While testimony before the Committee addressed a wide range of topics, a number of witnesses focused on two sectors, financial services and natural resources, which are an important aspect of development in many countries. These two sectors are also ones where Canada has particular expertise, and where the Canadian private sector is heavily involved internationally. They are thus the subject of the two case studies that follow.

Financial Services for the Poor

The Committee received a significant amount of testimony during its hearings regarding the contribution that financial services provided by private sector actors and regulated by governments can make to development. Overall, witnesses argued that:

• Financial services are an important element in the alleviation of poverty and the integration of the poor into formal economies;
• Best practices have and are still emerging in the provision of microfinance; and
• While no “silver bullet” can ever address all the challenges associated with access to finance, technologies such as cell phones and “mobile wallets” can greatly reduce the financial and other costs of bank accounts and related transactions.

Given the strong reputation and global links of the Canadian financial sector, it is likely that it can play an increasingly important role in the provision of financial services to the poor in developing countries in the years to come.

The Government of Canada, for its part, has played a lead role over the decades in supporting the provision of microfinance services to the poor. Larry Reed of the Microcredit Summit Campaign and others underlined the important role that governments must continue to play in this area. He told the Committee that “The challenge, I think — especially from the government side, when it is investing — is to shape the market such that the incentives and the rules of the game are set up so that the public good for which the government was investing continues to happen, even as private sector players come in and begin to become the dominant funders in the market.”[189]

The Need for Financial Services

According to the World Bank, among the “key lessons” learned about the financial needs of the poor over the decades include the fact that, “Poor people, like everyone else, need permanent access to financial services.” It added that “access to micro-credit is not sufficient; the poor also need access to savings, insurance, and payment services.” [190]

Recent decades have seen a significant increase in the provision of such financial services. However, survey data released by the World Bank in April 2012 indicates that three quarters of the world’s poor — some 2.5 billion people — still do not have a bank account. While nearly two thirds of the “unbanked” cited poverty as the reason for their lack of an account, about a third also cited the costs or travel and other difficulties associated with such accounts.[191]

From Microcredit to Microfinance

'Microfinance' is the provision of loans and other financial services to the very poor. It is an important tool that has helped millions of poor people in developing countries — particularly women — gain more control over their finances and, therefore, their lives.

Modern microfinance gained prominence in Bangladesh, where the Grameen Bank founded by Muhammad Yunus in the early 1980s successfully and sustainably provided credit without collateral (microcredit) to the rural poor. As American microfinance expert David Roodman later explained, Muhammad Yunus “…was the first leader of the modern microcredit movement to operate in a relatively businesslike way: to mass-produce and charge the poor enough interest to cover most operating costs so that the bank could expand to serve more people.”[192] Both Muhammad Yunus and Grameen Bank were awarded the 2006 Nobel Peace prize in recognition of their work.[193]

While attention long focused on the provision of microcredit to the poor, the focus in recent years has increasingly moved to microfinance, which includes other important and related services such as savings and insurance. Representatives of Opportunity International Canada, for example, told the Committee of Opportunity International’s broader portfolio of work. It is a microfinance network that works with governments and non-governmental actors “to provide scalable, sustainable microfinance services, including loans, savings, training, insurance, and other financial services, to reach the lowest echelon of the economically active, with a focus on increasing their income, improving food security and access to education, and creating jobs.”[194]

The modern microfinance industry is an interesting and arguably unique combination of for-profit and not-for-profit actors. Larry Reed of the Microcredit Summit Campaign told the Committee that the microcredit movement began in the 1980s as an initiative of non-governmental organizations (NGOs) that saw the need to provide credit services to the poor when the private sector was not doing so, and were initially supported by governments such as Canada and by private donations. By 1996, some six million people were being reached by microcredit, and the Microcredit Summit Campaign set a goal that year of reaching 100 million people by 2006; this goal was actually reached in 2007.[195] According to the latest Microcredit Summit Campaign Report, as of December 2010, some 3,652 microfinance institutions reported reaching 205 million clients, 138 million of whom were among the poorest when they took their first loan. Of these 138 million clients, 82% were women.[196]

While the microfinance movement was started by NGOs and financially supported by governments, for-profit actors eventually entered this area, and now have become its dominant funders. Mr. Reed told the Committee that whereas a decade ago, governments were the main source of the roughly $400 million devoted to microfinance, the combined asset base of over 100 microfinance investment funds in the world now is over $8 billion.[197] Nevertheless, Mr. Reed emphasized that this area still sees a significant amount of “blending” of NGOs with a mainly social orientation, and for-profit enterprises with a mainly commercial one.[198] Chris Dunford of Freedom from Hunger agreed, telling the Committee that “not all microfinanciers are the same in their business motives. Many are strictly commercial and profit oriented, especially in more developed regions like eastern Europe and central Asia, but equal or more numbers, especially in Africa or south Asia, are motivated primarily by social objectives.”[199]

Wendy Hannam told the Committee that Scotiabank acquired its microfinance expertise through the acquisition of a bank in Peru, one of the countries with the most experience in that sector. After researching local markets and taking a grassroots approach in the years that followed, Scotiabank essentially transferred the skills and knowledge developed in Peru to branches in other countries in the Caribbean and Latin America, including Chile, the Dominican Republic, Guatemala and Jamaica. She said that:

Microfinance has been shown to be an important driver of economic development in underserved communities. It is a key tool for supporting the goals and aspirations of women in particular. Approximately 60% of our microfinance clients in Peru are women. It also helps to grow the formal economy by providing accessible financing to people who would otherwise have to turn to informal channels.[200]

She noted that while women make up a large percentage of the bank’s microfinance customers, it no longer directly targets these services toward them; an earlier program in Jamaica that had done so has now been converted into the bank’s traditional business model, which in her opinion “...speaks to the success of the program.”[201]

Given Canada’s longstanding development cooperation with Haiti, the Committee was particularly interested to hear of the practical work being done by Fonkoze, which is the largest microfinance institution in Haiti. Fonkoze currently has over 900 employees, 60,000 credit clients representing a $16 million credit portfolio, and 270,000 savers with a $26 million portfolio. In 2011, it also processed some $96 million in remittances from the Haitian diaspora in Canada and elsewhere.

Fonkoze provides microfinance services to women through 46 branches across the country. Katleen Félix explained that the founding principle of Fonkoze is that women — who make up 99% of Fonkoze’s customers — are the backbone of the economy, and must be supported in their fight against poverty. Fonkoze has established some 1,750 credit centres across Haiti where women can receive credit, but also financial and health-related training. Other key Fonkoze principles are that all Haitians must participate in the country’s economy, and that there will be no democracy in Haiti if the people do not have access to financial services including credit, savings and insurance.[202] She also explained that Fonkoze offers a range of products to women in Haiti that are designed in stages according to their personal circumstances, and built around the idea of a “Staircase out of Poverty.”[203]

Strengthening Microfinance

While there has been great success in providing microfinance services to the poor over the decades, the last two years have seen controversy and increased scrutiny in this area. The controversy has centred on the fact that as microfinance services have continued to grow, a number of countries such as India have reportedly seen over-indebtedness, harsh collection practices and even suicides on the part of clients. Less high-profile have been questions related to the actual impact of microfinance on lifting people out of poverty, given the lack until very recently, of scientific studies or specific measures to track this.

Larry Reed told the Committee that the microfinance industry has worked to address recent controversies in several ways. One of these includes training people in new higher standards of behaviour based on principles such as fair and respectful treatment of clients and the prevention of over-indebtedness.[204] Another includes focusing on metrics that measure the “social good” that flows from microfinance, rather than simply using traditional financial performance measurements.[205] Alex Counts of the Grameen Foundation emphasized the importance of accountability mechanisms when working on development issues, telling the Committee that among many other tools now being developed, the Progress Out of Poverty Index is a “simple survey tool that can show trends about whether people are just treading water or are actually getting out of poverty.”[206]

In a 2012 study, David Roodman — who Muhammad Yunus has called “the most consistent and articulate analyst of microcredit in recent years”[207] — made a number of observations about the supporting arguments for, and the realities of, microfinance. Overall, he argued that even if microfinance does not achieve some of the broader claims made for it in the areas of women’s empowerment or lifting people out of poverty, it does succeed in the very real and important task of “leveraging modest subsidies to build financial institutions and industries that give millions of poor families more control over their finances.”[208]

Commenting on all of these recent debates, Chris Dunford told the Committee that:

...microfinance is a relatively new industry — and it's fair enough to call it that, even for those who are socially motivated and reaching truly poor people. As such, it's going through what you might call a shake-up period in which mistakes are being made, new models are being developed, and there's a lot of learning going on. Part of the learning is about what role government needs to play in regulating microfinance without stifling microfinance.[209]

In early 2011, chief executive officers of a number of international microfinance organizations began to discuss the future of the industry, and eventually established a Microfinance CEO Working Group. In a January 2012 report, this group wrote that: “At this moment, microfinance has an opportunity to build on past successes, learn from, and respond to the challenges it faces in order to be a more responsive, responsible, and transformative industry.”[210]

After Microfinance: the Formal Sector and Sustainable Development

Many large financial institutions in Canada and elsewhere have recognized the potential of the microfinance market both for its own sake and as a means to help people in the developing world graduate beyond microfinance within the formal economy. Jean-François Tardif emphasized the important characteristics that large for-profit entities can bring to microfinance through capital for lending, as well as expertise and technology. In terms of that expertise, he noted the work of Développement international Desjardins, a non-profit organization established by Quebec’s largest financial organization — the Mouvement Desjardins — some 40 years ago to increase financial inclusion in the developing world through the provision of financial services.[211]

Testifying before the Committee, Yvon Bernier of Développement international Desjardins explained that his organization “cooperates and acts extensively in partnership with the Canadian International Development Agency” on issues related to the provision of financial services in developing countries. He argued that the lack of financial services prevents growth in the private sector in developing countries. Microfinance should therefore “be considered as overall leverage for sustainable economic development, rather than simply as microcredit.”[212]

Jean-François Tardif used the example of Scotiabank's operations in Central and South America to argue that the formal financial sector can also play a key complementary role in graduating clients beyond microfinance to the formal financial world.[213] Similarly, Wendy Hannam argued that the best way to get people out of poverty is through “pro-poor growth,” which means involving the poor in economic growth through formal markets. She said:

The banking sector has a critical role to play. Generally it alleviates poverty and inequality by enabling economic growth through the provision of credit. In addition, the institutional infrastructure of the financial sector contributes by bringing down the cost of information, contracting, and transactions, which in turn accelerate growth.[214]

In practical terms, she also added that:

Perhaps most important, banks directly address poverty by providing access to basic banking services in a formal market, acting as a force of inclusion. In most developing countries, access to formal financial services is limited to 20% to 50% of the population. There is now growing awareness that access to a wide set of financial tools, such as savings products, payment services, and microfinance, provides the poor with much greater capacity to increase or stabilize their income, build assets, and become more resilient to economic shocks while increasing family security.[215]

While Scotiabank provides microfinance services — which it defines as loans of less than $2,000 for clients with revenues of less than $100,000 — it also provides more sophisticated services, including those designed for customers who have moved beyond microfinance. According to Ms. Hannam, “We track, and we've seen migration from the microfinance, which is really just a family owned business, to creating jobs, growing into small businesses. We've seen a big migration...”[216]

Mobile Banking and Knowledge Transfer

A number of witnesses discussed the potential for existing technologies such as mobile phones, which are widely available in the developing world — although apparently predominantly to men[217] — to establish infrastructure that can be used for inclusive mobile banking and other purposes. The most high-profile of these systems is M-PESA. It was launched in Kenya in 2007 with the support of DFID. By 2011, DFID was speaking of building on “the enormous success” of this “revolutionary mobile banking platform.”[218] Beyond the notable fact that around 25% of Kenya’s economy now flows through it,[219] M-PESA has also become the foundation for the development of a high technology sector in that country, where there are 74 mobile phones for every 100 Kenyans and nearly 99% of Internet subscriptions are phone-based. That sector is centred on developing applications for mobile phone technology. [220]

In her testimony, Dr. O’Neill of USAID argued that mobile banking was “perhaps the most important development game-changer in decades”:

To give you some sort of context, there are 500,000 bank branches worldwide, and there are five billion mobile phones. Almost two billion people have access to a phone but no bank account, so they have no ability to participate in the formal financial sector or to start businesses that have access to a bank in order to grow over time. If we could turn every mobile phone into a bank branch or a cash register for small businesses, we believe the economic benefits of financial inclusion could be transformative for poor countries in the world. We're already seeing quantifiable results of this hypothesis in Kenya. Within five years, 70% of the country's adult population has gained access to the financial and banking system through MPesa, the mobile operator's money market. [221]

Khalil Shariff told the Committee that in 2003, the Aga Khan Fund for Economic Development established a mobile phone company in Afghanistan called Roshan. It now reaches close to 4 million subscribers across that country. He explained that:

...Roshan now provides mobile money transfer services, which extends financial services to the 97% of Afghans who can't access banks. We're also using Roshan today on the not-for-profit side to support telemedicine, allowing Afghans to access health expertise from around their own country, and indeed from around the world. Another measure of Roshan's multiplier effects is the fact that it is one of the largest taxpayers in the country, contributing approximately 5% of the government's total domestic revenues.[222]

Alex Counts likewise emphasized the value of new and emerging technologies. He told members of a program in Uganda that uses mobile phones not only to download critical information, but also to aggregate and provide information about farmers and their crops to outside companies, which are then in a better position to integrate these farmers in their operations. In his words, “The mobile phone, put in the hands of people out on the field, poor people themselves, can be a way of capturing and aggregating that information that can remove a lot of the friction from the process between the private sector and the poor and allow partnering in ways that mutually benefit each other.”[223]

Wendy Hannam similarly expressed her enthusiasm for mobile banking, which she argued is "going to transform the world." She told the Committee that "Increasingly we will be able to distribute loans onto the phone, and people will be able to make payments, again, through these distribution outlets, through the phones.”[224] She explained that in the case of Haiti, before mobile phones,

...the only way for a family member in one community to transfer funds to a family member in another community a hundred miles away was to physically take that cash and find what they hoped was a trusted taxi driver or bus driver or somebody who would get the funds there. Sometimes they wouldn't get there. When they did get there, it was often at quite a cost: 20%, 30%, 40%. ...[225]

While only 10% of the population of Haiti has a bank account, some 85% of households have access to a mobile phone. Dr. O’Neill explained that when the devastating 2010 earthquake wiped out almost all of what had been very limited financial infrastructure in Haiti, the idea emerged to try to quickly develop mobile banking as a replacement. USAID and the Gates Foundation therefore set up a challenge grant to reward the first to bring such a service to market; the winner was Scotiabank and a Haitian mobile phone company, Digicel.[226] Dr. O’Neill told the Committee that, “In a country where there were fewer than two bank branches per 100,000 people, we've seen nearly a doubling of accessible financial services in less than two years.”[227]

In late 2010, Scotiabank and Digicel launched a “mobile wallet” service under the brand name TchoTcho Mobile that allows Haitians to transfer funds for just pennies per transaction. At the end of 2011, TchoTcho Mobile had more than 473,000 users and handled almost 10,000 transactions a day in a country where just 4 million people have cell phones.[228] This service has been both profitable and effective in making microfinance more widely available, winning international awards for development innovation. Scotiabank plans to launch similar services in other Latin American and Caribbean countries. [229]

Wendy Hannam also told the Committee that over the past year Scotiabank had held a number of discussions with CIDA in order to share information and identify areas for enhanced collaboration. She stated that “...we've had some very good discussions. We definitely see opportunities to partner, to work together more closely on the ground when we're both doing work in the countries, to share what we're doing, to share best practices and knowledge.”[230]

Mobile payment and related systems thus have significant development potential. Nevertheless, some challenges remain. In August 2012, The Economist magazine noted that while more than 120 operators now offer some sort of mobile money service in various countries and another 90 are expected to soon join them, none has yet achieved the success of M-PESA. There are a number of possible explanations for this situation, ranging from the dominant position of the carrier that launched M-PESA in Kenya, to barriers to entry related to the regulation of mobile money systems in many countries.[231] In any event, Kenya’s experience will provide important lessons for those interested in this technology and in replicating M-PESA’s success and bringing such a model to scale in other countries. While arguing that currently “...the enthusiasm for cell phone-based financial transactions is outpacing the reality of it,” Chris Dunford told the Committee that “it's still an extremely active area of experimentation and it's very promising.”[232]

Natural Resources

Among the topics that saw the most discussion before the Committee was the role of the natural resources sector — particularly mining operations — in the achievement of development objectives. The testimony before the Committee in this area was polarized, reflecting longstanding debates. The following provides an overview of key points from that testimony. While witnesses highlighted many challenges related specifically to the extractive sector, the solutions advocated by most, particularly the need to strengthen the capacity of local governments, were often those that have been emphasized in other contexts throughout this report.

Overall, witnesses agreed with the potential of natural resources to contribute to economic growth and poverty alleviation in developing countries. They also underlined the fundamental need for host governments to be able to transparently and accountably carry out their social, economic and regulatory responsibilities, and for mining and other industries to work closely with local communities throughout the resource development process. At the same time, however, a number of witnesses argued that large-scale mining operations can in fact complicate the process of development, particularly when governments lack the capacity to carry out these responsibilities.

Given that Canadian companies are world leaders in mining and other resource extraction, the question of how to ensure that the natural resource sector effectively contributes to realizing development objectives is an important one for Canada’s foreign and development policies. Khalil Shariff told the Committee that:

...it is inescapable that mineral wealth in the developing world is going to be a major driver of the future of these countries. That is not the end of the question; that is the beginning of the question. The issue now is, what supports are we ready to provide the developing world in order to help them manage their natural resources well in a way that will be a force and an engine for national development? That's the question, and I don't think we've got clear answers. [233]

Commenting on the fundamental need to strengthen host government capacity in this area, Karin Lissakers of the Revenue Watch Institute similarly underlined that “... this is a complex business. There is no single solution. You need to address a number of core issues simultaneously to have any sustained beneficial impact.”[234]

Natural Resources and Development

As the history of Canada has shown, natural resources can play an important role in the development of local and national economies. As a result of its experience, Canada is a leader in mining expertise and operations both within the country and internationally. At the international level, Pierre Gratton of the Mining Association of Canada (MAC) told the Committee:

Canada's mining sector is one of the country's most significant outside investors, responsible for about 10% of Canadian direct investment abroad, while the total value of Canadian mining assets abroad is valued at $109 billion. Two-thirds of these assets are in the western hemisphere, just under 50% of which is in just three countries: Mexico, Chile, and the United States.[235]

To illustrate the size of this industry, Ross Gallinger of PDAC testified that “There are 1,600 Canadian companies listed on the TMX; there are probably 700 listed on the Australian Stock Exchange and somewhere around 200 on the New York Stock Exchange.” [236]

Natural resource abundance represents a potentially significant economic engine for developing countries, given the benefits that can result such as direct tax and royalty transfers to local authorities, as well as employment and service purchasing, related business creation, and community development programs. Karin Lissakers told the Committee that her organization focuses specifically on the oil, gas and mining sectors precisely because, in her words, “…if you look at the numbers and the investment flows, you can see that these mineral resources have the potential to transform positively the many poor countries that have a lot of wealth in the ground.”[237]

In his testimony, Ross Gallinger pointed to the cases of Ghana, Chile and Botswana as examples which demonstrate the positive results that mining can bring to developing countries.[238] Brent Bergeron of Goldcorp told the Committee that his company is one of the largest taxpayers in Guatemala, paying close to $80 million in taxes and royalties last year both to the federal and, voluntarily, the local government.[239] Doug Horswill of Teck Resources discussed the local benefits that have resulted from his company’s operations in Chile and its partnership at a mine in Peru, which include taxes, direct employment of local citizens and multiplier effects in terms of indirect employment and suppliers.[240] In Burkina Faso, the IAMGOLD mine is the country’s largest private employer, with 2,200 employees.[241]

At the same time, examples unfortunately also exist where the presence of natural resource wealth has not contributed as it could have to sustainable development.[242] Catherine Coumans of MiningWatch Canada argued in a submission to the Committee that there is “expanding research that details the ways in which large-scale mining itself creates very serious and long-lasting development deficits, both at national and at local levels in many developing countries.”[243] She and others, such as Karyn Keenan of the Halifax Initiative Coalition, argued that the ways in which large-scale mining has taken place in countries without adequate capacity to either provide for their citizens or to regulate the industry has led to negative environmental impacts and social conflicts at the local level, as well as more general development deficits at the national level.[244]

Similarly, Karin Lissakers told the Committee that “…in many cases minerals have actually been adverse to economic development and social and economic equity.”[245] She argued that “the pathology of the so-called resource curse” includes very weak institutions, significant corruption and, as a result of both of these, the negotiation of bad deals. She said:

While companies are often blamed, we think a partnership and an agreed governance structure that addresses the underlying institutional weaknesses in the resource-rich countries can change the trajectory for the better in a way that benefits both the investors and the resource-producing countries.[246]

According to Stephen Brown of the University of Ottawa, “What is needed is a better understanding of the two sides of resource extraction as a development strategy, and effective ways to minimize the harm while maximizing the benefits.”[247] Pierre Gratton of the Mining Association of Canada told the Committee that:

We have seen examples of significant resource investment in extraction. We've seen places where the results of this investment have not been shared across the population base, where there are examples of corruption, and where we haven't seen the development we thought this investment would bring...

Over the last number of years, largely through ICMM, the International Council on Mining and Metals, we have been looking closely at this issue, the so-called “resource curse”. We have tried to identify ways in which we can ensure that this does not happen. It's by no means certain that the resource curse is going to happen. It's not certain that investing in Africa in a mining project is going to make the country worse off. It can make it better off... The question then becomes: how do you do development right? How do you do it in a way that ensures the likelihood of lasting economic benefits?[248]

Overall, many witnesses agreed that the minimization of the harm and maximization of the benefits associated with natural resource development both depend substantially on efforts to strengthen the capacity of governments at the national and local levels in countries where mining takes place.

The Central Importance of Institutional Capacity

As noted, witnesses drew strong connections between natural resource development and the fundamental need for national and local governments to be able to transparently, effectively and accountably manage the development of those resources in ways that benefit their citizens. The fact that many countries lack such institutional capacity, however, raises significant challenges.

Professor Anthony Bebbington of Clark University argued that:

The appearance and the expansion of large-scale mining changes so much, so profoundly, that achieving development in such a context becomes particularly complicated and difficult. While these transformations do not make development impossible, they are of such a magnitude that any effort to foster development cannot simply focus on projects. Instead, it must focus on institution-building and regulation. It must also get sequences right.[249]

While arguing for the need to address institutional issues aggressively and systematically early on, he also acknowledged that, “of course one can’t postpone extraction of natural resources indefinitely until institutions have been built...” Even with this reality in mind, however, he noted that:

...there is a sense, and I think cases like Nigeria and other historical examples support that sense, that if the extractive economy grows very quickly without significant progress in building institutions to regulate that economy and use resources transparently in ways that foster stronger relationships between governments and citizens, then it's very difficult to catch up after the fact. Once the incentives have been distorted, once politics functions on the basis of access to rents, it becomes very difficult to turn that around after the fact.[250]

Representatives of the mining industry agreed on the importance of institutional capacity, and on the fact that this is often lacking in developing countries.

In order to underline the importance of companies being able to cooperate closely with local government institutions and other stakeholders in achieving economic and social growth, Brent Bergeron of Goldcorp began by telling the Committee about the company’s operations in Canada. Goldcorp has a $1.8 billion mine under construction in northern Quebec, and had recently signed a collaboration agreement with the Cree nation of Wemindji for the development of the project, which included joint committees dealing with issues such as jobs and skills creation, education, and economic and business development activities. He stated that Cree leaders had earlier used the funds derived from the James Bay hydro project to invest in skills development and businesses that are now capable of supplying Goldcorp and other projects in the region. As a result, Cree companies received 81% of the total contracts awarded at Goldcorp’s mine in 2012, for a total value of $ 39.7 million. He added:

The most important aspect of the development activities was to increase the capacity of these communities to negotiate collaborative agreements with large multinational companies, in this case Goldcorp. With this collaborative agreement the Cree Nation will directly benefit from the success of the mine. This is the model we strive for at all of our international operations, and we have encouraged Cree officials to also reach out to local communities to share their positive experience where we operate. [251]

It is important to recognize, however, that successful mining operations like this one are built upon decades of national experience and take place in a country that has strong institutions at different levels of government, regulations, and other checks and balances — factors that are often not yet present in the developing world. This difference was reflected in Mr. Bergeron’s comments regarding Goldcorp’s operations abroad. He said:

…challenges do exist when our company attempts to replicate similar collaboration agreements in other areas of the world. Our challenges often deal with the lack of capacity of local governments and businesses, the lack of capacity of national governments to provide essential services that are necessary for the social and economic benefit of local communities, and the lack of adequate skills and labour to provide services to the mining operation.[252]

Ross Gallinger of the PDAC likewise told the Committee that “The areas where the mining companies go have very little government oversight.”[253] This is particularly the case in remote areas, which is often where mine sites are located. He noted that, in many cases, there are gaps between formal laws and regulations and the capacity at the local level to enforce them.

Chris Eaton of World University Service of Canada (WUSC) also argued for an emphasis on the local and district levels of governance. He said that “...we need to expand our support to the broader set of governance and capacity-building issues in the mining sector, tailored to the specific needs of civil society and national and local governments where mining occurs.”[254] He noted, for example, that in the case of Ghana, the national government “notionally sets aside some of the royalties it receives from mining operations to fund the development plans of districts in which mining occurs.” He added, however, that “Unfortunately, the mechanism through which districts can call upon these resources is not yet established or operational.”[255]

The practical challenge is, therefore, how to effectively build local and national institutions and governance capacity in the natural resource sector while resource extraction is taking place. After all, the concept of building “capacity” is much easier to invoke than to put into tangible practice.

Given the number and significance of Canadian companies in the global mining industry, the demand from various countries for support with institutional development, and the specific challenges posed by resource governance, many witnesses told the Committee that Canada can play an important role in this area. Daniel Runde (CSIS), for example, argued that Canada has opportunities to export its expertise in the natural resource sector given its demonstrated strength and know-how. He told the Committee:

Canada is world renowned for managing extractive resources in responsible ways, and this is an important Canadian export that needs to be further embedded in development cooperation. I think about provincial governments that have stewarded their resources very well. This is one of the holy grails of international development.[256]

There are compelling reasons for providing this assistance. The most obvious and important one is the causal relationship between institutional strength and societal benefit from natural resource development, which was described at length above. Beyond this development rationale for ensuring strong resource governance, however, a number of witnesses also argued that there are other reasons for providing this capacity-building support. As the extractive sector comes under increasing scrutiny, both companies and even countries such as Canada face “reputational risk” if they do not ensure that the highest social, environmental, human rights and other standards are followed in operations around the world.

Resource Governance and Revenue Transparency

In addition to the general need for capacity-building support, a number of witnesses emphasized the specific need to address institutional capacity with respect to the management of resource revenues, arguing that this is an area where development agencies like CIDA can and should play a significant role. As Karin Lissakers told the Committee, “Transparent and accountable government is the other major component that is going to transform these resources into development.”[257] Such governance can, she argued, “greatly increase the chances that these resource-rich countries would become self-sustaining, self-funding, successful economies.”[258] The Honourable Jim Abbott told the Committee that,

The dividends of good extractive governance are a peaceful society, investor confidence, a diversified economy with forward and backward linkages to the extractive sector, economic growth, improved social infrastructure, shared prosperity, and a positive corporate social response. That's a list that any of us would want to be associated with.[259]

Capacity in the area of resource governance is critical because it affects the ability of countries that have significant natural resource development underway to negotiate fair deals with companies to the benefit of their citizens. Karin Lissakers used the examples of Cameroon and Tanzania to illustrate this point:

Cameroon gets maybe 12 cents on the dollar per barrel of oil it produces. Norway, by comparison, gets 78 cents on the dollar. Tanzania, where there are large Canadian mining interests, produces about a billion dollars worth of gold each year but only gets roughly $100 million of tax revenue out of it.

She therefore argued that:

A rebalancing is critical. It is good for the investors, to attract investors, because it's the investors who have the technology and the capital to develop these resources, and it also generates a fair share of the economic grants for the governments. That means these governments must have the technical capacity to negotiate effectively, to oversee the concessions, and to manage the revenues.[260]

While government capacity is important to resource governance, some witnesses stressed that parliaments are also a key piece of the puzzle. For example, Jean-Paul Ruszkowski of the Parliamentary Centre argued that “…the need of emerging economies is mainly to acquire the tools to help governments, parliaments, and stakeholders reach a common understanding of the opportunities offered by the extractive industries and to mitigate the risks associated with them.”[261] He added that “An important way to achieve a balance between the different views on this is to enhance the capacity and the knowledge of parliamentarians so that they can contribute to good governance in the industry sector.”[262] He noted that parliamentarians must play a key role at all stages of the resource extraction process, from deciding whether or not to extract the resources, through negotiating the best deal, to developing those resources and optimizing the revenue derived from them.[263]

Karin Lissakers made similar points on the importance of parliamentary capacity, noting that, “...in the end, parliaments should have the oversight responsibility for their own governments’ actions.”[264] She added that her organization, Revenue Watch, was “very encouraged” by work it has done in Tanzania, where basic workshops for parliamentarians who sit on relevant committees had helped to transform what had been a “rubber-stamp Parliament” to one that was beginning to ask questions of the government regarding the development of the country’s natural resources. The Parliament went so far as to send back a recent mining bill because it believed the royalty structure was strongly unfavourable for Tanzania and that the law in general lacked sufficient oversight mechanisms. The Parliament has now also asked the government to present its overall plan for the long-term development of the country’s gas sector. She referred to this action as “a systemic game changer.” She underlined the symbolic and practical importance of having the Parliament “in public ways, through public hearings and public discussions, demand accountability and explanations and descriptions of policies.”[265]

Another important challenge related to extractive operations and resource governance is corruption, which can take many forms, including the payment of bribes and the diversion of resource revenue by individuals in a given country for their own benefit. While obviously not limited to this area, Superintendent Stephen Foster of the Royal Canadian Mounted Police told the Committee that extractive industries were one of a number “high-risk areas” for international corruption because they combined high dollar values and prominent public officials.[266] In addition to providing prevention and awareness messages to Canadian industry and officials, RCMP international anti-corruption units established in Ottawa and Calgary in 2008 focus on “detecting, investigating and preventing international corruption.”[267]

The Growing Body of Disclosure Requirements

The past decade has seen important progress related to revenue transparency in the extractive industries. An example is the Publish What You Pay coalition, which has advocated for greater transparency and accountability in the oil, mining and gas sectors. The coalition now comprises more than 600 civil society member organizations.[268] Over the years, it has broadened its call from an initial focus on revenue disclosure by both firms and governments to also include “…transparent and accountable management and expenditure of public funds as an essential way to addressing the poverty, corruption and autocracy that too often plague resource rich countries.”[269]

A key initiative at the international level that involves multiple stakeholders is the Extractive Industries Transparency Initiative (EITI). The EITI aims to improve transparency and accountability by using a “robust yet flexible” methodology to monitor and reconcile extractive industry payments and government revenues at the national level in each participating country.[270] While the EITI is a global standard, the process in each country is overseen by a multi-stakeholder group that includes representatives from governments, industry and civil society.[271] Karin Lissakers expressed her support for the EITI because it “gives civil society a seat at the table, [which] strengthens the accountability mechanisms internally in developing countries...”[272]

Arguably the most prominent and influential national initiative in this area has occurred in the United States. In 2010, the omnibus Dodd-Frank Wall Street Reform and Consumer Protection Act became law; it contains a section (1504) which requires all companies listed with the United States Securities and Exchange Commission (SEC) to report the payments they have made to the U.S. or other governments as part of the commercial development of oil, natural gas or minerals. This disclosure is required on a country-by-country and project-by-project basis, and according to the type of payment.

Finalizing the rules required to implement these new provisions proved to be both a difficult and time-consuming exercise, which was not completed by the SEC until August 2012. One important element of the new rules is the precision around which types of “payments” require disclosure on the part of companies. The definition captures:

• Taxes;
• Royalties;
• Fees (including license fees);
• Production Entitlements;
• Bonuses;
• Dividends; and
• Infrastructure Improvements.[273]

Now that the rules have been completed, U.S., Canadian and other companies listed in the U.S. will be required to report annually for fiscal years ending after September 30, 2013.[274]

Karin Lissakers expressed her support for Dodd-Frank-type requirements, adding that “The EU is moving ahead to replicate this type of legislation.”[275] Raymond Baker of Global Financial Integrity likewise argued for greater transparency on the part of all multinational firms operating in the developing world. In the specific case of the extractive sector, he told the Committee:

...I don't think there's any question that extractive industries need to account, in very careful terms, for what they are paying to the governments where they are established. They need to move toward full reporting of sales, profits, and taxes paid in countries in which they're functioning.[276]

While many Canadian companies are also listed in the United States, and will therefore be covered by the Dodd-Frank law, the rest will not be covered unless Canada moves to adopt similar requirements.[277] On this point, Karin Lissakers stated:

As a matter of levelling the playing field for companies, we think it's important that major jurisdictions like Canada adopt similar legislation or regulatory requirements through their provincial regulators. ...Canada is particularly important, because, as you know, more than half the world's mining companies list in Canada. Canada, a major mining and oil country itself, should lead by example. We hope your government will support such legislative requirements.[278]

When asked about the industry’s position on mandatory reporting requirements, Pierre Gratton noted that “...there's an increasing recognition that transparency is good for business.”[279] Recalling that support for the EITI is a requirement for membership in the International Council on Mining and Metals, he added that “the bigger companies have bought into this conceptually.”[280] He noted that his organization’s members “are all companies that are dual-listed on the New York Stock Exchange, so they all fully expect to have to comply with Dodd-Frank and aren't squawking about it. They're just waiting for the rules.” He also told the Committee that “...it's starting to be seen as actually good business to have these payments to government published,”[281] but he added that such reporting requirements could be more onerous for smaller firms.

In early September 2012, it was announced that the Mining Association of Canada and the Prospectors and Developers Association of Canada had joined with Publish What You Pay Canada and the Revenue Watch Institute to form a Resource Revenue Transparency Working Group. The aim of the group is

... to develop a framework for the disclosure of payments to governments for Canadian oil and mining companies operating domestically and internationally by June 2013. Once complete, the working group will make policy recommendations to federal government policymakers and/or provincial security regulators for the Canadian adoption of mandatory disclosure requirements based on the framework.[282]

In announcing this new working group, the Deputy Director of the Revenue Watch Institute argued that:

Current disclosure regimes don’t produce the same information across exchanges and for all companies...Ideally, Canada’s response will improve upon existing reporting standards and create a framework that will level the playing field by holding all companies to the same high standard of reporting, regardless of where they operate.[283]

For her part, the Director of Publish What You Pay Canada stated that “Our hope is that we will mimic or exceed the type of regulations we see under Dodd-Frank...”[284]

Corporate Social Responsibility

In the course of discussing the natural resources sector, a number of witnesses addressed the issue of corporate social responsibility (CSR), with some revisiting debates that had previously been voiced on this subject before the Committee.[285] While this report does not attempt to provide a comprehensive examination of debates about CSR, it does highlight those concerns that are most relevant to the Committee’s study of the broader issue of the role of the private sector in development.

Over the decades, corporations in various sectors have increasingly accepted that they have human rights, environmental and other responsibilities to the societies in which they operate. Then-UN Special Envoy for Business and Human Rights John Ruggie argued in 2008 that “CSR occupies the space between the requirements imposed on companies by law, and prevailing social expectations of the corporation’s role in society. Social expectations typically evolve more rapidly than the law, and they define what is sometimes called a company’s ‘social license to operate’.” He added that “The gap between the requirements of legal compliance and prevailing social expectations is particularly wide in countries with weak governance and weak rule of law. In that setting, it may take companies a while to figure out that legal compliance by itself is not enough to operate successfully.”[286] Anthony Bebbington similarly told the Committee that when considering mining operations, legality alone is not sufficient to ensure legitimacy.[287]

In the particular case of the history of CSR and the extractive industries, Dr. Luning reminded the Committee that “...CSR was primarily developed as a response to resistance against mining operations. Loss of livelihoods, ways of life and threats in local communities triggered resistance, and CSR was a response to this.”[288] As in other sectors, companies in the extractive industries have taken steps over the years in an attempt to address these issues, adopting a wide range of CSR norms and practices. While the implementation and effectiveness of CSR remains a contested subject for many in the development community, the core principles of CSR are now widely accepted.

The past several years have seen the emergence of a number of frameworks and initiatives related to CSR, which both codify internationally accepted standards and promote best practices. The Committee was told by representatives of the mining industry that Canadian companies adhere to a growing number of frameworks and programs.

While CSR is a complex and multi-faceted issue, several key points are worth noting:

• There exist a wide range of CSR frameworks and initiatives, developed by intergovernmental organizations, industry associations, civil society organizations or some combination thereof (multi-stakeholder);
• These mechanisms may combine a number of key elements, including human rights, the environment and social responsibilities, or focus on particular issue areas; they may also be context-specific, as in the case of operations in weak governance zones; and
• CSR frameworks provide guidance to companies rather than additional legal obligations.

Some key examples of CSR frameworks, guidelines and tools that are relevant to the extractive sector include:[289]

Applicable to Multiple Sectors

• OECD Guidelines for Multinational Enterprises (Intergovernmental) —Comprehensive guidelines updated in 2011, agreed to by 44 governments. They are recommended for multinational enterprises operating from or in adhering countries in areas such as: the environment, disclosure of information, human rights, employment and industrial relations, combating bribery, consumer interests, science and technology, competition, and taxation.
• United Nations Global Compact (Intergovernmental) — a UN initiative directed at businesses that want to align their operations with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption.
• International Finance Corporation (World Bank) Performance Standards on Environmental and Social Sustainability (Intergovernmental) — updated in 2012 and composed of eight performance standards in areas such as the environment, labour, land acquisition and Indigenous peoples, all of which International Finance Corporation (IFC) clients are expected to meet throughout the life of an investment by the IFC.

Applicable to Specific Sectors

• Extractive Industry Transparency Initiative (Multi-stakeholder) — multi-stakeholder initiative involving governments, companies, civil society organizations and investors that supports disclosure and verification of company payments and government revenues in the oil, gas and mining sectors.
• OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas — (Multi-stakeholder) Recommendations to assist companies that may source minerals or metals from conflict-affected and high-risk areas to help them respect human rights and avoid contributing to armed conflict.
• Voluntary Principles on Security and Human Rights (Multi-stakeholder) — The only human rights guidelines designed specifically for oil, gas and mining companies. These provide guidance for companies on how to maintain the security and safety of operations, while also respecting human rights and fundamental freedoms.
• Equator Principles (Single-stakeholder) — Financial industry standards used to determine, assess and manage social and environmental risk in project financing.
• International Council on Mining and Metals Sustainable Development Framework (Single-stakeholder) — Sustainable Development framework composed of 10 principles that was developed after a consultation process with stakeholders. All ICMM members are required to implement these principles.

The Committee was provided with an example of the operation of one such framework — the Equator Principles — by Ross Gallinger of PDAC:

There are two aspects that a company has to go through in entering into a developing country. We'll use Peru as a good case.

If you're looking at financing your operation — because an operation can be anywhere from $500 million to billions of dollars in investment — you will probably have to get money from the banks. Most banks are connected to the Equator Principles, which require you to follow International Finance Commission (sic) guidelines on development. One of the processes is the requirement for an environmental impact assessment. It gives you the scope of what needs to be looked at in terms of water, air, and land aspects. It determines what your activities will be and how you will ensure that there's no significant environmental impact. Even Peru has that kind of process for the development of an environmental impact assessment.

What's also included is a social impact assessment of the potential social effects and how they are going to be mitigated.[290]

Most CSR-related programs implemented by mining companies occur at the local level near mine sites. They are aimed at both mitigating negative impacts and maintaining positive relations with local communities. In terms of consultations with local populations, Brent Bergeron of Goldcorp explained that his company consults with local aboriginal and other residents in two ways. In addition to consultations through municipal and provincial governments, he said:

We also consult with them at the mine operation itself. We bring people to the mine operation, we explain a lot of the technical issues they don't understand regarding how a mine operates, and then we actually discuss with them community grievance mechanisms.[291]

He added that the company’s “investments also include funding community development projects, which are an important part of our social licence to operate in communities and countries.”[292] Doug Horswill of Teck Resources stated that his company “focuses on building local relationships, business relationships, and other relationships to support development. We don't move ahead without community support, so you build that any way you can.”[293]

While company-funded CSR programs cannot address all challenges in developing countries, they can lead to positive health, education and other impacts for citizens in certain cases. Even in this regard, however, Ross Gallinger stressed the importance of local engagement. He argued that there is a need to take an inclusive approach to development work, suggesting that rather than a company unilaterally moving to build a service like a school in a local area, the focus should be on sustainability, with the company saying to the community: “How can we work together so that you can build your livelihood, your capacity, and you can use this operation and what we're doing as a springboard to going forward?”[294] While such engagement with local communities is critically important, he also acknowledged that it would always be a challenge. In his words:

…there's still always going to be something that might come up, an incident that occurs. It's how companies deal with that, moving forward. It's always going to be a challenge. Communities will change as well. Generational aspects will change. The youth will come in and their expectations will be completely different.

We constantly have to have this conversation. We constantly have to figure out how we can work together with those communities so they can truly feel they're also benefiting from the development that's going on.[295]

Beyond such day-to-day challenges, CSR projects can be problematic on other levels. Most practically, depending on how they are designed and planned, they may be unsustainable after the company that provides them exits the area. Brent Bergeron told the Committee that:

Mining operations are often called upon to provide many basic services to our employees in communities where foreign governments have traditionally not been able to perform. In addition to job creation, our company also invests in many activities related to health, education, and business creation...The very fact that our company funds many infrastructure projects also creates challenges for us with local and national governments by creating a dependence on the management and operation of these facilities. While our company has the ability to provide funding for the operation of the facilities, the strategy is not sustainable in the long term.[296]

An even deeper problem may emerge if such projects blur responsibilities and undermine accountability relationships, causing local residents to look to companies for the provision of necessary services rather than their governments, or causing local governments to focus more on revenue-generating companies than on their citizens. As was noted in a previous section of this report, witnesses including professors Sabine Luning and Bonnie Campbell argued that such distortions in accountability relationships work against the development of strong and legitimate governments.

Natural Resources and Public-Private Partnerships

In 2009, the Government of Canada adopted a Corporate Social Responsibility Strategy for the Canadian International Extractive Sector, which CIDA has since played a role in implementing. In September 2011, the Minister of International Cooperation announced that as part of this strategy and the Agency’s broader focus on sustainable economic growth, CIDA would spend some $26.7 million over 5 years on an Andean Regional Initiative (ARI) for Promoting Effective Corporate Social Responsibility ($20 million), and also enter into partnerships on 3 specific pilot projects with non-governmental organizations and major mining companies ($6.7 million). The 3 pilot projects are:

• A 3-year project in Ghana, co-implemented by World University Service of Canada (WUSC) and co-financed by Rio Tinto Alcan, designed to provide skills training to 400 young people and to strengthen the ability of the local government to provide education and clean drinking water (CIDA contribution: $500,000; WUSC/Rio Tinto Alcan: $428,000);
• A 5.5-year project in Burkina Faso, implemented by Plan Canada and co-financed by IAMGOLD, designed to implement job skills training in mining and other sectors in 13 communities (CIDA: $5.7 million; Plan Canada: $0.9 million; IAMGOLD: $1 million); and
• A 3.5-year project in Peru, implemented by World Vision Canada and co-financed by Barrick Gold, designed to increase the income and standard of living of 1,000 families affected by mining operations (CIDA: $500,000; World Vision/Barrick Gold: $500,000).[297]

These three pilot projects were the subject of debate during the Committee’s hearings. While the benefits of the projects were not often disputed, a number of witnesses argued that these arrangements did not reflect the best possible use of public development funding, either because they risked further blurring the lines of responsibility between the public and private sectors, or because they effectively subsidized CSR work the companies should have paid for themselves. Stephen Brown, for example, said that “we're not asking if it's worthwhile to train 1,000 people. We're saying if we have a limited amount of money, where is that money best spent? The answer is not clear that it should be spent with World Vision and Barrick Gold in mining-affected communities.”[298] He added:

My main message here is that the use of public funds with private corporations for the goal of development — and by development I mean poverty alleviation and fighting inequality — must be done only with extreme care, and my concern is that the current partnerships with these mining companies and NGOs do not meet the standard of an effective use of public development funds.[299]

Kenneth Georgetti of the Canadian Labour Congress said of these pilot projects that,

The CSR projects do not in any way implement company accountability principles as understood by the international community dealing with these issues. We're worried that these projects will serve instead to gloss over local conflicts that have already emerged or will arise as a result of any investment project.[300]

Carlo Dade, however, argued that it was a mistake to view partnerships with the private sector as a subsidy. In his words, “…there's this cross-fertilization, not subsidization. It's a complete misunderstanding of the situation to think of this as subsidy. I can tell you that everyone who works on the issue would agree on that point.”[301] For his part, Pierre Gratton (MAC) told the Committee that “All three partnerships will help address the most fundamental obstacle to ensuring that benefits from large-scale private sector investment in the developing world are optimized, that obstacle being lack of capacity.”[302] He added:

The debate that's taken place here in recent weeks around this has given these three projects more notoriety than they deserve, in the sense that these projects very much developed bottom-up. This was not a question of companies going to CIDA and lobbying for money and then finding a partner. These were projects that were identified by the NGOs in question on the ground in these countries. They were looking for partners. The companies identified themselves as potential partners. The NGOs did a lot of their due diligence on the companies. I think it probably worked both ways.

Once they developed a project, CIDA expressed an interest in it.[303]

The then-Minister of International Cooperation confirmed this, telling the Committee that “These are projects that were developed with Canadian organizations. The Canadian organizations then made a proposal and request to CIDA.”[304]

Chris Eaton of WUSC defended his organization’s project in Ghana on a number of levels. He underlined that it was a WUSC-initiated pilot project supported by Rio Tinto Alcan and CIDA; that it was focused on strengthening the capacity of the local government in one district of Ghana to deal with issues including education, water and sanitation, and unemployment; and that it was not meant to replace CSR programming by Rio Tinto Alcan, which in any event had ceased its operations in the district in question as the project was commencing, but had decided to continue funding it nevertheless.[305] While admitting he was less familiar with the other two pilot projects, Fraser Reilly-King of the Canadian Council for International Cooperation (CCIC) said of the one in Ghana that:

WUSC is beyond education, health initiatives, and training initiatives. It's working with local government to try to ensure that the real benefits from that project come to the local community. So it's trying to take the royalties that the country gets and bring them down to the local level. So I'd say that the practice there is guided less by corporate interests than by development interests.[306]

Dr. Luning stated that while partnership projects like WUSC’s in Ghana may have tangible development benefits, it was important to distinguish between the responsibilities of the public and private sectors:

The new public-private partnerships should not lead attention away from two central tasks, one for public actors, the other for private enterprise. For the public actor, the Government of Canada, the tasks should continue to be focused on bilateral public-public partnerships that are crucial for institutional development, in particular in young mining countries such as Burkina Faso. For the private enterprise, for Canadian or other multinational large-scale mining initiatives, the focus should be on proper processes of negotiation with local populations and a focus on social and environmental mitigation in order to prevent economic exclusion and development deficits.[307]

Brent Bergeron stated that his company supported partnerships between CIDA, mining companies and NGOs partly because they help decrease local dependence on companies, an issue that was referred to previously:

A strategy to decrease ... dependence needs to be implemented, and Goldcorp does believe that leveraging the skills of the Canadian government and NGOs will decrease the dependence and, therefore, increase the overall development activities in foreign countries. This is why we suggest that a trilateral partnership could be established with the Canadian government and NGOs, which are more capable of performing economic and social development activities.[308]

As noted above, Pierre Gratton told the Committee that the essential question pertains to how development can be done in a way that ensures lasting economic benefits:

That's where I see these CIDA partnerships as pointing a way forward. Companies work with others who know international development and the benefits of aid better than the mining industry does. By partnering with them, you enable more creative approaches to ensuring that the value and jobs associated with the extractive industries flow more broadly to the communities in and around the mine and beyond.[309]

Overall, testimony before the Committee on the role of the natural resource sector in development reflected both longstanding debates in this area and new perspectives. While the challenges raised were often specific to the sector, consensus in the testimony on the need to strengthen the institutional capacity of governments, parliaments and communities reflected ideas that have been emphasized in other contexts throughout this report.