EITI Conference, February 2016
Some societies learn from crises, other
Financial
Crisis,
however,
average
societies are destined to repeat them. In an
commodity prices have halved. The
era of low commodity prices, now is the
commodity super-cycle is defined as
time for the Extractive Industry (EI) to learn
tandem movements in commodities prices
and say never again. In order for EITI
over an extended time period. Erten and
nations to move forward, attitudinal
Ocampo (2012) argue that analysis of real
changes regarding short termism are
commodity prices over the last century
demanded. Stakeholders must transition
gives evidence for four super-cycles in non-
from a short term to long term focus to
fuel commodities. The 2008 financial crisis
match the nature of the EI. In the following
marks the end of the current super cycle
brief, we will examine some of the
and has ushered in a new climate of low
challenges that are exacerbated by short
and falling commodity prices. Most
termism and focus on the role the EITI can
forecasters do not expect a strong revival
play in facilitating this attitudinal change.
in values in the next few years, meaning
now marks the perfect opportunity to
The commodity super-cycle
ensure vast improvement is made for the
next super-cycle. This foresight will ensure
The prices of the world’s most important
that when the next super-cycle ends, EITI
commodities tripled from 1999 to 2008,
nations will have learnt from the past.
with the price of oil increasing by a factor
of 8 (Gangelhoff, 2015). Since the Global
EITI Conference, February 2016
Governance Challenges under Commodity
governments often find themselves in a
Price Volatility
crisis which damages every sector of the
country.
Governance in an era of low commodity
prices is high on the agenda at the 7th
Existing challenges in resource governance
global conference in Lima, Peru. The
are further exacerbated by the prevalence
budgets of many EITI compliant and
of a ‘race to the bottom’ mentality. This is
candidate nations are highly sensitive to
where nations expand production to
fluctuations in commodity prices and, as
maintain
such, good governance is required to
incomes when per unit income falls. As a
protect against inevitable downturns in
result, a situation of oversupply in markets
prices.
is created which intensifies downward
their
nominal
extractives
pressure on prices.
Relatively few nations have been able to
transform their oil, mineral and gas wealth
Under this mentality, advancements in
into sustainable economic development. In
transparency
times of high commodity prices resource
information may come under threat. Just
rich
increased
as governments come under pressure to
revenue from extractives. During these
raise royalties and taxes in periods of high
periods governments are often tempted to
commodity prices, calls for de-regulation
introduce new legislation to further
grow when prices decrease. This is a
increase their share in extractives wealth
dangerous attitude. By their very nature
and typically channel this wealth into
the extractive sectors require a long-term
enormous
programmes
outlook to minimise wastage and deliver
often part financed by borrowing. When
real results to all stakeholder groups
the boom turns to bust government
invested in their extraction.
countries
experience
consumption
and
access
to
public
revenues from extractives are hit hard.
Without a long term investment plan in
The long term commitment of mining –
place
short term attitudes in a long term market
during
the
‘boom’
years
EITI Conference, February 2016
The development of an extractive project
The EITI can support this change in
is usually characterized by a sequence of
attitudes by engaging stakeholders from
stages, from exploration to rehabilitation,
civil society, government and industry to
which can last for up to 40 years (Clo,
open the discussion into long term
2000).
resource management.
At
the
beginning,
there
is
exploration, where potential projects are
mapped and their economic viability
Smoothening Commodity Cycles through
assessed. Most exploration contracts last 3
Fiscal regimes
- 5 years.
Strong fiscal governance in terms of a solid
Combining cost-benefit analysis and a
macroeconomic
standard discounted cash flow model, a
embedded in law is first and foremost very
decision of viability will be made and a
important. Rising commodity prices during
mining licence must be obtained. In Africa,
the upturn in the super-cycle can often
this is a process which takes 2-3 years on
lead
average
Lastly
overspending. Not only are corporations at
construction of the physical mining site will
risk to over-investment, but so too are
take place, which, depending on the
governments. When prices increase so do
accessibility of the resource can take 2-6
profits for corporations and hence tax
years.
revenues for governments will rise.
(Gaijo
et
al,
2012).
to
framework
overconfidence
which
and
is
hence
However, governments that are most
The extractive process is therefore arduous
successful have successfully countered
and is highly susceptible to risk along the
fiscal revenue volatility and remained
way. In an industry that is long term in
prudent despite expected increases in
infrastructure, key decisions must not be
commodity prices.
dictated by short term market movements.
Long term planning is thus vital and
Prudent spending: Sovereign
attitudes require a dramatic change from
funds
short termism to long term sustainability.
wealth
EITI Conference, February 2016
The first country to be awarded EITI
Aside from reducing over-expenditure
compliant status, Azerbaijan, provides an
when prices are high, smarter use of
excellent example of fiscal prudence and
government spending must be encouraged
the country’s achievements have been
at all opportunities. Political elections are
noted at the EITI conference. The country
often a source of large spikes in
founded a sovereign wealth fund for its oil
expenditure. In elections, there is an
industry in 1999 in order to accumulate
incentive for governments to utilise
money from resource extraction and invest
expenditure projects to curry favour with
in other assets. This foresighted approach
the general public regardless of returns on
boasts a 12% debt to GDP ratio at present
investment. This again highlights the short
- far greater than other resource rich
term attitudes that are such a challenge in
nations which are heavily in debt due to
the industry. Remaining politically resolute
consecutive large fiscal deficits financed
must be a key part of the fiscal framework
through hedging on commodity prices
and the EITI can help ensure this through
during the super-cycle.
its reporting. In this sense, transparency
must not be used to vilify governments,
The best time to make these policies is
rather it should be used to help better
now. The current super-cycle is over, and
them and build a more informed society.
now is the time to put in place multi-
This positive agenda is vital in helping
stakeholder partnerships which, crucially,
produce smarter fiscal rulings regarding
have a long term focus on natural resource
spending.
governance. The impacts of this will enable
EI nations to harness the opportunities of
Base Erosion and Profit Shifting (BEPS)
the next super-cycle and, when prices start
to depress again, demonstrate greater
Lastly, some big name global companies
fiscal reliance.
are not paying a fair amount of tax. It is
estimated at present that international
Smarter spending: Using transparency
governments
are
losing
somewhere
between $100 - $240 million USD annually
EITI Conference, February 2016
because of BEPS, meaning fundamental
natural resource management to reduce
changes in tax rules are therefore required.
the prevalence of commodity price related
The EITI can play an important role in
crises which plague the developing world.
implementing
adopting
To ensure a better outcome for the next
country by country reporting of profits,
super-cycle in commodity prices, the time
sales and employee locations to help bring
to act for the EITI is now.
this
through
about fairer taxes. The EITI must recognise
the
need
Corporations
to
hold
in
Multi
resource
National
References
importing
countries equally accountable in delivering
Clo, A. 2000. Oil Economics and Policy, New
shared prosperity to Low Income Countries
York: Springer Science and Business Media
(LICs).
Erten B and Ocampo J 2012. Super cycles of
Conclusion
commodity prices since the mid 19th
century. Department of Economic and
The surge in commodity prices over the
Social Affairs Working Paper 110
past decade has played an instrumental
role in spurring faster growth in LICs.
Gajigo O , E Mutambatsere and G Ndiaye
However, the latest super-cycle has ended.
2012. “Gold Mining in Africa: Maximising
In this current era of lower prices, the EITI
Economic Returns for Countries”, Working
must play an active role in helping
Paper 147, African Development Bank,
countries improve their fiscal regimes. The
Tunis, Tunisia.
initiative must promote a positive agenda
that facilitates more prudent spending and
more thorough tax revenue collection.
Most importantly, the EITI must continue
to encourage the end of short-termism in
Gangelhoff, G 2015. The End of the
Commodity Super-cycle? Economics Brief :
USAID.