The energy transition is driving demand for minerals needed for low-carbon technologies, such as solar panels, wind turbines and electric vehicles. This demand could grow by up to 900 percent for some minerals over the next two decades, yet technological innovations also make these projections uncertain. According a new report from the Extractive Industries Transparency Initiative (EITI), produced by the University of Queensland, EITI implementing countries will likely play a substantial role in satisfying growing demand.

Government officials in many mineral-rich countries are excited about the mining sector’s economic promise. They are hoping for new investments that will bring in revenues, jobs and opportunities for local businesses.

But the prospects for converting natural resource wealth into sustainable development outcomes hinge on good governance (addressed in this new report from the Natural Resource Governance Institute [NRGI]). History points to the corruption and public finance risks that a mining boom can bring, including bribery in licensing, inadequate environmental and social assessments and lost revenues due to weak tax collection. In some cases, the mere anticipation of an uptick in investment could destabilize economies in mineral-rich countries.

Corruption in licensing and procurement

The business opportunities associated with a mining boom could be vulnerable to corruption. One key risk relates to the award of mining licenses. In many countries, authorities rush to approve new mines, with governments seeking to speed licensing processes. Peru, for example, has streamlined community consultations, and Brazil has introduced a policy to expedite approvals for mines of strategic importance. As flurries of applications stretch the capacities of government departments, companies may be increasingly tempted to offer bribes to speed up approvals, especially in a highly speculative context characterized by geopolitical competition between economic superpowers to secure transition mineral supply.

Officials may also feel pressure to cut corners and bypass due diligence checks, increasing the risk of politically connected (or/and unqualified) companies acquiring mining rights, or of weak or manipulated socio-environmental assessments. This can be particularly problematic since some transition minerals are located in unmined, environmentally fragile areas, in countries that are sensitive to environmental and social impacts. For example, mining projects in the “lithium triangle”—which comprises Argentina, Chile and Bolivia—could further strain the region’s limited water resources.

Similarly, the procurement of goods and services by mining companies can be vulnerable to corruption. Research by the OECD has found this to be a key risk area in the mining sector.

Transparency and multi-stakeholder dialogue can help to mitigate these risks. Governments should clearly justify any “fast-tracked” awards processes and commit sufficient time and resources to due diligence checks. Mining companies can support anti-corruption efforts through commitments to strong business integrity practices and due diligence processes across their business units. The EITI’s expectations for supporting companies, to which many of the world’s largest mining companies are committed, provides a starting point.

Uncertainty around public finances

Even if a country has abundant mineral reserves, weak governance and a lack of transparency can foil potential investment. For example, countries may struggle to attract high-quality, responsible mining companies in the absence of robust, publicly available geological data. Yet only four EITI implementing countries—Colombia, Indonesia, Kazakhstan and Mongolia—have adopted the CRIRSCO good practice guidance for public reporting of exploration results, mineral resources and mineral reserves.

Even if the sector grows, producing countries and investors will not be in a position to take fully informed decisions because of the uncertainty around economic prospects. Price volatility may lead to unpredictable revenue flows and macroeconomic planning challenges. Governments may collect less revenue than officials anticipate as a result of opaque tax structuring by companies operating across transition mineral value chains. In 2018, Chile had to create a committee to supervise lithium contracts after allegations of transfer pricing abuse.

Governments of resource-rich countries should promote transparency and accountability of the sector to mitigate these risks and realize their mining potential. They should publish more detailed information on the reserves and economic potential of transition minerals; strengthen oversight of companies’ revenue flows and financial relationships; and promote policies that support long-term economic planning and transparent decision-making.

Opacity in commodity trading and state participation

As resource-rich countries seek to take advantage of global competition for transition minerals, some are expanding the role of state-owned enterprises (SOEs) in the mining sector. For example, in the Democratic Republic of the Congo, the state recently established the Entreprise Générale du Cobalt (EGC) to manage all artisanally mined cobalt. In Indonesia, SOEs manage trade of tin, nickel, bauxite and other minerals.

Lack of transparency of revenue flows between governments and SOEs is a known risk, especially where SOEs are involved in the sale of the state’s share of production. While the oil and gas sector has been particularly vulnerable to corruption in commodity trading, the mining sector could face similar risks as governments increasingly involve SOEs to seize opportunities coming from growing demand for transition minerals.

For countries that foresee a strong role for SOEs, it is important that authorities identify associated governance and corruption risks and institute measures for mitigation, both for partners of SOEs and the SOEs themselves. Like companies in the private sector, there is no reason why SOEs cannot commit to high integrity standards across their business units and establish processes for risk assessments and due diligence checks, including when dealing with commodity traders.

Based on past experiences, only a well-managed mining sector will contribute to sustainable development in mineral-rich countries. Without high governance safeguards and real anti-corruption efforts, countries will lose out on potential revenues, deter investment, miss the opportunity to diversify their economies and increase risks of negative socio-environmental impacts. The result will be a mining boom that fails to deliver on its economic promises and an energy transition that may not advance global decarbonization at the speed needed – or advance it at the expense of the citizens of mineral-rich countries.  

This post appears also on the EITI website.