' Nigerians, for 
example, generally see the boom period as the ``good times,'' and blame 
their current poverty on ``structural adjustment.'' Thus, the process 
of learning from mistakes can usefully be complemented by external 
guidance. International codes can be helpful: They get noticed, and 
their official status signals that they have been subject to a 
reasonably rigorous process of scrutiny and assessment and so should be 
taken seriously. Even where such codes are entirely voluntary, they can 
change behaviour.
    Where wrong decisions were the result of misaligned incentives 
rather than mistakes, the incentives have to be changed. While in 
principle, incentives can be changed both by penalties and rewards, in 
the case of decisions appertaining to resource revenues the key changes 
are likely to come from new penalties. This is because the private 
rewards for socially costly decisions are usually too high to be 
countered by even higher rewards for good decisions. The terrain of 
penalties opens up a role for the law. Legal process is not the only 
means by which penalties can be introduced, but it is likely to be a 
critical part of solutions.
    In section 2, I review the evidence on the resource curse and its 
causes, including a prognosis for the long-term consequences of the 
present commodity booms should patterns of behaviour stay unchanged. 
The key conclusion from this section is that were behaviour patterns to 
stay unaltered the present booms would be a missed opportunity of quite 
staggering proportions. The issue under discussion is undoubtedly the 
single most important issue for the development of the countries now 
stuck at the bottom of the global economy: The ``bottom billion.'' In 
section 3, I anatomize the decision process by which valuable natural 
resources in the territory of the society are harnessed for economic 
growth that benefits the society. I delineate five key decisions. For 
each I consider whether past failures were predominantly due to 
mistakes or to misaligned incentives. In section 4, I turn to the scope 
for new international voluntary codes. Primarily, these address those 
errors due to mistakes although they can also help to realign 
incentives. In section 5, I turn to the potential need for new laws the 
national promulgation of which would be coordinated across the OECD 
analogous to antibribery legislation. Such laws are difficult to 
introduce and so are a last-resort approach for the realignment of 
incentives. Section 6 concludes.
           2. the resource curse and its causes: the evidence
    The ``resource curse'' is evident from particular situations, such 
as Nigeria since the discovery of oil, but as a general proposition 
about those countries that export primary commodities it has been more 
controversial (Auty, 2001). Counter examples to Nigeria, such as the 
rapid growth of Botswana since the discovery of diamonds, demonstrate 
that any resource curse must be contingent. Further, there was an 
apparent discrepancy between two different types of general (that is, 
statistical) evidence. The main general evidence came from a study by 
Sachs and Warner (2001) which showed that using cross-section 
comparisons resource riches were damaging. Cross-sections essentially 
compare the overall experience of one country with another. Economists 
have, however, come to doubt such evidence where it is used to 
investigate processes that occur over time, because it is easy to 
misattribute to temporal processes what are in reality underlying 
differences between countries. Evidently, the resource curse is such a 
process: Resources are discovered and this produces various changes 
which eventually damage the economy. These ubiquitous suspicions of 
cross-section analysis appeared to be confirmed in the case of the 
resource curse by time series analyses by Deaton and Miller (1995) and 
Raddatz (2007). Time series analysis relies upon before-and-after 
situations in each country and so is better suited to temporal 
processes such as the resource curse. They found that the consequences 
of a commodity boom looked on average to be entirely benign on various 
economic criteria. However, an acknowledged limitation of their method 
was that it could only investigate the first few years following a 
boom. My own recent work with Benedikt Goderis has reconciled this 
apparently conflicting evidence (Collier and Goderis, 2007a, 2007b). 
Using the statistical technique of cointegration we are able to analyze 
both the short-term and the long-term effects of commodity booms using 
data for virtually every country in the world, and spanning the period 
1970-2003. Our results confirm that in the first few years price booms 
benefit the overall economy. However, after around 20 years the effects 
are often highly adverse. Simulating the current commodity booms in the 
14 major African commodity exporters, we find that the long-term effect 
is to reduce output relative to counterfactual by around 25 percent. 
The resource curse is a reality.
    The adverse long-term effects are confined to price booms in 
nonagricultural commodities. A likely explanation for this is that 
agricultural booms accrue predominantly to farmers who usually use 
their windfalls sensibly. In contrast, nonagricultural booms usually 
accrue predominantly as government revenue. The current commodity booms 
are nonagricultural and we investigate whether such booms inevitably 
lead to the resource curse or are themselves contingent. We find that 
they are contingent upon initial conditions of governance: Above a 
threshold level there is no resource curse. Thus, for example, Norway 
has been able to benefit from its oil not only in the short term but 
has harnessed the revenues for long-term growth. Our measure of 
governance is taken from the International Country Risk Guide, a 
commercial rating agency. On this measure, the threshold level below 
which the resource curse sets in is approximately equivalent to the 
governance standards of Portugal in the mid-1980s. Unfortunately, 
almost all of the current commodity booms in low-income countries are 
occurring in environments where governance is below this threshold. 
This emphasis upon the importance of governance in the management of 
resource rents is consistent with a recent analytic literature which 
models the political economy of the resource curse (Arezki and van der 
Ploeg, 2007; Baland and Francois, 2000; Hodler, 2006; Mehlum, Moene and 
Torvik, 2006; Robinson, Torvik and Verdier, 2006).
    Governance is, however, multifaceted and in one important respect 
it has manifestly improved in the resource-exporting countries since 
the 1970s. Following the collapse of the Soviet Union there was a waive 
of democratization and so they are now more democratic. With Anke 
Hoeffler I have investigated whether democracy improves the economic 
performance of resource exporters (Collier and Hoeffler, 2006). We find 
that whereas in other economies democracy has such an effect, in the 
resource exporters' performance is significantly worse. In effect, 
instead of democracy disciplining the decision process, the resource 
revenues undermine the democratic process. We decompose democracy into 
two facets: Electoral competition and checks and balances. The economic 
damage done by democracy comes from electoral competition and is offset 
if checks and balances are sufficiently strong. The instant democracies 
of the 1990s have electoral competition without checks and balances 
because the latter are much more difficult to establish. As Iraq and 
Afghanistan demonstrate, elections can be introduced rapidly in any 
society because they are events and the incentives for parties to 
participate are strong. In contrast, effective checks and balances are 
processes, and since their purpose is to limit power the powerful have 
little incentive to build them. An implication is that the waive of 
democratization has not improved governance to the level at which the 
incentives of decision-takers are now well-aligned. Other approaches to 
the improvement of governance in the low-income resource exporters is 
thus likely to be critical to whether history repeats itself.
    3. mistakes and misaligned incentives: five key decision points
    The dismal outcome of commodity booms to date reflects either 
mistakes or misaligned incentives and in principle either of these 
could predominate in the poorly governed countries. To analyze these 
two possibilities I focus on five decisions that are jointly critical 
in harnessing a commodity boom for broader growth across the economy.
Decision 1: Negotiating the resource extraction contract
    In developing countries resource extraction rights are invariably 
vested in the government. Because governments lack the organization, 
skills, and capital to undertake extraction themselves, it is 
appropriate to sell these rights to resource extraction companies. The 
first critical decision is how these sales should be conducted.
    The government has one major advantage: It is usually the monopoly 
seller of the nation's resources. The exception is where rebel 
organizations control some of the national territory and in effect 
compete with the government in selling rights. For example, this was 
for many years the situation in respect of Angolan diamonds. When Jonas 
Savimbi, the head of the Angolan rebel organization, was killed, an 
event which marked the end of divided control of the nation's 
resources, the stock price of resource extraction companies doing 
business in Angola fell on the New York market by 4 percent. Asset 
holders recognized that the move to monopoly would worsen the 
bargaining position of companies and that this would more than offset 
any material benefits of peace.
    However, the government has two major disadvantages: It has less 
information that a resource extraction company as to the likely value 
of extraction rights, and it has a more severe ``agency'' problem. The 
former generates mistakes, whereas the latter generates misaligned 
incentives. As a first step in reducing the information asymmetry the 
government can invest in a geological survey, so that the uncertainty 
over the value of the rights is reduced. Where good geological 
information is available, the next and key step is through an auction. 
An auction reveals value through competition among informed companies: 
The government itself does not need to know the value of the asset it 
is auctioning. The most celebrated instance of the benefits of 
auctioning rights is the sale of the rights to the third generation 
mobile phone network in the U.K. The British Treasury was about to sell 
the rights in a negotiated deal for 2bn when it was 
persuaded to rely upon an auction instead. The auction revealed a price 
of 20bn. If the British Treasury can so radically 
misestimate value, it is evident that the typical African Ministry of 
Finance does not have the core competence to negotiate satisfactory 
deals. The amount of information revealed by an auction depends both 
upon the details of its design and the integrity with which it is 
conducted. For a discussion of a design appropriate for a resource 
auction see Cramton (2006). The integrity issue is taken up below.
    The agency problem facing governments is that the power to 
determine deals is delegated to some agent of government, typically the 
Minister of Industry or the President. Resource extraction companies 
thereby have the opportunity to arrive at a deal which is personally 
rewarding for the agent of government, and for the company, at the 
expense of the society. Again, auctions are potentially the solution to 
this agency problem. However, auctions can easily be gamed. To prevent 
this, auctions would need to meet certain specified standards, and 
adherence to these standards would in turn need to be monitored through 
a process of international certification.
    Currently, many African governments are entering into packaged 
deals, usually with China, that combine resource extraction rights with 
construction contracts. Such packaging has some organizational 
advantages. It is, however, entirely compatible with an auction 
process: The auction can specify that the government wants the package. 
Resource extraction companies would then team up with construction 
companies and potentially also with their national aid agencies to 
submit a joint bid. An advantage is that bids would then be comparable.
Decision 2: Design features of the contract
    The second critical decision concerns the specification of the 
rights that the government proposes to sell. Extraction rights have 
three key dimensions, their duration, the tax regime that will be 
applied, and the credibility of these commitments. The third of these 
dimensions is the core of the matter.
    Because the government is sovereign it can change the terms of any 
deal that it strikes. This gives rise to a ``time-consistency'' 
problem: The inability of the government to commit induces extraction 
companies to discount its offer. The problem is far more acute for 
governments that start with a weak reputation as is normal across 
Africa. In this case, if the government reneges it suffers only a small 
loss of reputation. The problem is particularly severe where no 
geological survey is available or planned, so that prospecting rights 
are inevitably highly speculative. The government cannot credibly 
commit to refrain from changing the terms of the deal should the 
company strike lucky.
    The approach usually urged by the international financial agencies 
in such situations has been to encourage governments nevertheless to 
offer long-term contracts, and then, should companies strike lucky, to 
advise governments not to renege on their terms. The intention is that 
governments should gradually build their reputations to the point at 
which their commitments would be credible. Such advice seems to me to 
be seriously mistaken in two respects.
    First, governments with poor reputations that offer long-term 
contracts for highly speculative outcomes will receive only offers that 
include a heavy discount for the likelihood that they will renege. In 
effect, the company works on the assumption that the contract will be 
changed. If, subsequently, the government fails to change the contract 
it hands the company a windfall over-and-above the expected return. 
Conversely, if the government indeed reneges on the contract, it incurs 
a loss of reputation which would not have occurred had it not made the 
commitment. The alternative is for the government to offer for sale 
only rights that extent over a limited time horizon. It can further 
reduce the need to renege on a contract by designing its tax system so 
as to be heavily geared upon the level of rents. Thus, flat rate 
royalties should be avoided. Taxation should start only above some 
threshold world price at which the firm is making normal profits and 
rise steeply as the price increases above that threshold. Both features 
reduce the incentive for the government to renege on the contract 
should the company strike lucky. They thereby increase the confidence 
of the company that the terms of the contract will be respected and so 
reduce the discount that is built into its offer.
    However, the key reason why the advice is mistaken is that the 
incentives for governments already tempt them to offer contracts with 
horizons that are too long and tax regimes that are too generous. By 
designing contracts in this way governments increase current revenues 
at the expense of revenues in the future when the current group of 
ministers may not be in power. This misalignment of incentives is at 
its most acute in transitional governments which are common in post-
conflict situations. For example, the transitional government of the 
Democratic Republic of the Congo knew that many of its members would be 
out of government after the post-conflict elections, scheduled for 
2006. In the preceding 3 years long-term rights to mineral extraction 
were sold off under a very generous tax regime. For example, during 
2006 mineral exports are estimated to have been around $200m whereas 
royalty payments received into the government budget were a mere 
$86,000. The prices at which these rights were sold were inevitably 
heavily discounted by the lack of credibility of the regime's 
commitments. Similarly, while it was still a rebel organization, the 
current government of Congo Brazzaville is believed to have sold ELF 
the long-term right to oil at a heavily discounted price in return for 
financial support in its subsequently successful military struggle. 
Analytically, these sales of extraction rights were equivalent to 
incurring international debt at very high interest rates, something 
that would not have been permitted by the international community.
    The appropriate specification of the rights to be sold thus depends 
upon political as well as geological considerations. While a mine might 
have a natural life of 30 years it will often be economically 
disadvantageous for the society to sell extraction rights over such a 
long horizon. It may be preferable to incur the extra transaction costs 
implied by rights that are shorter than the natural life of the 
investment.
Decision 3: Transparency in revenues
    The third critical decision is the degree of scrutiny of revenues. 
Until the Extractive Industry Transparency Initiative (EITI) which 
started in 2002, revenues paid to governments by resource extraction 
companies were usually confidential. This lack of disclosure gave rise 
to two abuses: One by companies; the other by government officials. 
Most revenue-receiving governments have little capacity to scrutinize 
whether payments by companies are fully compliant with tax regimes. 
However, once payments are made public companies are potentially 
exposed to a greater degree of scrutiny and are more likely to be 
voluntarily compliant. The abuse by government officials is that 
payments that should properly accrue to the budget instead are 
improperly diverted. Indeed, the key impetus for the EITI was the 
evidence from the IMF that some $2bn of oil revenues that should have 
accrued to the Angolan budget were missing. The scrutiny of government 
by citizens depends upon information. This is exemplified by the 
decision of the Nigerian Federal Government to implement the EITI at 
the level of the 36 states within the federation which between them 
receive half of the oil revenue. The Federal Ministry of Finance 
decided to publish in the newspapers the monthly oil revenues sent to 
states and handled by state governors. On the day of first publication, 
newspaper circulation in Nigeria spiked: Citizens wanted to hold their 
officials to account. The benefits of the EITI already extend beyond 
Africa: It has substantially improved the management of resource 
revenues in Russia and central Asia. [Here I rely upon the opinion of 
Eric Bergof, Chief Economist of the European Bank for Reconstruction 
and Development.]
    An even more fundamental abuse of resource revenues is when they do 
not accrue to the government in any form but are instead paid to rebels 
who control part of the national territory. This was, for example, the 
case for many years with diamonds sold by Savimbi's rebel organization 
UNITA. The international community faced up to this problem at around 
the same time as EITI through a voluntary system of certification of 
the provenance of diamonds, the Kimberley Process. This has already 
proved highly successful in curtailing rebel access to the world 
diamonds market and the effectiveness of scrutiny is steadily being 
increased. The system is also being considered for a few other high-
value commodities such as coltan.
    The opacity of resource revenues and their theft by rebel groups 
are not mistakes. Evidently, they are the result of misaligned 
incentives: Opacity and theft benefit those who misappropriate resource 
revenues.
Decision 4: The aggregate savings decision
    By far the most important decision point concerns the proportion of 
resource revenues that should be saved. There are two distinct 
timeframes that need to be taken into account in reaching this 
decision, one long term, and the other medium term.
    The long-term timeframe concerns depletion. The extraction of 
nonagricultural natural resources depletes the stock of the asset. To 
maintain the overall value of assets some of the resource depletion 
should be offset by an accumulation of other assets. The proportion 
that should be saved depends upon the likely length of life of the 
resource and upon the likely rate of return on investment relative to 
the rate of return earned by leaving the resources in the ground, but 
in general a significant proportion of revenues from resource 
extraction will need to be saved in order to avoid overall depletion of 
assets.
    The medium-term timeframe concerns the price cycle of the 
commodity. The world prices of commodities have a long record of 
substantial fluctuation. While there is nothing so predictable as a 
genuine ``cycle,'' manifestly there are periods when prices are 
sufficiently out of line with their long-term average level that it is 
reasonable to expect a degree of reversion towards the long-term mean. 
There are good reasons why a government might try to smooth its 
expenditures rather than simply let expenditure track these extreme 
fluctuations in revenue. Volatility in expenditures gives rise to 
inefficiencies: For example, during periods of high expenditure 
commitments are made to rather low-return items which then can only be 
financed during periods of low expenditure by deep cuts in items which 
should have been prioritized.
    Offsetting depletion and smoothing the price cycle both require the 
government to save part of the revenue from resource extraction. This 
decision to save is subject to further ``time-consistency'' problem. 
Consider the decision of a prudent finance minister whether to save 
revenue. The saving necessarily defers the spending decision to the 
future, a time when the minister responsible is likely to be different. 
If this future finance minister is also prudent then no issue arises. 
However, if the future finance minister is ``populist'' then the 
revenues saved by the prudent finance minister are simply handed to the 
populist finance minister to spend. Let us suppose that not only do 
prudent finance ministers prioritize savings more highly than populist 
ministers, but that the quality of their spending is higher. Thus, the 
prudent finance minister faces a dilemma. If there is a significant 
risk that there will be a future populist finance minister then the 
current prudent finance minister may reasonably decide that the best 
course of action is not to save the revenue even though savings would 
otherwise be warranted. This is a form of time-consistency problem 
because future governments would be better off if only they could tie 
their hands, renouncing the freedom of a future populist minister to 
mis-spend the savings of the current prudent minister. If they 
renounced this freedom the prudent minister would save and this would 
make a future government better off, whether or not the minister was 
populist, whereas while ever the future government retains this freedom 
then it cannot benefit from it. Evidently, a future government cannot 
itself renounce its freedom because it does not yet exist. However, the 
present government can act on behalf of the future government by 
establishing a fiscal constitution. By this I mean a constitutional 
provision which enshrines some basic principles of the savings decision 
which curtails the freedom of a future populist minister of finance to 
deplete assets.
    In the absence of a fiscal constitution the decision of a prudent 
finance minister not to save windfall resource revenues need not be a 
mistake. Rather, it is the consequence of misaligned incentives. 
Several resource-rich governments have now recognized the need to 
realign incentives by introducing a fiscal constitution. For example, 
the governments of Chile and Nigeria have both recently enacted such 
provisions to handle the depletion and price swings of their commodity 
exports, copper and oil respectively. Constitutions can always be 
overturned. However, the process of overturning them is both public and 
slow. These obstacles might well be sufficient to deter a populist 
minister from even attempting to deplete assets: by definition, a 
populist finance minister is in a hurry (in economic terminology he has 
a high discount rate). In making the populist option more difficult, 
the fiscal constitution also reduces the returns to becoming a populist 
minister of finance and thereby makes populism less likely.
Decision 5: The public investment decision
    Having determined the proportion of resource revenues to be saved, 
the government must then decide which assets to acquire. Specifically, 
it must decide how much of the savings should be held abroad and, for 
the savings invested domestically, which investments should be chosen. 
There are two distinct reasons for saving abroad. One is that those 
savings intended to smooth consumption over the price cycle need to be 
held in liquid form so that they can be depleted during the 
unpredictable periods of low prices. Hence, they have to be held in 
foreign financial assets. Domestic financial assets, though liquid at 
the level of an individual holding, are merely claims on illiquid 
investments within the society and so cannot in aggregate be 
liquidated. The other reason is that at some point the return on 
domestic investment is liable to drop below that available on world 
markets and at this point it is better to hold savings temporarily 
abroad until conditions within the economy permit them to be switched 
into domestic investment. This is termed ``absorptive capacity.'' The 
rate of return on domestic investment is influenced by many factors, 
but a particularly pertinent one is that during savings-driven 
investment booms returns are driven down due to both the congestion at 
the planning stage and rising construction costs at the implementation 
stage. It is usually more efficient to stretch the domestic investment 
of the savings generated by a commodity boom over a longer period than 
the commodity boom itself.
    Complementing these macroeconomic considerations about absorptive 
capacity, are microeconomic concerns about the selection of public 
investment projects. For a project to be satisfactory it should meet 
two criteria: Honesty and efficiency; and so these aspects of the 
project need to be assessed prior to approval. An effective public 
investment process should thus subject all proposed projects to two 
tests. Dishonesty in public investment procurement is a massive problem 
in resource-rich countries. The minimal defence against it is to 
require all projects to go to competitive tendering. Since it is easy 
to subvert competitive tendering, as with auctions there needs to be 
some scrutiny of the process backed by certification that the tendering 
process meets reasonable standards. For example, a common way in which 
competitive tendering is subverted is for public officials in charge of 
procurement to agree in advance with a particular firm that once it has 
been awarded the contract the government will change the specification 
in such a way as to warrant repricing. A contract to build schools 
might be recalled in order to change the design of the buildings and 
the alterations accepted at a price higher than is warranted. While 
there is indeed a genuine need to be able to adjust contracts, since 
the adjustments are not retendered there is scope for abuse and so the 
process needs to be policed. Honesty is not enough. Some of the most 
egregious public investments of resource revenues would have been 
disastrous even if their implementation had been completely honest 
because they were foolishly conceived. The defence against this process 
has to be technocratic: The likely rate of return on projects has to be 
estimated in an impartial manner, with only those projects that offer 
returns over some threshold set around the rate of return on assets 
held abroad being approved. This was in essence the decision process 
that enabled Botswana to convert diamond revenues into world-beating 
growth. The evaluation of public investment projects is standard in 
developed countries, but it is also a process that is readily gamed. 
Because future returns are inevitably hypothetical, it is invariably 
feasible to manipulate estimates to suit political demands. Hence, 
again there is a need for scrutiny and certification of the process.
    The tendency to use the revenues accruing during commodity booms 
for surges in public investment projects which are poorly selected is, 
to an extent, a mistake. However, it also reflects misaligned 
incentives. Where ever public procurement processes and the scrutiny of 
rates of return are weak there are large personal gains to be had from 
maximizing the current flow of public investment projects. Indeed, 
since many of the kickbacks accrue upon commissioning the project, 
there is an incentive to commission far more projects than can be 
implemented, resulting in the common spectacle of projects that stand 
uncompleted for many years while new ones start up around them. Thus, 
the core problem is less a matter of mistakes than of misaligned 
incentives.
                     4. the role of voluntary codes
    Recall that our starting point is the current commodity boom 
against the backdrop of the dismal history of the resource curse. 
History must not be repeated, but it will be repeated unless there is 
an appropriate combination of learning to correct past mistakes, and 
institutional innovation to correct misaligned incentives. I now 
consider to what extent voluntary codes can be useful in facilitating 
both learning and the realignment of incentives.
    Manifestly, voluntary codes can be powerful instruments. The EITI 
and the Kimberley Process are both important examples of how voluntary 
codes can improve resource extraction. To what extent can this approach 
usefully be extended?
    Voluntary codes have power for four core reasons. Their basic 
rationale is informational. The code simply codifies good practice and 
thereby informs governments as to what is generally considered 
sensible. The codification helps to distinguish this particular advice 
from the babble of advice, often contradictory, to which governments 
are subjected. Governments can respect codified advice because they 
infer that it has been subject to thorough and impartial analysis.
    However, the informational role is probably not the most potent 
aspect of codes. In all the badly governed resource-rich societies 
there are reformers anxious to critique poor policies. However, the 
reformers themselves face a coordination problem: Each voice for reform 
is also, often inadvertently, a voice for self-promotion. Thus, for the 
normal human reasons of personal rivalries it is often difficult for 
reformers to coordinate around an agreed set of objectives. Recognizing 
this, the opponents of reform often play a game of ``divide and rule.'' 
A code has the advantage of providing a neutral goal around which 
reformers can rally. By being depersonalized, it is both easier to get 
pressure for adoption, and easier to defend once adopted than any 
personalized reform.
    Voluntary codes also provide a norm for the coordination of 
external pressure. Adherence to the EITI rapidly became a condition for 
some donor assistance, and adoption of the Kimberley Process became a 
benchmark for NGO pressure.
    Perhaps most importantly, codes separate the sheep from the goats. 
By revealing those governments that are willing to comply with a 
particular set of standards, they also reveal those that are not. There 
is a strong incentive for governments not to reveal themselves as being 
in the latter category. A dramatic instance of this phenomenon was the 
creation of the Euro, something initially intended so that France could 
have a common currency with Germany. Once Spain announced that it 
intended to meet the criteria for membership, Italy and Portugal felt 
compelled to do the same. Similarly, the Kimberley Process, though 
voluntary, has rapidly attracted every diamond producing country in the 
world.
    Where is there currently scope for codes concerning the revenues 
for resource extraction? Of the five critical decision points, only the 
third is currently covered. All of the other four have potential for 
being codified. One new code could cover the design and conduct of 
auctions. A second could cover the specification of the time horizon 
and tax regime, for example, setting limits on the horizon of rights 
sold by transitional governments. A third could cover the savings rate 
out of resource revenues likely to be appropriate. A fourth could cover 
the procedures for public investment.
    If these codes are to be promulgated some entity needs to be 
responsible for them. The precedents for the promulgation of voluntary 
codes suggest that various approaches can be effective. Many codes of 
economic behaviour have been promulgated by the IMF and are part of its 
annual Article IV consultation process in which all its member 
governments are required to participate. The Kimberley Process is run 
by public-private partnership between the diamonds industry, NGOs, and 
diamond-producing governments. The EITI started as an NGO campaign, was 
then adopted by the British Government, was then tentatively and 
temporarily lodged with the international financial institutions and 
has now become an official international organization headquartered in 
Oslo. Which agencies would be most appropriate as the codifier of the 
four proposed new codes?
    It would clearly be both more effective and more practical to lodge 
the new codes with existing agencies rather than attempt to create new 
ones. The four codes naturally cluster into two pairs. The first two, 
on auctions and the specification of mineral rights, are both concerned 
with transparency in resource revenues. The other two, on the savings 
decision and the processes of public investment, both concern the 
conduct of budgets. The first pair is close to the existing mandate of 
the EITI and would most naturally be lodged there. They would require 
the organization to acquire some expertise in the conduct of auctions 
and the design of rights but this would surely be feasible and 
complement the expertise that as a new organization it already needs to 
build. The second pair, concerning budgets, belongs most naturally with 
the IMF and the World Bank. The Fund is indeed already advising 
governments on savings out of resource windfalls and codification would 
be a sensible development of this work. Similarly, the World Bank 
routinely undertakes Public Expenditure Reviews, and specific 
guidelines on processes of public investment for resource-rich low-
income countries would be again be a natural extension of this work.
    Independent international verification and certification are now 
standard in many areas of economic activity. The new codes would 
require two distinct systems of verification, one concerning the 
conduct of auctions and the other the conduct of public investment. The 
core rationale for each of them is that a government needs to be able 
to demonstrate to its citizens that it is in compliance with its own 
stated commitments. The governments that are most in need of this 
capacity to enhance their credibility are those with poor reputations 
that are attempting to reform. Hence, the provision of verification and 
certification is not a quasi-police operation intended to force 
compliance upon an otherwise recalcitrant government. Rather, it would 
enable those governments that were genuinely committed to reform to 
reveal their type. As such governments revealed their type, corrupt 
governments would be revealed by default and this would facilitate 
pressure for change within their societies. Reforming elements would be 
able to ask why their governments had chosen not to comply with 
international norms that other governments had adopted.
                   5. the role for international law
    International law is so difficult to get enacted that it must be 
used very sparingly. Is there a real need for the promulgation of new 
international law regarding resource extraction? The one area where new 
law might be pertinent is to reinforce the voluntary code on auctions 
by requiring those resource extraction companies based in the OECD to 
enter into new contracts only through certified auctions of extraction 
rights. Would this be desirable and is it feasible? The close analogy 
to such a law is the antibribery laws which were adopted across the 
OECD in a coordinated process orchestrated by that body. It was 
important for these laws to be coordinated since no single country was 
prepared to disadvantage its own businesses vis-a-vis those of other 
countries by enacting a law individually.
    What would be the consequences of such a pan-OECD law? One possible 
consequence would be that the governments of resource-exporting 
countries would not adopt certified auctions and as a result China 
would scoop the pool of resource extraction contracts. However, this is 
not a likely outcome. Once the law was adopted, a government that 
decided to sell extraction rights through a nonauction process would 
know that a key group of potential purchases was thereby excluded. In 
effect, the decision would hand monopsony power to China and thereby 
manifestly disadvantage the country. It is one thing doing deals with 
China when China knows that the government with which it is dealing has 
many alternatives, and quite another to choose to put oneself in such a 
disadvantageous position. Obviously, by holding an auction a government 
would not in any way preclude selling the extraction rights to the 
Chinese. Hence, within resource-rich countries there would be strong 
pressure to preserve competition for the purchase of resources by 
adopting auctions.
    If as a result of the legislation auctions became standard then the 
OECD countries would benefit. At present sales are often conducted in 
an opaque manner. This is sometimes tantamount to a competition in the 
degree of corruption that the bidder can countenance, and sometimes a 
competition in which China can supplement its offer by aid but OECD 
companies cannot.
    Laws involve penalties for breaches. However, the court-inflicted 
penalties need not be severe because the power of deterrence in this 
case is likely to come predominantly from citizens, both as consumers 
and as employees. No significant OECD-based resource extraction company 
could afford to acquire concessions for resource extraction through 
processes which clearly breached of the law. In effect, much of the 
power of the law here comes from the information signal conveyed by the 
detection of a breach. Consumers and employees know to penalize 
companies that act illegally.
                             6. conclusion
    The current commodity booms constitute the most important 
opportunity for development that low-income commodity exporters have 
ever had. Yet if history repeats itself this opportunity will be 
missed. In these countries aid has limited potency: Their governments 
are sometimes already awash with revenue. A neglected type of 
assistance, which might be more helpful, is the promulgation of 
voluntary codes and laws specifically designed to improve the economic 
governance of resource rents. For the resource-rich countries improving 
economic governance is of the essence. In this paper I have suggested 
how new codes and laws could address both the mistakes and the 
misaligned incentives that lead inexorably to the resource curse. 
Difficult as these new codes and laws would be to promulgate, the costs 
are trivial both relative to the scale of existing development 
assistance and to the likely beneficial effects.

    Senator Feingold. Thank you, sir.
    We'll begin with 7-minute rounds.
    Professor, I'll begin with you. Thank you again for your 
testimony. Given your long career of working on these issues, 
I'm curious where you've seen progress in reversing the 
resource curse. Are there particular success stories that you'd 
turn to in Africa that we can use as examples for efficient and 
transparent resource management?
    Mr. Collier. Yes. I'm moderately optimistic. I think 
there's quite a lot of learning from failure been going on. We 
see that most remarkably in Nigeria, where the reform team that 
came in in 2003 really had learned from failure. It was just 
determined not to repeat history, got this whole--two things 
going. One was the fiscal responsibility act, which was 
fundamentally about the savings decision. But the other was 
introducing competitive tendering in public procurement, which 
was fundamentally about the investment decision.
    So they managed to set up institutional processes on both 
those two critical downstream decisions. So it was very 
impressive.
    I was recently in Uganda, where the Ministry of Finance and 
the central bank are very concerned to handle these things 
right, very aware of the pitfalls. Last week I was in Zambia, 
where the Governor of the Central Bank is deeply concerned. And 
with the sad death of President Mwanawasa, that's a real 
turning point in that society. It could go right or wrong.
    So across the continent there's a lot of awareness. Ghana, 
which has got, like you say, all these discoveries, it's 
fragile. It could go populist. They've got an election coming 
up. It's an easy issue for the three candidates to promise to 
throw a consumption party. That's the downside danger. So it's 
trying to--the only way to counter that is to build a more 
informed society on the custodial role of depleting these 
assets and pointing to the neighbors, the sad history of the 
neighbors who have already been there.
    Senator Feingold. Let me ask you about Chad and Cameroon. 
As you know, controversy has long surrounded the 650-mile oil 
pipeline between Chad and Cameroon that the World Bank helped 
to construct. Earlier this month the Bank finally canceled that 
agreement because the government has failed to translate 
revenues into poverty reduction.
    What can be learned from the bank's experience with this 
project?
    Mr. Collier. I think, to be honest, I think the bank was 
foolish to go into the agreement from the start.
    Senator Feingold. Foolish for going into it in the first 
place?
    Mr. Collier. Yes. I think the proper analysis of the Chad 
deal would have said this is what economists call time 
inconsistent. That is to say the government had no incentive to 
keep its promise. It had every incentive to make a promise, 
because by making the promise--the promise was the government 
will pass legislation, the World Bank will take the 
reputational risk, and the oil companies will sink investments 
of $4.2 billion.
    Then you ask yourself, which of these actions is easier to 
reverse? And it's not easy to take the $4.2 billion investment 
out of the ground, but it's very easy to change the 
legislation. And the oil companies, once that's done, have very 
little incentive to put any spine into the defenses because 
it's the World Bank which is carrying the reputational risk.
    So the whole structure of that deal was to my mind doomed, 
and so it shouldn't have been set up. Twenty minutes of decent 
economic analysis at the start would have said this is doomed.
    Senator Feingold. Thank you, Professor.
    Mr. Goldwyn, thank you also for your testimony and for your 
previous service to the United States. I want to first follow 
up on your assessment of the bureaucratic obstacles within the 
U.S. Government to effective interagency strategy and 
implementation with regard to promoting good governance and 
transparency in energy-producing countries. Could you elaborate 
a little bit on those obstacles?
    Mr. Goldwyn. Yes, thank you. In the United States right now 
we have a very disaggregated system of responsibility in terms 
of energy. Energy advocacy--production, the Commerce Department 
is interested in that. Energy security itself, no one is really 
responsible because energy security means in some senses 
stability of supply. Well, that's a political question, how 
stable are your suppliers. So it means that the Africa Bureau 
would worry about Nigeria if they had time to focus on Nigeria, 
but the people in the economics and business office, which 
might worry about supply, don't have a relationship with 
Nigeria and they're not going to go in and talk to the 
President. At the very senior level, there's no one really on 
the national security staff which is responsible for looking at 
both the relationship of the countries and the impact of the 
economics and the impact of governance, transparency, the 
underlying problems. Human rights people have one piece and 
economic people have another piece and the bilateral have 
another piece.
    Nobody on the seventh floor of the State Department is 
really responsible for doing this. The Under Secretary for 
Economics, Energy and Agriculture is in there too, sort of has 
that job, but not the focus. So as a result, we don't have an 
integrated look at this.
    Even on transparency, EITI is the Economics, Energy and 
Agriculture Bureau. Voluntary Principles on Security is in the 
Democracy Bureau. If you're going to make change within a 
country, it's going to be at the head-of-state level, 
especially in Africa and developing countries. It's where all 
the policy is made. And there's nobody in the economics and 
business office that's going to get a meeting with a head of 
state of any of these countries.
    The issue is this: When our President or when our Secretary 
of State talks to these countries, is this on their agenda or 
not? Right now it's not. So it's a failure of organization, but 
it's also a failure of policy focus. Right now we don't see the 
problem as an integrated whole. There is foreign policy and 
there's energy and we don't mix them together.
    That part you can't fix with a wiring diagram. That's got 
to be a change in consciousness and strategy and policy. 
Actually, one of the recommendations I didn't talk about in my 
oral testimony is we might commission a national intelligence 
estimate on energy security in Africa or worldwide, because 
it's a way that people will see the risks of governance and 
transparency and supply. By having an estimate, you can put 
that on their table and it will get the attention of all the 
policymakers. That's something that the Congress might be able 
to motivate.
    Senator Feingold. Thank you for that suggestion, Mr. 
Goldwyn.
    Senator Isakson.
    Senator Isakson. Following up on that point, before you 
asked that question and he answered, I was getting ready to 
address the question about lost influence. But let me go to 
this disaggregated responsibility. I think that's a correct 
statement, that there is not as much coordination as we need 
between agencies dealing with Africa.
    But I would take issue with the statement you made about 
we've lost influence in Africa. I'm not an expert. I've only 
been on this subcommittee for a year and a half. But it seems 
like I can't remember a time when the United States has 
invested more or spent more, or had more of an emphasis in 
Africa, in my lifetime than we have over the past 8 to 10 
years, from PEPFAR to engagement with the African Continent to 
AFRICOM and stuff like that.
    So I just wanted you to elaborate a little further on this 
recent lost influence in Africa that we have.
    Mr. Goldwyn. Thank you for the question, Senator. There's 
no question the United States has a lot of engagement in 
Africa, and our engagement in the health sector is really 
dramatic, and our engagement in counterterrorism and the Pan-
Sahel Initiative, or now the Trans-Saharan Counterterrorism 
Initiative (TSCTI), is impressive also.
    But we have a lot of competition now that we didn't have a 
decade ago. We not only have competition from the Europeans, 
but China and Africa. There are now hundreds of companies in 
the upstream in Africa. The wealth has changed the calculus 
also. There was a time a decade ago when an offer of trade or 
an offer of aid or debt relief would give the United States 
traction with these governments. They needed to listen to us 
because their political survival was dependent on their 
relationship with the United States. But with these incredible 
revenues right now, they can borrow in the capital markets or 
they can get a loan from China, and they don't need our debt 
relief and they don't need our aid, and the areas where we want 
to give aid, like civil society, is not an area that's top of 
their agenda anyway.
    So our ability to basically use pressure and influence to 
change their behavior has evaporated with the competition and 
the wealth, but also with the disengagement. Take Angola for 
example: One school is they're bad, don't talk to them. But the 
problem when you don't talk to them, when the Assistant 
Secretary of State for Africa goes there once every 4 years, is 
they don't really care a whole lot about what we think. They 
have no stake in the relationship.
    That's why I think we can recover that by more engagement. 
On the key countries--Angola, Nigeria, Equatorial Guinea--we 
now engage and we have shown some results for that. But a lot 
of these countries, we don't really talk to, and it's hard to 
have influence without that relationship.
    Senator Isakson. On that point, Equatorial Guinea, Obiang 
just released those 34 political prisoners that he'd had, that 
we've been insisting on for some time, which was a move in the 
right direction on the human rights side. I think the State 
Department, at least in the engagement I've had with them, has 
worked very hard on promoting exactly that type of behavior, 
and finally raised enough pressure to where he did it. So that 
was a good move by them.
    Mr. Taylor, what is Public Witness? Is that the name?
    Mr. Taylor. I'm sorry? Could you repeat that?
    Senator Isakson. What is Global Witness?
    Mr. Taylor. Global Witness.
    Senator Isakson. Tell me a little bit about what Global 
Witness does.
    Mr. Taylor. Global Witness is a nongovernmental 
organization. We have a base in London, we have an office here. 
Some of my colleagues are here with me. We're an organization 
that has spent since its inception in the early 1990s its time 
looking at the link between natural resources and conflict and 
all the various facilitating factors around that. So our 
interest has been the role of middlepeople, the key actors, 
companies associated or not, the various resources and so on, 
the trade mechanisms and pathways.
    Part of what we do is investigative, so we do also 
undercover investigation work. Some of it's normal, everyday 
type of research that anyone else might do. We compile our 
information together in reports where we present our findings, 
which are the findings of people on the ground, and then we 
basically visit wherever appropriate, whichever countries are 
appropriate, to seek positive change. Hence our involvement in 
processes like EITI, like the Kimberley process, and so on.
    Senator Isakson. Well, I read your testimony, which I found 
to be very informative, I might point out. You made a comment 
in your verbal comments about this needing to be a process of 
best performance, not only by the African country but also by 
the company participants. I read in your printed statement that 
recent testimony by Mr. Stanley pleading guilty to a $180 
million payment to one of the governments. I've forgot which 
one it was. That I guess is the type of company participation 
you're talking about.
    Is that the exception or is that the rule in Africa right 
now with American companies?
    Mr. Taylor. I suppose I've looked at this more from an 
international perspective.
    Senator Isakson. Well then, international.
    Mr. Taylor. But that of course involves American companies. 
So I think that the truth of the matter is that we've looked in 
lots of countries outside of Africa as well, Central Asian, 
former Soviet Union Republics as well, and the pattern seems to 
be that it really depends on the players on the ground and the 
extent to which there is or isn't governance and who the key 
players are in the country.
    So you will find in some countries some companies have done 
all sorts of questionable things, and yet you will also find 
the same companies being almost champions of the good in 
neighboring countries. So really, it's not a clearcut, 
homogeneous type of effect. So we know of companies, for 
example, in Angola that were shipping arms to the government 
side through invisible subsidiaries that didn't exist on any 
formal books, based in tax havens, during the last stage of the 
fourth stage of the Angolan civil war. What on Earth is an oil 
company shipping arms for?
    Again, that's not uniform and it didn't just apply to a 
certain company from Western Europe who doesn't exist any more. 
I can elaborate a bit more if you'd like. But there were more 
than just the obvious ones, the worst players involved in this 
type of practice.
    Senator Isakson. So from that answer I take it it's more 
what the countries proposed, rather than a culture of doing 
business of just offering bribes going in; is that correct?
    Mr. Taylor. I think the context of the country concerned 
influences the type of behavior that happens. But I think, just 
as within governments you meet people who are very effective 
and you also meet people who aren't very effective, I think the 
same applies in companies. So it really depends who's on the 
ground in the company. Perhaps had a different executive been 
involved in that particular country, they might have chosen a 
different pathway. Who knows?
    What we see is what we've pulled up and found in the course 
of digging around, sometimes for a long time. And you get a 
very clear picture of who's been doing what and how they've 
been doing it.
    It's for that reason I think that, whilst the EITI 
addresses this kind of bringing governments in and I'm very 
keen to stress that I think it needs to be a good club, a club 
of the good, rather than a club of the bad who've been forced 
to join--hence I think the United States and Britain and so on 
should also participate--it's not enough, because there are 
some countries that will never join, like Angola we think--why 
would Dos Santos Inc. want to make itself accountable? The 
answer is it doesn't. And at the same time, different companies 
have been involved. So it's necessary to bring in elements of 
rigor around the accountability for the way in which the 
companies themselves have behaved.
    Senator Isakson. Thank you very much.
    Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman.
    Let me once again just take up the point that you made, 
Senator Isakson. That is that the three witnesses we have 
before us now have written outstanding papers and offered 
insights I believe that are very, very helpful, and we 
appreciate that. I want to pick up particularly one of these 
insights about the organization of our own government. You 
dwelt on that, Mr. Goldwyn, in pointing out the dilemmas of who 
in our government has some responsibility for some facet of the 
energy problem we're discussing this morning.
    But the central point that some of us have tried to make in 
the committee, even offered legislation--and Chairman Biden has 
been very active in this area, in addition to Chairman 
Feingold, and I've tried to participate in making the point to 
Secretary Rice and to others that we really have to have an 
Energy Secretary or a coordinator, someone of stature, who is 
able from the security standpoint to make a difference.
    Now, there have been some modest attempts made in the 
Department in that direction, which we appreciate, and I pay 
full tribute to those who have those responsibilities. But as 
you say, they do not appear to be able to get items onto the 
President's agenda or maybe even the Secretary's agenda, as 
there are face to face meetings with other persons at the 
highest levels, and that is of the essence right now. There may 
come a time in which the fabric of diplomacy of the countries 
that we're discussing in Africa permits assistant secretaries 
or others on down to have these sorts of dialogue and make a 
difference, but not at the present time, which requires higher 
level actors.
    So I am hopeful that our persistence and yours from the 
outside will be helpful, because this is an essential point for 
our government right now in discussing Africa or, for that 
matter, in conversations with people in Russia, for the same 
reason.
    Well, let me just follow through by saying that in Angola, 
and we spent I think quality time on that today, the chairman 
has mentioned his meeting President Dos Santos many years ago. 
After several years, then-Secretary Reuben Jeffrey visited 
Angola last summer, which was in fact the first high-level 
contact by an American official in the country. Our staff 
members who are behind me today visited this summer, and I 
think since the chairman's visit were the first persons 
representing Congress in any way.
    It may be that our officials feel Angola is inhospitable, 
but nevertheless it is a very important country. We often talk 
about the need for diplomacy with countries with whom our 
relations either need repair, strengthening, or are virtually 
nonexistent, and this would appear to be a good example. It 
arises in part because it's an important country strategically 
in Africa, but also because of the energy focus that we have 
this morning and the implications for others, not only in 
Angola but outside of the country in this respect.
    So I appreciate your pinpointing the lack of contact and 
observation. Even if we got right our organization, whoever the 
Secretary of Energy was and the State Department would need to 
go to Angola, or someone representing him or her at that level, 
at some point.
    Let me just pick up a third point. You've mentioned the 
Norwegian model, perhaps inappropriate for many of the African 
states, and I accept that point. But I can remember a trip to 
Azerbaijan and a visit with President Aleyev in 2005, at the 
very beginning of the first trickling of oil from the Baku 
platform of BP starting its headway through Georgia on to 
Chehan, Turkey. The question before that country at that point 
was just the one we're discussing today, What degree of 
transparency? Really, not that Baku had not had an oil history 
for decades, but this was a new beginning, and obviously the 
predictions of the change of the GNP for Azerbaijan were at the 
order of 50 to 100 percent a year for the better part of the 
next 5 as projected.
    When I asked President Aleyev the question, he cited the 
Norwegian model. Without your knowledge about this, I said: 
That's a good model; I appreciate that; I'm going to report 
that to everybody in the United States.
    Now, in fairness, I've seen President Aleyev in each 
subsequent year, 2006, 2007, 2008, just this summer. He's 
followed through. Now, it's not exactly the Norwegian model, 
but still there are some very bright young Azeris, economists, 
who do make transparent the amount of money coming into the 
country and the various levels that are going into the 
government now, because the next point then was, what about the 
rural roads in Azerbaijan or the schools for the people that 
are not in Baku, or the cleanup of the mess of the oil 
business, say for 7 decades, or so forth. And each time the 
President has pledged that they're doing it, and he's begun to 
produce figures that are doing this.
    Now, I cite this simply because conversations and 
visitations of this sort are I believe helpful. Not that I was 
that persuasive, but somebody at least kept asking, kept 
reporting. He knew that it was being reported. He was proud 
really of the reports. We reported to the people of Azerbaijan 
in press conferences within the country what was occurring, 
with the full knowledge of the President, not as a covert 
agent.
    It's a very small country, but a huge amount of money, and 
it continues to grow and will, with 1 percent of all the oil in 
the world going through that pipeline today. And it all starts 
there, with huge royalties coming in, plus the whole strategic 
problem of the NABUCO pipeline situation.
    Now, this is an interesting model for African countries to 
take a look at. They have many more people, much more diverse 
population and governance situations, but it's not unique in 
the world today to do it right and at least to make some 
headway, and to pay credit internationally to people who do 
this sort of thing. Our senior officials visiting can do that.
    So I take advantage of this hearing and your presence to 
make these points because I think they may be important for our 
diplomacy, and I congratulate you again on your scholarship 
which informs all of us.
    Thank you, Mr. Chairman.
    Senator Feingold. Thank you, Senator Lugar.
    I'll just have a few more questions as we get near the end 
of the hearing. Back to Nigeria again, Mr. Goldwyn, Nigeria is 
so critical in terms of our energy policy, as Senator Lugar was 
just talking about. Yet our engagement in the Niger Delta under 
this administration has been minimal. How specifically can the 
next administration reengage and what are the first steps, and 
what would be the role for Congress in this?
    Mr. Goldwyn. Thank you for the question. Just one word for 
Senator Lugar, I just have to say: Thanks to you for your 
leadership on this. Clearly we wouldn't have a Caspian 
ambassador-at-large if it wasn't for your legislation. The 
Western Hemisphere. You've advocated this issue in all regions 
of the world, and it is an example of how it can work. So thank 
you and your staff for your leadership.
    On Nigeria, we have to be humble about Nigeria because the 
core of the problem there is a lack of political legitimacy. 
You have a President whose candidacy is still not certain 
because it's under appeal. He doesn't have control over the 
Governors. A lot of the Governors may have control over him. 
You have a Federal system with limited powers over the regions.
    But I think there are a number of ways in which the United 
States can help and I think we need to work first with the 
European countries and perhaps even with China on it. First is 
to use the power of the Presidency, our President and Secretary 
of State, to communicate to Nigeria, as we have not 
significantly done over the last 6 years, that this is an 
international problem. Crime is spreading to neighboring 
countries. Destabilization is happening to neighboring 
countries. Nigeria's own democracy is at risk. So part of that 
is to keep the pressure on to deal with this problem.
    Deal with this problem has two aspects. One aspect of that 
is development and the other aspect of it is political 
engagement. On development, I think if we are willing to be 
quiet about it and to talk to this Niger Delta ministry, to 
talk to others, about how they can spend the significant sums 
available for development to make a difference in the Delta I 
think that can be helpful, because there's been a lot of money 
washing around, as has been said here. It's absolutely true. 
But whether that's roads, job creation, they've got to have 
change on the ground.
    I think we do have expertise, we this community here, the 
development community, but that has to be quiet and not in the 
newspapers and not public, because if it looks like external 
pressure they're going to push back on it.
    The second thing is I think we do have to have a quiet 
conversation with the Nigerians that it isn't just their 
problem diplomatically. There's strong resistance, especially 
to the former colonial powers, to go in and tell them how to do 
their business. But the fact is that by having a contact 
group--United States, European Union, the Chinese, if they're 
willing to be part of it--that you can give the groups in the 
Niger Delta, the militants in the Niger Delta, the sense that 
there is an external watch going on over whatever political 
concord is going on. We're not going to be guarantors per se in 
terms of military, but we can be helpful.
    I think the third thing we have to do is keep shining a 
light on the transparency side and on the crime side. I think 
we, through a previous CSIS study, we figured out that for $100 
million you could put basically a ship with radar capability 
into the river delta and some fast boats and you could 
basically shut off bunkering from the Niger Delta through two 
river streams.
    The Nigerians didn't want to take us up on that offer, but 
I think we've got to keep putting that in their face because 
it's a way to say, we can show you how it's done and then you 
can buy this yourself. So I think there's a security strategy 
as well.
    But I think the last thing I would say is something we 
didn't do and we need to do in the future is to acknowledge 
progress where it has been made. We never complimented, at the 
Presidential or Secretary of State level, the Nigerians for 
doing Nigeria EITI, for doing the greatest, most intrusive 
audit ever done under EITI principles, for publishing what was 
paid in the States and everyplace else. We've just sort of hit 
them when they're down, but we never said this is great. And 
they need that for the political return for doing this kind of 
work, to give them a political incentive to do it. So I think 
we need to find a way to say ``good job'' where we can.
    Senator Feingold. I think that's a really good point. I 
remember when President Obisanjo wanted to think about going 
for another term and Parliament said no. I went out of my way 
to say, this was a great thing that you stood firm on this. 
It's very important that you acknowledge the positive. I 
appreciate that comment.
    Mr. Taylor, it looks like you wanted to comment on that 
point, and then after you do that I'd like you to go into a 
little bit more detail about the importance of civil society in 
African countries, the critical role they play in ensuring 
accountability within extractive industries. In your 
experience, how can civil society in Africa be further 
supported to play a more active watchdog role?
    Mr. Taylor. Thank you, Mr. Chairman. It's just a small 
point. I don't disagree with what David was just saying in 
terms of the Niger Delta and bunkering, but this might be of 
interest and I think it requires a bit further checking because 
I would sort of solidly support such an approach. But a number 
of years ago we were informed that Shell had a technological 
capacity to essentially--this might be the wrong terminology, 
but essentially fingerprint oil from certain locations. 
Obviously, you need a reliable database from the various 
places.
    The reason I want to raise this is we're talking a lot of 
oil goes disappearing net. You hear the figures 300,000 to \1/
2\ million barrels per day can just go; a vast quantity anyway. 
My point really is you can't hide that stuff. Somebody in some 
refineries are getting it.
    At the time of the conversation I'm referring to, there was 
reference to a refinery--I don't know which one--in Texas and 
another one in Rotterdam. So wouldn't it be interesting from 
the enforcement point of view to check whether certain supplies 
of oil into various refineries that maybe one could sequence 
are actually receiving this stuff, because it's basically 
stolen goods.
    At the time there was a refinery down the coast, I think 
operated by TOTAL, in Cote d'Ivoire that took only 30,000 
barrels and they discovered that it was taking bunkered oil. 
What the government did I understand was to short out the 
bunkerers by basically formulating a proper contract so the 
money went to the state instead of the bunkerers. It seems to 
me that would be a very cost effective, very nonviolent way of 
dealing with what is otherwise a difficult thing when it comes 
to enforcement with lots of people with guns. It just seems I'd 
just like to commend that as something worth looking into.
    In terms of civil society itself, it's something I really 
wanted to emphasize. We've encountered a number of problems in 
different countries, ranging from Congo-Brazzaville, where our 
colleagues there were judicially harassed for nearly a year, to 
Gabon, where civil society organizations were effectively 
closed down whilst Gabon was a board member of EITI.
    One aspect I think of a heightened effort by the U.S. 
Government, but also other participants, is to jump on this 
stuff, think to create the culture where a country like Gabon 
wouldn't even consider closing down civil society whilst a 
board member. I find it quite unconscionable that they even 
thought that was a goer. So I think to do something to address 
that.
    We desperately need to have civil society empowered, 
because this is not an audit process where you put the file on 
the shelf; this is about civil society holding government 
accountable. If, as we referred to EG earlier, 34 political 
prisoners released, well, great. But they still win 99 percent 
of the vote, there's no opposition press, there isn't really a 
civil society. We need to do something about that. Otherwise, 
frankly, it becomes a bland auditing process and won't deliver.
    Senator Feingold. Thank you, Mr. Taylor.
    I thank the whole panel. It's an excellent panel. I know 
all three Senators involved feel that way. I particularly want 
to thank my colleagues for their very serious participation in 
this entire hearing.
    I'm going to close the hearing. We're going to leave the 
record open until Friday, without objection. With that, the 
hearing is concluded.
    [Whereupon, at 11:27 a.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


 Prepared Statement Hon. Charles E. Schumer, U.S. Senator From New York

    Chairman Feingold, Ranking Member Isakson, and the other members of 
the subcommittee, thank you for holding this hearing on this important 
subject. I am pleased that the committee is looking for ways to address 
the resource curse and to promote policies that will help countries 
with abundant natural resources develop economic development and 
political stability. I strongly believe that utilized properly, natural 
resources can play a positive role for economic and political 
development in host countries. However, declining economic growth, 
social inequality, political repression, domestic violence, and 
pervasive corruption are more often than not the outcome when 
developing nations tap into their natural resources.
    One of the most serious problems with the operation of extractive 
industries in developing countries is the lack of transparency in the 
accounting of revenue and profit from extractive industry. This lack of 
transparency often gives way to endemic corruption, creating ``rentier 
states,'' with weak government institutions that use these revenues to 
keep themselves in power, and often fall prey to powerful outside 
interests. As a result, citizens of these countries see little, if any 
benefit, from their own natural resources. More often than not, they do 
experience all the negative consequences from the extraction of natural 
resources. And corruption within host governments increases the 
potential for global economic and political instability in the form of 
civil unrest, state failure, terrorism, and economic and humanitarian 
crises.
    As a result, resource-rich developing nations rank at the bottom of 
development indices, especially with regard to economic growth, 
transparency, and stability. Countries such as Nigeria and Angola are 
clear examples of this; their governments have consistently been bad 
stewards of their countries' natural resources. Instead of generating 
wealth and political stability, the income generated by natural-
resource extraction creates incentives and opportunities for 
corruption, and finances extra-legal activities, such as militias used 
for domestic oppression.
    Currently, there are no rules in place that explicitly require any 
disclosure of the payments that host governments receive from 
international oil or mining companies that operate in their country. 
All too often, the international companies who engage in natural-
resource extraction in these countries pay significant fees to the host 
governments, as a prerequisite of even being able to operate within 
their borders. As a result, it is difficult, if not impossible, to 
calculate the revenue streams to a government from crude oil, mining, 
and/or natural gas extraction, with any accuracy. This lack of 
accountability allows the host government to abscond with the revenues 
that should be shared equally by all citizens. Often, government 
officials will use this wealth for their own personal enrichment and to 
secure their hold on power, allowing them continued access to the 
wealth of the state.
    It is clear that without a financial accountability on the part of 
the host government, the extraction of natural resources will continue 
to perpetuate poverty and hinder economic growth and political 
stability in developing countries. In an effort to ensure that these 
payments to host governments are not being channeled to corrupt 
officials or being used to fund political violence, I have introduced 
the Extractive Industries Transparency Disclosure Act of 2008.
    This bill would require all companies registered with the 
Securities and Exchange Commission (SEC) to annually publish any 
payment made to foreign governments for the extraction of natural 
resources, including oil, gas, metal ores, coal, industrial materials, 
and minerals. The legislation also directs the SEC to make the 
information it receives publicly available on its Web site so that the 
information is available to citizens of the host countries, nonprofit 
organizations and other groups working in the host countries, and to 
corporate shareholders.
    The cost to the SEC of implementing and maintaining this 
information would be minimal. According to Global Witness, 14 of the 
world's 15 largest publicly traded oil and gas companies would be 
covered by this legislation. This will help to ensure that a level 
playing field for all companies is maintained. My legislation would 
also protect foreign companies from giving bribes or other types of 
illicit payments to host governments, as any and all payments made 
would have to be publicly disclosed.
    According to the Publish What You Pay Coalition, 25 of the world's 
33 oil rich countries have ``low'' or ``medium'' UNDP human development 
ratings; this bill will help ensure that the benefits provided by 
natural resources in these nations are directed to those most in need. 
Public disclosure of these payments will allow ordinary citizens and 
government accountability groups to hold governments liable for money 
stolen, misspent, or squandered. The transparency provided by this 
legislation is a critical step in fighting corruption and the 
instability it fosters in resource rich developing nations around the 
world.
    Instability in resource-rich is more than a development problem--it 
directly impacts our national security, as well. In addition to its 
current instability due to political and ethnic fighting, Iraq is also 
at risk of the resource curse. Much of the current fighting is centered 
over the shift of power between the Sunni Arabs and the Shia Arabs. 
This fighting will be exacerbated once Iraq's oil and gas industry 
resumes its previous production levels, given the historically high 
price of crude oil. Even without returning to their preinvasion 
production levels, Iraq is on pace to generate roughly $100 billion in 
profit from its oil production in 2007 and 2008.
    Unfortunately, the Iraqi Government has yet to pass a revenue-
sharing law to ensure that Iraq's oil resources are shared in an 
equitable and transparent manner and that all current and future 
revenues equally benefit Sunni Arabs, Shia Arabs, Kurds, and other 
Iraqi citizens. Failure to pass such a law will make Iraq even more 
dangerous and unstable, a disastrous outcome for Iraq, the region, our 
servicemembers fighting in Iraq, and our national security.
    I believe that the State Department needs to enumerate a clear 
policy that encourages the Iraqi Government to develop quickly an 
effective framework for national hydrocarbon legislation that includes 
all interested parties. I also believe that the State Department should 
be working to ensure that any contracts signed for both technical 
service and oil field development do not circumvent this process and 
thusly undermine it.
    Chairman Feingold and Ranking Member Isakson, thank you again for 
holding a hearing on this important topic that not only affects 
economic growth, but our national security. I look forward to future 
opportunities to advance my legislation and to make progress on this 
issue in Iraq and other developing countries.
                                 ______


                                 
                              
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