Everyone s business. Towards a mature understanding of the role of the private sector in development

Transcription

1 Everyone s business Towards a mature understanding of the role of the private sector in development

2 Everyone s Business Towards a mature understanding of the role of the private sector in development EXECUTIVE SUMMARY Too often the discussion of the role of business in supporting development has been based on caricatures. Either business is big and bad, or there is an uncritical championing of the private sector as inevitably better than anything that local or national government can offer. Around the world, national governments and the World Bank have placed support for the private sector at the heart of their development strategies. The new UK coalition government has recently re-iterated its support for private-sector-led wealth creation as the way to address poverty. Businesses can provide jobs, tax revenues, investment in infrastructure and skills, and innovation all essential to developing countries economic growth. Precisely because of the central role that businesses play today, it is essential to ensure they are also accountable to citizens both in the developed, and the developing, world. CAFOD believes that the time is right for a more nuanced, yet realistic, approach to the private sector which will ultimately be more likely to contribute to genuine improvements in the lives of people in the developing world. This involves: Recognising there is no single private sector. Private sector actors vary greatly in size, legal status, sector affecting their impact on development and the impact of policies on them Appreciating that while businesses can have a considerable impact on development, these impacts are not automatically positive Understanding the particular nature of transnational corporations (TNCs) due to their size and mobility and the implications for effective legal frameworks Increasing our knowledge of how enterprises can contribute to poverty reduction, especially through their core business activities. 1

3 Developing a more evidence-based approach to the role of business in development requires clearer information about how companies operate and their impacts on society in terms of contributions and costs. Taking TNCs as a starting point, this paper includes recommendations for disclosure in order to deepen our understanding of international business and inform private sector development policies. Poor people are the private sector. They are the farmers and small businesses that we are trying to help. CAFOD s recommendations to governments Adopt and enforce an appropriate legal framework for corporate reporting Improve access to justice for victims of corporate abuses Build capacity of national and local governments in the South Ensure that a focus on TNCs does not lead to the needs of micro, small and medium-sized enterprises being ignored 1. WHAT DO WE MEAN BY THE PRIVATE SECTOR? Launching a consultation on the links between growth and development in 2006, Hilary Benn, then Secretary of State for International Development, emphasised that Poor people are the private sector. 1 He was referring to the estimated 90 per cent of people from sub-saharan Africa, many of them smallscale farmers, who can be regarded as being engaged in private sector activities. This is a helpful reminder, but one that can also be deceptive. The economic and political power that Wal-Mart wields as the world s largest food retailer is a world away from the experience of the rural coffee farmer in Liquicia district, Timor- Leste. So while the private sector includes huge numbers of small-scale farmers, artisans and local entrepreneurs, it also includes some of the richest economic entities on the planet. It follows that the positive and negative impacts they have are likely to be very different. The World Bank and donor governments need to respond to the diverse nature of the private sector by recognising that different approaches may be needed to manage the impact of different sized firms, and that policies will have different impacts on firms, depending on their specific characteristics and sector. 1 Speech on Growth and Poverty Reduction to the New Economics Foundation, 19 January

4 The growth of transnational corporations (TNCs) The number of companies operating trans-nationally is growing steadily. There are now some 82,000 TNCs worldwide with 810,000 foreign affiliates. In 2008, these companies employed a total of approximately 77 million people. 2 Even within this pool of TNCs, some companies are extremely large. General Electric, Shell, Vodafone, Toyota and ExxonMobil, are some of the biggest companies in the world by foreign assets. As economic entities they dwarf many states. In 2008, the top 100 companies had assets of US$10,760 billion. 3 Almost three-quarters of the world s 100 largest companies have their headquarters in just five countries the United States, France, Germany, the United Kingdom and Japan. The number of TNCs from emerging economies is growing, although from a low base. Seven TNCs from such countries appear on the list of 100 largest non-financial companies ranked by foreign assets. 4 These are Hyundai Motor Company, Samsung Electronics, LG Corp (all Korean) CITIC Group (China), Hutchison Whampoa Ltd (Hong Kong/China), Cemex S.A. (Mexico) and Petronas (Malaysia). TNCs still represent only a fraction of total private sector activity around the world and account for around four per cent of total employment. 5 Why are they important? According to different estimates, between one third and two thirds of world trade takes place within TNCs. 6 In some industries, such as coffee, chocolate or soya beans, a small number of companies dominate entire markets. 7 Finally, the links both upstream, in terms of supply chain, and downstream, in terms of retail and distribution, mean that the policies transnational companies adopt and implement can influence millions of people worldwide. Micro, Small and Medium-sized Enterprises (MSMEs) looking beyond the labels Definitions of MSMEs vary considerably. There is no standard classification. Depending on country and sector, firms in the SME category may employ anything between 25 and 500 people. It is important to remember that around 70 per cent of the population of low income countries are engaged in agriculture and smallholders can be regarded as businesses and entrepreneurs. 8 Examples of MSMEs could also include alternative business models such as cooperatives, perhaps within the fair-trade supply chain. 2 UNCTAD World Investment Report UNCTAD World Investment Report UNCTAD World Investment Report UNCTAD World Investment Report See for example Adrian Henriques (2007) Corporate Truth The Limits to Transparency 7 Duncan Green (2008) From Poverty to Power 8 Claes Lindhal (2005) Wealth of the Poor: Eliminating Poverty through Market and Private Sector Development, Sida studies no. 14 3

5 The very smallest of enterprises are known as microbusinesses. They may employ a dozen people or be a single entrepreneur. Women play an important role in running these very small businesses. Deputy village chief Nai Sareth, (far right), hands out loans to people in her village in Cambodia. The money will be used to buy and raise chickens. While many small companies depend on local and domestic markets, some MSMEs will be internationally orientated, e.g. as suppliers or importers of specialist materials. In the mining sector this could include for instance smaller junior mining companies operating in the prospecting and exploratory phase of developing a mine site. In a developing country context, medium-sized firms may in fact be multinationals. This means that although MSMEs are frequently lumped together, absolute definitions are not particularly helpful. Policymakers need always to bear in mind that in fact they represent a very diverse group of businesses with different priorities and needs. Case Study: Small businesses in Colombia In Colombia years of fighting between the guerrillas, state armed forces and paramilitary groups have forced around four million people to leave their homes. Displaced families lose their livelihoods and support networks, typically ending up with very few resources in the poor neighbourhoods of the larger towns where there is already high unemployment. The needs of displaced communities have not been a priority for local and regional authorities. From 2007 to 2009 CAFOD partner Secretariado Nacional de Pastoral Social (SNPS)/Caritas Colombia has been working with 500 families from displaced and vulnerable 4

6 communities in Neiva, Garzón and Florencia. Around half are of the beneficiaries are displaced and 76 per cent are women. The project offered trauma counselling and legal aid as well as advice and support for those interested in setting up small business cooperatives. As a result of the programme, participants set up 25 small businesses for 256 families, including a coffee growing cooperative, a bag making business and a furniture business which supplies local department stores. It is still early days for the fledgling enterprises as with any small business the challenge will be ensuring that they are competitive and sustainable. Other challenges identified include access to credit, financial and human resource management, access to markets and complying with national tax regulations. However, even at this early stage, the positive impact that running a business has had on confidence of those involved is clear. As one 42 year-old mother who runs the metal furniture business reports: My family has food to eat and regular money to buy clothes and shoes. I rely on myself. I can provide what my family needs. It s given me a sense of confidence and trust in myself as well as other people. Amparo at work at the metal furniture workshop. After training from Pastoral Social, she is now part of a metal furniture business and makes a small but steady wage which has improved her family's home. 5

7 Formal versus the informal sector Many poor people work in the informal sector. This means they either run or work for businesses that are not registered and do not pay taxes or social insurance. The World Bank estimated in 2005 that informal businesses represented more than half of all economic activity in developing countries. 9 Evidence suggests that the decision to remain informal may be a conscious choice by entrepreneurs. 10 While this might be a deliberate strategy for businessmen and women to reduce costs and red-tape, there are implications for working conditions and access to social protection (insurance, pensions etc.) The informal sector also includes a disproportionate number of women. 2. HOW DO BUSINESSES CONTRIBUTE TO DEVELOPMENT? The private sector s primary contribution to poverty reduction is through generating and sustaining economic growth. Clearly, however, the manner in which private sector entities trade, invest, employ staff and address their social and environmental impacts also has a profound impact on poverty reduction and human development. 11 A Cambodian girl poses as a hair model in the beauty salon where her sister works. With them is the salon owner. The link between businesses and economic growth is the primary basis for private sector development policies. DFID s 2009 White Paper stated that growth is a necessary, but not sufficient, factor for development. It is clear that some countries have been far more successful than others in translating economic growth into alleviating poverty. 9 World Bank World Development Report See for example Do Marginal Firms in Bolivia Benefit from Formalising? Finance Research David McKenzie, and Yaye Seynabou Sakho, June House of Commons International Development Committee: Private Sector Development. Fourth Report of Session

8 Research has highlighted that success factors include the initial degree of inequality within a society at the outset the more equality the more likely that growth will lead to better poverty reduction - and fair distribution of income and wealth during the growth process. 12 Therefore, Lindhal argued that for donors to achieve their goal of poverty reduction, they should look at policies which support both economic growth and fair income redistribution. This second ingredient seems to have been overlooked in many private sector policy approaches. CAFOD is particularly interested in looking beyond Corporate Social Responsibility initiatives to the development benefits generated by core business activity. This is where a company puts its resources and effort, therefore core business practices are likely to have the greatest impact in the developing world. Potential development benefits: Job creation is of central importance to alleviating poverty in the developing world. Poor people have identified getting a job - either by starting a business or working for someone else - as the most important route out of poverty. 13 Most private sector jobs are in agriculture or small local enterprises. As well as providing an income, setting up a business can be beneficial for individuals by boosting their confidence, providing security and increasing well-being. When looking at the type of jobs created by the foreign private sector, there is evidence that some policies and procedures within international supply chains have contributed to improving conditions and driving up wages for some workers. This can also have a knock-on effect on domestic businesses. Training and skills development provides another form of investment Tax and other revenue payments from businesses contribute to state budgets, particularly through tax payments from small and medium-sized businesses within the formal sector Investment in enterprises in the developing world actually comes primarily from domestic sources. In addition, at a global level foreign direct investment (FDI) from international companies is more significant than aid flows. While the majority of FDI goes to the developed world, a limited number of developing and transition economies have been receiving an increasing amount. 12 Claes Lindhal, The World Bank s Voices of the Poor survey referenced in World Development Report

9 FDI to the world s poorest countries is dominated by the extractives sector. For example, in 2009, only 3 per cent of global FDI inflows ($28 billion) went to the 49 least developed countries. Of that $28 billion, 63 per cent went to Angola, Sudan and Equatorial Guinea 14 Enterprises are a major source of technology and innovation. The private sector plays a crucial role in adapting and applying technologies (including the internet and IT). This has contributed to rapid reductions in poverty in a number of Asian countries in particular 15 However, closer analysis of the evidence, especially in relation to specific sectors and types of business, shows that the picture is more complicated for most of the benefits described. While foreign companies can create helpful linkages, in some instances, no local benefits are apparent or they even contribute to putting small, local enterprises out of business. Some oil, gas and mining operations may bring considerable FDI but create relatively few local jobs. Wealth creation by the private sector has also created huge inequalities. The International Labour Organisation (ILO) notes the effects of performance pay for top managers and executives by some firms: In 2003, Chief Executive Officers in the US earned 370 times the average employee, by 2007 the gap had increased to more than 521 times. 16 In relation to quality of jobs, it is often assumed that these are better within TNCs and their suppliers. However the global trend is that employment has increased but the bargaining power of employees has been weakened. This is reflected in working conditions and wage levels. In many countries, the number of non-standard jobs has grown over the last 15 years. These are part-time, temporary jobs (including fixed term and seasonal work) and self-employment. Latin America, for instance, has experienced a rise in informal employment in the formal sector for example, casual jobs without a contract. Outsourcing of jobs to employment agencies is also widespread, for example, in electronics manufacturing and assembly. 14 World Development Report Claes Lindhal, ILO World of Work 2008: Income Inequalities in the Age of Financial Globalisation, p. 18 8

10 Labour rights organisation CEREAL has documented high proportions of agency workers and abusive and illegal use of repeated short-term contracts in the Mexican electronics industry. 17 Unions term this precarious work. Sub-contracting not only means that workers miss out on paid holiday or other benefits, but can also be used to deny workers their rights to organise independently or bargain for improved conditions. The International Metalworkers Federation cites the example of Korea where, when workers tried to form a union, they were dismissed by their employer who either did not renew the workers contract or did not renew its own contract with the subcontracting agency. 18 In this way, workers core labour rights can be undermined by flexible working practices. When we turn to the revenues that companies of all sizes generate, it is interesting to note that between 1993 and 2007, the average rate of corporate tax globally fell by 10 percentage points. 19 During this period the corporate tax rate fell in 78 of the 97 countries for which data is available. Repatriation of profits also grew massively over the same period with profit remittances from developing countries to international companies home countries reaching an estimated $169 billion in 2005, twice the global flow of aid. 20 Studies of domestic businesses show that larger enterprises are often successful in avoiding tax payments. Mexican textile worker at a fair trade cooperative garment factory which pays better wages than other sites. There has been an increasing focus by civil society, the OECD and the G20 on tax avoidance and evasion by TNCs. Precisely because of a lack of data, it is difficult to get a full picture of just how much revenue is lost to developing countries and amounts are disputed. While measures have been taken to address these issues in the last couple of years, transfer pricing and tax havens remain significant challenges for economic growth and poverty reduction. For example, in 2008 and 2009, the figures for FDI to the British Virgin Islands were almost the same as for the whole of Brazil. 21 Finally, while new and innovative products can be of great value to developing countries, analysts are beginning to grapple with the environmental and social impact of continuous economic growth and consumption based on novelty. 22 If Western patterns of consumption are repeated across the developing world they will lead to depletion of finite resources and huge environmental impacts. Are the jobs that are being created therefore actually sustainable in the medium to longer term? 17 See reports by Centre for Reflection and Action on Labour Issues : CEREAL (2007) Electronics Multinationals and Labour rights in Mexico and CEREAL (2009) Labour rights in a time of crisis 18 International Metalworkers Federation (IMF) submission to the UN Special Representative of the Secretary General for business and Human Rights, May ILO (2008) 20 Duncan Green (2008) From Poverty to Power 21 World Investment Report In 2008 both Brazil and BVI received 45 billion dollars. In 2009 Brazil recorded FDI inflows of $26 billion and BVI $25 billion. 22 Sustainable Development Commission (2009) Prosperity without Growth 9

11 3. WHAT ARE THE CHALLENGES IN HARNESSING THE PRIVATE SECTOR FOR DEVELOPMENT? Power and influence of large companies over public policy The recent financial crisis posed the question whether or not some of the largest TNCs in the form of the international banks had become too big to fail? Politicians are still looking for a response. The ILO identifies a moral hazard problem in that these [financial] actors grasp all the gains from irresponsible financial positions while the losses from such operations are partly shifted to society. 23 This refers very specifically to the banking sector, but it does illustrate the power that some international companies have vis-a-vis the nation state. Investment has transformed the landscape of Shenzhen, China. Globalisation means that the largest companies are more international than ever before in terms of foreign assets, subsidiaries and employees. Global supply chains reach right around our world, linking customers in Guildford with agents in Hong Kong and factory owners and workers in Guangdong. Because businesses and capital are more mobile than ever, it becomes more difficult for national governments to pursue redistributive policies, makes it harder to tax companies, reduces the bargaining strength of workers and makes it easier for governments to tax them instead. 24 In both the developing and the developed world, companies can be extremely effective lobbyists. As vital economic actors, it is important that businesses participate in policy debates, however the issue here is one of balance. Large companies have much greater resources to spend on influencing policy or draft laws than other affected parties. One study on the American Jobs Creation Act (2004) estimated the return on corporate lobbying in the US as $200 for every $1 spent. 25 Between 1998 and 2004, the US Chamber of Commerce spent $193,582,839 to influence Congress decisions, not including the amounts spent on lobbying by individual companies. As Adrian Henriques notes, comparable data for the UK is simply not available because there is no requirement to disclose along the lines of the US Lobbying Disclosure Act ILO World of Work Report 2008: Income Inequalities in the Age of Financial Globalisation p Ibid 25 Alexander, Raquel Meyer, Mazza, Stephen W. and Scholz, Susan, Measuring Rates of Return for Lobbying Expenditures: An Empirical Analysis under the American Jobs Creation Act (April 8, 2009). Available at SSRN: 26 Adrian Henriques (2007) Corporate Truth The Limits to Transparency 10

12 Small businesses and micro-businesses in the developing world may find it very difficult to organise and/or articulate their own asks of local and national government effectively. DFID has recognised this in many of its programmes, including its Latin American programmes, offering support to help small and micro-businesses in Bolivia and Nicaragua organise themselves so they can produce strategic demands and engage in policy discussions with governments. 27 Women production workers in a food business in south-east Colombia. Gaps in existing legal frameworks Though he has yet to make specific recommendations to address this issue, UN Special Representative on Business and Human Rights John Ruggie recognised there is a global imbalance - companies are able to use national and international legal frameworks to defend their interests but it is far more difficult for citizens who are victims of corporate abuse to bring successful claims against TNCs. Companies have huge advantages over civil society in terms of access to information, resources and legal expertise. International initiatives to address corporate accountability, for example the Global Compact or the OECD Guidelines for multinational enterprises, are overwhelmingly based on voluntary rather than regulatory approaches, and lack meaningful sanctions if standards are not met. 27 DFID (2008) Market access for the poor. Lessons from Latin American 1 11

13 Case Study: Allegations of torture against Monterrico Metals in Peru In May 2009 CAFOD and the Peru Support Group submitted evidence to the business and human rights enquiry by Parliament s Joint Committee on Human Rights, highlighting the case of Monterrico Metals plc, a company incorporated in England in In August 2005, 28 people were detained by police and then held for three days at the Rio Blanco mine in a remote area of northern Peru. They had been protesting against the development of the mine which is the principal asset of Monterrico Metals. According to their witness statements, the protestors were held against their will and subject to physical and psychological torture, including beatings and in some cases sexual abuse. Attempts to seek justice through the Peruvian courts have been slow and difficult. In March 2009, Peruvian prosecutors accused the police of torture but cleared the mining company and private security firm Forza of wrongdoing. Peruvians who were involved in the protest are now pursuing their case for compensation in the English courts, arguing that the company must have known of the conditions in which they were being detained but failed to take steps to prevent or end their ordeal. The company disputes this. At the time of writing, the case against Monterrico Metals plc and its Peruvian subsidiary Rio Blanco Copper SA is finally expected to come to trial in the English High Court in This will be almost six years after the original events. Business and human rights States have the primary responsibility to promote human rights recognised in international law and ensure they are respected. It is clear that relying solely on host governments to uphold this duty is not sufficient to ensure that rights are promoted and respected. Many UK businesses operate in or have business partners and suppliers in territories identified by the UK government as major countries of concern in relation to human rights, for example China, Colombia and the Democratic Republic of Congo. 28 In many instances, national or local governments are unwilling or unable to protect the human rights of their citizens. Large-scale projects in the oil, gas and mining sectors are often particularly contentious and high-risk in this respect. In Honduras, the administration identified a lack of technical expertise within government departments to monitor the 28 Foreign and Commonwealth Office (2009) Annual Report on Human Rights

14 social and environmental impacts of gold-mining operations effectively. 29 In the Philippines many potential mine sites lie within ancestral lands of indigenous peoples whose rights are recognised in ILO Convention 169. The UN special rapporteur on indigenous rights found that national legislation, which on paper gives significant legal protection for indigenous communities rights, is contradicted by other laws and not always enforced effectively. 30 CAFOD partner organisations in Latin America report an increasing tendency on the part of the state to treat legitimate protest by civil society against large scale projects as crime. 31 Too big to criticise? It is interesting to look at the aggressive tactics adopted by some companies to defend their interests from public criticism via the judicial system. For example, in 2007, Indian company Fiber & Fabrics International used the courts to get a restraining order against local Indian organisations. Subsequently, the international NGO Clean Clothes Campaign and the India Committee of the Netherlands, their internet service provider and local Indian organisations faced a court case for cyber crime and criminal defamation when they reported claims of abuses of labour rights in an Indian garment factory. 32 In October 2009, UK-Dutch firm Trafigura tried to use the UK courts to prevent newspapers reporting a parliamentary question on the effectiveness of legislation to protect whistleblowers and guarantee press freedom. The question related to allegations that, in 2006, Trafigura had dumped toxic waste in the Ivory Coast. UK supermarket group Tesco has also been criticised by leading writers when its subsidiary Tesco Lotus brought a libel action against three commentators in Thailand who claimed that the firm s expansion had a negative impact on local businesses. 33 The case was dropped in 2009, but has implications for the ability to conduct a public debate about the role transnational companies play in society at a time when that role is increasing. 34 In the Philippines many mineral reserves are located in the traditional lands of indigenous peoples. The drive to maximise profit The legitimate purpose of a business is to make a profit. At the same time, it is clear that some very successful business models for example in terms of delivering profits for shareholders - can have devastating effects on the ordinary lives of people in the developing world. CAFOD believes that a realistic approach to the strengths and limitations of the market should underpin discussions on the role of the private sector in development. 29 CAFOD (2006) Unearth Justice: counting the cost of gold. 30 CAFOD (2008) Kept in the dark: why it s time for BHP Billiton to let communities in the Philippines have their say. 31 CIDSE (2009) Impacts of Extractive Industries in Latin America. 32 See press release 15 June 2007 Clean Clothes Campaign summoned to Indian court in alleged defamation case and accompanying court order 33 For the PEN letter and Tesco s response see

15 A key question when looking at business impacts on development is that of externalities i.e. who ultimately pays the price? In economics, an externality is a term to describe the positive or negative effects of a transaction on a third party who has not been consulted and whose interests have not been taken into account. Joel Bakan famously described the corporation as a pathological structure due to its nature of constantly externalising social and environmental costs in order to maximise profit for investors. 35 Another profitable business model which has been a feature of global supply chains has been constant pressure from buyers to suppliers to cut costs in order to reduce product price. Often labour costs are where the savings are made. As the World Investment Report notes: In the global banana industry, for example, the downward spiral in purchase prices has been passed on to workers in the plantations and to small producers, further depressing wages and working conditions in producing countries world-wide, according to the Second International Banana conference (Arias et al.,2003). 36 So while the private sector contributes significantly to economic growth, it is not a given that profitable private sector activity will automatically lead to poverty reduction. A nuanced approach to analysis is required, taking into account the specific sector and country context, type, size of business and the priorities of its owners. It is important to remember that while a business can deliver poverty reduction or benefits to society, its primary goal is to generate profit. 4. HOW CAN WE PROVIDE THE RIGHT POLICY FRAMEWORK SO THAT BUSINESS ACTIVITY SUPPORTS DEVELOPMENT? There have been a range of government and donor approaches to the role that the private sector should play in development to date. These have included aggressive deregulation policies to attract FDI. So, for example, the World Bank pursued a policy of pressing for revision of mining codes in many Latin American countries including Honduras and Peru during the 1980s and 1990s to encourage inward investment. More recently the focus by donors has been on public-private partnerships, making markets work for the poor and creating an enabling environment for business. Although these approaches represent a move away from pure Washington consensus models, a more balanced approach to the private sector is still needed. 35 Joel Bakan (2004) The Corporation 36 World Investment Report

16 The World Bank s World Development Report 2005 highlights a basic but important tension: Societies benefit greatly from the activities of firms but the preferences of firms don t fully match those of society. 37 This is common sense, however, such recognition seems to be missing from many private sector policy approaches. In a lop-sided approach to good practice, the World Bank was, until 2009, giving Singapore, the Marshall Islands and the United States top ranking on the employing workers index in its Doing Business report because of the low protection that these countries offered to workers and the lack of union representation. Although this particular measure has now been altered, the 2010 Doing Business report still highlighted Rwanda as the top reformer on employing workers. The rationale for this was that Rwanda had ended the requirement for employers to consult employee representatives and notify the labour inspector before redundancy procedures and had abolished the law which had set a limit on repeated use of short term contracts. Likewise, countries such as the Maldives and Qatar which had no corporate income tax, were first in the tax ranking system, even though this model is clearly unsustainable at a global level. 38 Societies benefit greatly from the activities of firms but the preferences of firms don t fully match those of society. DFID s 2009 private sector development strategy stressed the role that businesses play in contributing to economic growth. However, measures to address negative impacts were much more low-key and based around voluntary, multi-stakeholder approaches. The Conservative Green Paper on Development highlighted the need for greater transparency and accountability in development outcomes but this requirement needs to be extended to the private sector as well. How can businesses lead? Donors and development NGOs certainly do not have a monopoly on tackling poverty. Clearly, there are many actions that companies can take to maximise their positive contribution to development. This will depend on the country context, size, and sector as well as the priorities of the business owners. In relation to TNCs, there is consensus that purely philanthropic projects are not enough. For a number of years, the concept of Corporate Social Responsibility (CSR) has also been looking rather outdated. Aside from issues of greenwash, NGOs have been raising concerns about the limited power that CSR professionals have within companies. 37 World Development Report World Bank (2009) Doing Business

17 Perhaps in recognition of this, the semantics of the debate are changing. There is a new focus on core business and inclusive business i.e. allowing more people to participate in the benefits of private sector activity. DFID launched the 2008 Business Call to Action on the Millennium Development Goals to mobilise companies to use their core business and skills to create jobs and stimulate growth. High-profile businesses such as Standard Chartered, Cadbury, Vodafone, SABMiller and Anglo-American are seeking to set the agenda on development. Examples of this approach include pilots of mobile phone technology in Africa, provision of banking services and improving access to water and sanitation. The number of sector specific and company case studies is growing, but it is still important to capture more evidence about the overall developmental impact of businesses as well as the contribution of more inclusive business practices to poverty reduction. 39 Carrots and carrots? This new focus on the impact of core business activity is welcome. However, in stimulating companies towards a model of inclusive business, the emphasis is placed very heavily on carrots to make them act. For example, at the 2009 ODI debate series, a central question for governments and donors is how to create the appropriate incentive framework to facilitate further innovation in inclusive business? 40 Clearer information is needed on tax flows between the developing and the developed world. 39 Caroline Ashley Measuring the impact of business on development ODI opinion April Building a common future with business ODI concluding event 13 October

18 Given that businesses are seeking to be involved in development initiatives which mesh with their core business objectives, e.g. tapping into new markets, CAFOD would counsel a careful approach to incentives to ensure that donors are not subsidising activities for which there is already a strong business case. In addition, one aspect of core business practices a company s approach to tax - seems to be lacking from both the Business Call to Action and Simon Maxwell s definition of the fourth generation of global corporate citizenship. 41 It is vital for policymakers to recognise that exploring positive actions by business is not incompatible with more systematic approaches to ensure that companies do no harm. RECOMMENDATIONS TO STRENGTHEN THE CONTRIBUTION OF THE PRIVATE SECTOR TO DEVELOPMENT: How can we increase the positive impact of businesses in developing countries? CAFOD believes that important first steps are developing sensible reporting requirements for TNCs, stronger monitoring institutions and effective ways for citizens to access justice if corporate abuses occur. Gaining accurate, comparable information about the impacts of business in the developing world is central to an effective approach to the private sector. The recommendations outlined below would provide policy makers and companies with a clearer picture of the positive and negative impacts of core business activities specifically in relation to TNCs. These measures would also provide a more informed basis for further policy decisions. For example, on the issue of business and human rights, there is a lack of comparable information from companies and governments. This means much of the debate relies on case study evidence, featuring either abuses or good practice. There is real need for more quantitative data. The proposals outlined below would also help to address power imbalances by giving citizens around the world better access to reliable information about international companies operations. 41 Simon Maxwell, September 2009 Harnessing the power of business for development impact: towards the fourth generation. 17

19 Recommendation one: Adopt and enforce an appropriate legal framework for corporate reporting Home governments such as the UK should introduce mandatory reporting and disclosure requirements for their companies operating abroad. Legislation at UK or EU level would require companies to publish payments to governments including taxes broken down on a country by country basis. This would help citizens in the developed and developing world to have a much clearer idea of what individual companies were contributing to the national economy. Ultimately, CAFOD would also like to see this matched by a requirement for oil, gas and mining companies to disclose contracts as well. If government officials and company representatives were aware that contracts would subsequently be published, this would act as a preventative measure to reduce the risk of corruption and increase the likelihood that terms will be negotiated which represent a good deal for citizens of resource-rich developing countries. Disclosure of social and environmental data (for example human rights impact assessments and social and environmental impact assessments) is also a necessary step towards greater accountability. Citizens and affected communities would be able to get a clear picture of the costs and benefits of particular private sector projects. The UK Companies Act 2006 first introduced the concept of social and environmental reporting but its provisions need to be strengthened. Evaluation of current practice shows that companies are not providing sufficient data and privately owned TNCs are not covered by the existing law. 42 At an international level, there is particular value in using international accounting standards to deliver country-bycountry disclosure of tax and other payments to governments. This would provide users with audited and comparable data and would also apply to a wide range of companies from many countries. The International Accounting Standards Board is currently in the process of considering developing a standard for the extractives sector. CAFOD, with other members of the Publish What You Pay Coalition, believes that this provides a clear opportunity to require oil, gas and mining companies to report on a country-by-country basis

20 Companies frequently raise corporate confidentiality in discussions about disclosure. While the issue needs to be considered, this argument has been consistently used against any measures to increase corporate transparency for decades. 43 The IMF has noted that in fact there are very few reasons for oil, gas and mining contracts to remain confidential for more than a few months after being signed. 44 Cost is also raised as another barrier and, in some cases, gathering and publishing additional information would create extra costs. Disclosing on the internet or in electronic form could help to make this process cheaper. Why is a mandatory approach needed? A number of existing voluntary and multi-stakeholder initiatives include reporting. CAFOD has been part of the Ethical Trading Initiative and the Extractive Industries Transparency Initiative since they began. Our experience is that they have been useful as a source of learning for companies, civil society and government. However, relying on these initiatives alone would be too slow and too piecemeal to deliver the scale of change that is needed. ETI has been generating learning about working conditions in supply chains for over ten years. EITI has been promoting disclosure of payment information by oil, gas and mining companies for more than five. It is now time to build on what has been learned from these multi-stakeholder approaches to deliver more systematic change. EITI has shown the value of increasing awareness of payments made by oil, gas and mining companies, however the multistakeholder initiative has been resource intensive and progress to date has been very slow and patchy. As of 1 September 2010, of the 27 countries which had committed to implement EITI, only Azerbaijan, Liberia and Timor-Leste had actually met the validation criteria. Governments of resource-rich countries such as Angola, Cambodia and Burma have chosen not to sign up. In its 2006 enquiry, the UK International Development Committee specifically recommended that DFID should at the very least actively consider transferring [EITI] from a voluntary to a mandatory approach in The United States has recognised the need for mandatory reporting by oil, gas and mining companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act requiring disclosure of payments to governments on a project level basis was passed in July It is time for the UK and other EU states to follow suit. 43 Adrian Henriques (2007) Corporate Truth: the limits to transparency 44 IMF (2005) Guide on Resource Revenue Transparency 45 House of Commons International Development Committee: Private Sector Development. Fourth Report of Session , p

21 Timorese NGO Luta Hamutuk presents information on the Petroleum Fund and revenues from oil and natural gas to the local community in Bazartete. Relying on voluntary disclosure by firms will not be enough. Organisations which carry out human rights impact assessments cite publication as good practice yet, to date, there is only one example of a company choosing to publish a human rights impact assessment. In addition, there is a question of reciprocity: if communities and other stakeholders outside the company have given time and information to such an impact assessment, it seems appropriate that they should be entitled to see the way that their views have been presented and the conclusions drawn. Case study: Revenue transparency in the oil and gas industry in Timor-Leste For Timor-Leste one of the smallest, poorest countries in the world, future development depends on how successfully revenues from the oil and gas industry are managed and spent. Currently over 90 per cent of the national budget comes from oil and gas revenues. Since independence in 2002, Timor-Leste has made real progress in increasing transparency in its oil and gas sector. This is due to a strong legal framework for the petroleum industry which for example requires all payments into the country s petroleum fund to be listed by company in the fund s annual report. Participation in the Extractive Industries Transparency Initiative (EITI) has also contributed to greater disclosure of information about payments to government by companies from the oil and natural gas industries. Timor-Leste compiled its first EITI report in 2009 and completed the official validation process by July 2010 to achieve EITI compliant status. Work is still going on to raise awareness of EITI and the petroleum fund with people from local communities outside Dili. 20

22 Experience from EITI in Timor shows that participation by civil society groups helped to build understanding and raise awareness of how oil and gas companies operate. Conoco Phillips, ENI and Woodside are the companies most closely involved in the national EITI process. In Timor-Leste, the challenge now is to ensure that lessons learned on transparency and accountability from EITI are extended to other sectors, e.g. construction and public procurement. Learning from other countries shows that these are sectors where risk of corruption is high. The legal framework for the petroleum sector has served Timor well over the last five years and is internationally recognised as strong. The Petroleum Fund Law is scheduled for review this year and it is vital that this is done through a formal process with a transparent public consultation on any proposed changes. Consultation on the original draft legislation in allowed civil society to participate leading to a stronger final outcome. Given the importance of the fund to Timor s future, it is essential that there is a vibrant and informed public debate about how the resources of the fund are going to be used. Recommendation two: Improve access to justice for victims of corporate abuses UN special representative on business and human rights John Ruggie is now developing specific recommendations to flesh out his protect, respect and remedy framework. This piece of work is an opportunity for governments to address some of the power imbalances between TNCs and communities. In order to reduce the legal and practical barriers to accessing justice, we support developing recommendations around the scope of directors duties within company law; making clearer links between a company and its subsidiaries in relation to corporate liability and making it easier for victims of corporate abuses to bring class actions. There is also merit in exploring how the burden of proof can be reduced for affected communities through preventative measures. For example, in the context of mining projects in the Philippines, local NGO SALIGAN has proposed introducing court protection orders. Businesses wishing to enter into a community would first have to apply for exemption from an existing protection order. The onus therefore would be on extractive companies to demonstrate to the court that their operations would not have a negative impact on human rights 21

23 and the environment before any new mining project could be considered. 46 This would be in addition to meeting existing requirements for Free, Prior and Informed Consent from indigenous communities. Given the range of issues and challenges identified over the last five years in relation to business and human rights, it is important to plan for the end of the John Ruggie s mandate. We would like to see a follow-up special procedure agreed, e.g. a UN special rapporteur or working group on the issue of business and human rights, to make sure the current discussions and recommendations lead to lasting changes. When measures supporting the Ruggie framework are finally implemented, adequate resources must be available at international level to evaluate the actual impact on business and human rights. This should include scope to investigate particular cases. The UK Government can take a leadership role by establishing a robust, independent UK Commission on Business, Human Rights and the Environment along the lines of the CORE Coalition proposal. 47 The commission would enhance accountability and recourse mechanisms as well as being a source of expert advice for UK companies examining their impact on human rights and the environment. Recommendation three: Build capacity of national and local governments in the South Many companies and civil society groups have highlighted that if states fail to enforce national laws this undermines responsible business practices. At national level, donor support to stimulate markets and investment should be balanced by also looking at whether there are adequate institutions to provide social and environmental protection, for example effective labour tribunals, tax authorities and technical expertise for accurate monitoring environmental and social compliance. Access to robust, comparable data from corporate reporting in TNCs home countries would complement measures to build capacity of host country institutions. We believe there is also merit in developing a UN-based source of expertise and advice to civil society, local and national governments in relation to the private sector. It would help developing governments to get the most out of their negotiations with private sector companies, for example in the context of public-private partnerships, bi-lateral investment agreements or large scale infrastructure projects. An 46 SALIGAN (2009) Access to Remedies: Submission to the UN OHCHR Consultation on Business and Human Rights by Sentro ng Alternaribong Lingap Panligal,