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Bursting the bubble of natural resource expectations

Source: Thomson Reuters Foundation - Thu, 19 Jun 2014 05:40 GMT
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After oil was found off Ghana’s southwest coast in 2007, John Atta Mills, former president of Ghana is said to have proclaimed, “We will use those resources so that you will be able to do whatever you want, and indeed, you can live in reasonable comfort.”

Now imagine that you’re an impoverished Ghanaian with no running water or electricity and every day is a struggle. How would you feel after hearing your president say that? Somewhere between hopeful and ecstatic is probably the answer, and therein lies the problem.

When expectations are inflated, whether purposefully or by mistake, the inevitable bursting of the bubble can lead to cynicism, anger and even conflict.

Governments are likely to make grand predictions about the wealth that newly discovered natural resources may bring because it a) gives them the excuse to spend money that they do not have on the promise of a better future; b) creates a sense of optimism in the country; and c) allows them to bask in the glory of having been in power when natural resources were found and their country’s economy prospered.

At the Natural Resource Governance Institute (NRGI) conference at the University of Oxford last week, the issue of managing expectations – and not making promises that can’t be kept – was the subject of a panel discussion.

While government revenue from natural resources comes in many forms, the majority comes from income tax, but no income tax can be assessed on an extractive company until it makes a profit. Given the huge amount of upfront investment required to start the drilling and extracting process, it could take well over a decade to turn a profit and start the flow of serious money into government coffers.

DON’T BELIEVE THE HYPE

Unfortunately, if governments hype natural resource discoveries for their own ends, companies often are guilty of doing so as well.

While a company may be cautious when talking to media and government about its find, it may use an entirely different tone when talking to investors. The company won’t lie (that’s illegal), but it may give an overly rosy picture.

However, if citizens get their information from company financial disclosures, they, too, could be sucked into disseminating an overly optimistic view of their country’s natural resource wealth.

The media are, in theory at least, meant to be objective voices of reason and can be a force for good if journalists are well trained and know the issues around natural resource governance. They can help to dampen expectations by explaining the nuances of natural resource extraction in a way that a layperson can understand.

However, in a number of developing, resource-rich countries, journalists are not well trained, well paid or encouraged to dive deep into the issues which they cover. In those cases, the media can be a negative force that simply amplifies the government’s message and helps to enlarge the expectation bubble.

One panellist at the NRGI conference gave an example of how, while he was based in Liberia, a local newspaper published as fact that a major U.S. oil company had paid the Liberian government $14 billion to secure the rights to an oil field. Given that Liberia had a 2012 Gross Domestic Product (GDP) of $1.77 billion, the $14 billion figure was understandably front page news. Where had this money gone, had someone in government stolen it, Liberians wanted to know? The country was, for a short time at least, up in arms.

It later transpired that a representative from the oil company had told journalists that over time, the newly found oil could bring in as much as $14 billion to the Liberian government in taxes, royalties and bonuses.

While the misunderstanding ended up being a harmless mistake, civil wars have been started by less.

Disclaimer: Both Thomson Reuters Foundation and Natural Resource Governance Institute provide training to journalists in developing countries on covering the extractive industry.

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