Monthly Archives: June 2013

Shell in Nigeria: the Trans-Niger Pipeline Pollution

nigeria

A major fire that forced Shell to close its Trans Niger Pipeline in southern Nigeria raises serious questions about the way the oil giant is operating, Amnesty International and the Nigerian National Coalition on Gas Flaring and Oil Spills (NACGOND) (an NGO) said.The organizations called for an independent inquiry into the events that led to the fire at Bodo in Rivers State – an area already devastated by years of oil pollution.

Eight Shell contractors were arrested by Nigerian security services in connection with the fire that broke out last week (June 19, 2013), following an oil spill at a section of the pipeline near Bodo that was being repaired by Shell contractors.A Shell-led investigation into the cause of the fire is due to begin this week.

Shell claims the fire was a consequence of oil theft. However, community members told NACGOND that in the days leading up to the fire Nigerian security forces prevented anyone other than Shell’s contractors going near the area of the spill. From the shore people saw barges being loaded with oil and taken away from the site.  “Shell’s investigation into the cause of the fire is not enough,” said Tracy Adole of NACGOND. “What’s needed is a fully transparent and independent inquiry into what happened at Bodo in the days before the fire and the role – and competence – of Shell’s contractors. There are serious unanswered questions as to who Shell entrusted with the high-risk repair of the pipeline, and about its own level of oversight.”

The fire broke out following an oil spill on 11 June in an area where Shell contractors were working on maintenance and repairs. The area was guarded by security forces apparently preventing unauthorised access. Local residents attempted to visit the site to asses the scale of the spill but were turned back.  Witnesses reported seeing oil being loaded onto barges by Shell’s contractors for several days after the spill.  “The facts make it difficult to believe that anyone other than Shell’s contractors were in the vicinity in the days leading up to the fire,” said Tracy Adole. “Shell was quick to blame oil theft as the cause of the latest pollution and fire at Bodo, but the company has yet to fully answer for the role of its own contractors.”

Over the last decade, Shell has claimed that most of the oil spilt in the Niger Delta is due to oil theft and sabotage of its pipelines. The company bases these claims on a system that includes publicly contested data and relies almost exclusively on information provided by the company itself.The alleged theft and sabotage cases have not been verified by any independent bodies.

Last week, NCP, found that Shell’s statements that sabotage is responsible for most oil spilt in Nigeria were based on disputed evidence and flawed investigations.

In 2008 two massive oil spills occurred at Bodo in the Niger Delta. Both were the result of operational failures by Shell. Despite the enormous environmental damage done, Shell never cleaned up the spills. The community has now taken their case to the UK courts to seek compensation and clean up.  In 2011 a major scientific study carried out by the UN Environmental Programme documented serious problems with Shell’s response to oil spills. The same study noted that Nigerian regulators were “at the mercy” of oil companies when it comes to site visits to investigate oil spills.  Amnesty International asked Shell for a response to the latest spill and fire at Bodo and the arrest of contractors in relation to oil theft. Shell directed Amnesty to its public statement.

Nigeria: Wider Investigation Into Shell’s Nigeria Operation Needed After Arrest of Contractors, Amnesty International, June 26, 2013

Geological Scandal: Guinea and the UK Offshore Guernsey

Iron_Ore_Pellets

As he lay on his death bed in 2008, the former president of Guinea Lansana Conté agreed to hand over a licence worth billions of pounds to mine a share of Simandou, one of the world’s richest undeveloped mineral deposits.  The rights to extract half of the iron ore at Simandou, situated in a mountainous region of Guinea’s south-east, were unceremoniously stripped from Rio Tinto, and awarded to BSG Resources, a mining company based in the offshore haven of Guernsey, a British Crown dependency, whose owner (through a family trust) is Israeli diamond magnate Beny Steinmetz.  Having pledged to invest just $165m to develop a mine at Simandou to secure the rights, BSGR sold a 51 per cent stake in it to Brazilian company Vale for $2.5bn, according to Forbes.BSGR had pulled off the deal of the century, in one observer’s words.

In January this year, the FBI began to investigate the deal. Wire-tapping and a sting led to allegations that Mamadie Touré, Mr Conté’s wife, had received payments into US-held bank accounts, from Frederic Cilins, an agent for BSGR in Guinea.FBI agents also allegedly found that the Frenchman, Mr Cilins, had put pressure on Touré to destroy evidence showing that the rights to the Simandou mine had been won after millions of dollars were paid in bribes to Guinea government officials. Touré is now co-operating with the investigation in the hope of obtaining immunity for her own potential criminal conduct, according to a criminal complaint filed in federal court in New York in April.

In May, after Mr Cilins was charged with obstructing the federal grand jury investigation, BSGR released a statement acknowledging that it had once had a business relationship with the Frenchman, but adding: “Allegations that there was anything improper about the manner in which BSGR obtained its mining rights in Guinea are entirely baseless and motivated by a campaign to seize the assets of BSGR.”

Alpha Condé, the current President of Guinea, who came to power in 2010 after half a century in opposition, now wants the Simandou licence back in Guinea. He hopes the US criminal case will help his effort to retrieve it.“I have to wait for the findings of investigations by both the US judicial system and the Guinea system, before I can act or have an informed opinion,” President Condé told The Independent. “The evidence suggests there is a strong case. The US [is] saying that the evidence of corruption is strong.”  President Condé, who is attending the G8 summit as a guest of David Cameron, argues that the British authorities have a role to play in raising the pressure on Mr Steinmetz to return the licence. Transactions went through the UK as well as US banking systems, and he is understood to be pushing for the Serious Fraud Office to start an investigation. Mr Condé – who is being advised by Tony Blair and George Soros on how to curb corruption, build the country’s economy, and enact a “national transformation” – believes that the Simandou scandal has its roots in Western countries, and they must play a key role in holding guilty parties to account.  “Cooperation from the US has already brought a lot of evidence forward,” said Mr Condé. “But England is central because a lot of the transactions will be initiated there. So getting the UK government to provide us with information will accelerate the current investigation.”  Mr Condé says greater exchange of information about offshore assets and companies between Western and African countries will boost the fight against Guinean corruption.  “We are trying to address a problem that has its source in Western countries,” Mr Condé says. “We need to deal with places where the problem arises. Most of the countries involved in the corruption in Guinea and more widely in Africa are of Western origin so the West has to be part of the solution. It is not that we are relying on Western countries to solve our problem, it is that we want Western countries to be part of the solution.”  Offshore companies need to be better monitored and controlled, he says. “We don’t have the technology to identify the problems but this is the very way that corruption is perpetrated….

In 2010, Mr Condé, who is 75, was declared winner of Guinea’s first democratic election since the country gained independence from France in 1958, taking over from a military junta which had seized power in 2008 after Mr Conté’s death. Having endured jail time and exile during his years in opposition, supporters of his Rally of Guinean People party saw the win as a triumph, but in less than a year he faced a coup from which he narrowly escaped with his life.

Critics have claimed Mr Condé has attempted to rig subsequent elections, including a legislative election which had been scheduled for 30 June, but was postponed. Elements of the military deeply opposed to Mr Condé are said to be fomenting unrest in the capital of Conakry – fuelled by deep ethnic divisions. More than 50 people have been killed during protests in the past three months.  “The President wants these elections to be credible, so he has a problem if the opposition behave in this way,” says Scott Horton, a legal adviser to the Government of Guinea.

Fundamentalist Islamic groups have also been infiltrating Guinea from neighbouring Mali, where French forces intervened to combat such groups in January. Organised gangs, arms traders and drug dealers have fed on the country’s instability…Meanwhile, Mr Condé continues to drive the project to begin iron ore production at the part of the Simandou mine Rio Tinto retained. Despite scepticism from many analysts, he insists the $20bn project will begin in 2015.

The corruption deal of the century: How Guinea lost billions of pounds in Simandou mining licensing, The Independent, June 18, 2013

The Age of Colonization: why colonies need empires

French Polynesia.  Image from wikpedia

On May 17th, the territory of French Polynesia…was reinscribed on the UN’s disapproving list of “non-self-governing territories”. The UN resolution requires France to move swiftly towards setting French Polynesia on the path to self-determination.   France boycotted the proceedings. But only 12 days earlier, elections in its scattered French Polynesian imperial outpost brought a heavy defeat for the territory’s long-standing pro-independence leader, Oscar Temaru, and victory for his arch-rival, Gaston Flosse, who vows never to let another flag fly over the presidential palace. Self-determination, the French government sniffed, “cannot be

The UN’s “non-self-governing” list dates back to 1946 and originally consisted of territories reported as dependencies by the colonial powers themselves. In the decades that followed, most became independent, or were annexed, or were officially acknowledged as, in effect, enjoying political autonomy. But 16 territories around the globe, mostly minute islands in the Caribbean, Atlantic or Pacific Oceans, remain officially in the queue for decolonisation. In the Pacific they include Tokelau, Pitcairn Islands, American Samoa, Guam and New Caledonia. Each year, a UN committee meets to deliberate on their status, and to pronounce its verdict on the appropriate steps towards decolonisation.

Yet, when consulted, independence has not been the preferred option for many Pacific islanders. In two UN-supervised referendums, held in 2006 and 2007, Tokelau (population: 1,411) narrowly failed to obtain the required two-thirds majority to end its status as a New Zealand dependency, though the results were close. The 47 inhabitants of Pitcairn, still home to descendants of the Bounty’s mutineers, have no desire to end British rule. Politicians from American Samoa repeatedly ask to be removed from the UN list.

The Pacific territory with the most realistic chance of decolonisation is nickel-rich New Caledonia, a French colony since 1853. In the 1980s indigenous Kanak leaders pushing for independence managed to get their islands relisted as “non-self-governing”. Violent conflict on the island, which has a substantial French settler population, ended in 1988 only after the authorities in Paris agreed to a referendum on independence to be held ten years later. When that time came, in 1998, Kanak leaders agreed to a further delay of 15-20 years, meaning that the scheduled referendum must be held at some point before 2019—and perhaps as early as next year. Many of the French settler politicians, who remain loyal to the motherland, hope that some further compromise can again avoid a potentially polarising electoral contest.

Mr Temaru’s successful bid to have French Polynesia officially listed as still a colony was inspired by the New Caledonian experience. In the past Paris has threatened to pull the economic plug on any territory that chooses independence, explaining why many Tahitians prefer some form of loose autonomy while remaining under the French umbrella. Yet at times the government in Paris has shown signs of growing weary of its costly Pacific dependencies.

The Pacific’s colonies: Ends of empire, Economist, May 25, 2013, at 41

Deforestation in Indonesia: slowdown

Rafflesia

Indonesia’s president, Susilo Bambang Yudhoyono, is not known as a conviction politician… On the environment, though, Mr Yudhoyono has been uncommonly courageous. In 2009, two years after world leaders met on the island of Bali to agree on a “road map” to slow climate change, Mr Yudhoyono pledged Indonesia to cutting its carbon emissions by at least 26% by 2020. Then, in 2011, he imposed a two-year moratorium on forest-clearing concessions under a $1 billion agreement with the Norwegian government. The money is meant to support a UN programme to reduce emissions from deforestation and forest degradation. On May 16th Mr Yudhoyono once again showed his environmental mettle: despite intense pressure from commercial interests, he signed a decree extending the moratorium for two more years.

This is good news for Indonesia’s forests, home to a dizzying diversity of wildlife, from endangered orangutans and rhinos to a Rafflesia that produces the largest flower on earth (1 metre, or three feet, wide). It is also a fillip for global efforts to combat climate change. According to a 2007 study by the World Bank, Indonesia is the world’s largest emitter of greenhouse gases after America and China, mostly because of the destruction of forests and peatlands.

The moratorium excludes concessions leased before May 2011 and does not protect secondary forest. But Frances Seymour, a former head of the Centre for International Forestry Research now at the Packard Foundation in Washington, DC, says that the extension is important because it also identifies threatened peatlands for preservation. Indonesia’s peatlands are a vital habitat, partly because they are huge absorbers of carbon from the atmosphere, just like forests. The forestry minister, Zulkifli Hasan, claims the moratorium has slowed the pace of deforestation to 450 hectares (1,100 acres) a year, down from an annual 3.5m hectares in the late 1990s and early 2000s. That represents a very large cut in the carbon that would otherwise have been released into the Earth’s atmosphere.

Some of the biggest logging and plantation firms are starting to take their environmental responsibilities seriously, too. In February Asia Pulp and Paper, a subsidiary of the Sinar Mas Group, announced an end to all natural-forest clearance—a victory for Greenpeace and other environmental campaigners that had organised international boycotts of its products. Now the firm has opened its concessions to the Forest Trust, an environmental group, to ensure that future plantation development does not take place in forests, including forested peatlands. Its announcement followed a similar commitment in 2011 by Golden Agri-Resources, Sinar Mas’s palm-oil subsidiary.

Some of the old problems still bedevil Indonesia’s efforts to combat climate change. Environmental governance remains weak, the result of a decentralised government and conflicting laws and regulations. The president’s own task-force on climate change often fails to impose its will on ministries determined to defend their fiefs.

The forestry ministry is widely seen as corrupt, even by Indonesian standards, and officials have been caught selling permits to exploit forested areas. National development schemes, such as Mr Yudhoyono’s “master plan” to turn the country into one of the world’s ten biggest economies by 2025, do not always take account of the environmental impact. His government has yet to finalise a reference map of the country’s forests on which everyone can agree. Meanwhile, convincing local leaders of the case for preserving their forests remains a challenge.

The transparency introduced since Indonesia signed the original letter of intent with the Norwegians in 2010 has transformed the conservation debate. A constitutional court ruling on May 16th, for example, allows indigenous people to exercise their traditional rights over a forest. Mr Yudhoyono deserves credit for helping this freer debate to take place.

Indonesia’s forests: Logging the good news,Economist, May 25, 2013, at 40

Latin America Trade: Pacific Alliance v. Mercosur

Brazil-Uruguay frontiers

On May 23rd, 2013 in the Colombian city of Cali the presidents of four Latin American countries—Chile, Colombia, Mexico and Peru—signed  an agreement removing tariffs on 90% of their merchandise trade. They will also agree on a timetable of no more than seven years for eliminating tariffs on the remaining 10%. They have already removed visa requirements for each other’s citizens and will proclaim their aspiration to move swiftly towards setting up a common market.  The Pacific Alliance, as the group calls itself, is “the most exciting thing going on in Latin America today”, according to Felipe Larraín, Chile’s finance minister. Some outsiders think so, too. Costa Rica and Panama want to join; Canada’s prime minister, Stephen Harper, and his Spanish counterpart, Mariano Rajoy, have said they will attend the Cali meeting as observers.

Behind the excitement is the sense that the Pacific Alliance is a hard-nosed business deal, rather than the usual gassy rhetoric of Latin American summitry. Under the leftist governments that rule in much of South America, there has been plenty of talk of regional integration, but precious little practice of it. Intra-regional trade makes up just 27% of total trade in South and Central America, compared with 63% in the European Union and 52% in Asia….

The four founding members are free-market and mainly fast-growing economies which have embraced globalisation, with a web of regional trade-agreements and expanding commercial ties to Asia. Their combined GDP is around $2 trillion—35% of the Latin American total and not much less than that of Brazil, the region’s gian.

The private sectors in the member countries have played a big role in setting the Alliance’s priorities. The stock exchanges of Chile, Colombia and Peru have created a single regional bourse. Negotiators are working to smooth border procedures and standardise rules, such as on labelling. They are making progress in talks to harmonise the rules of origin—how much local content goods must have to be tariff-free—in their existing trade agreements with each other. “They are trying to resolve the problem of the spaghetti bowl of regional trade-agreements,” says Antoni Estevadeordal of the Inter-American Development Bank. This “exercise in regulatory convergence” could be a model for other parts of the world, he adds.

The Pacific Alliance marks a return to the principles of “open regionalism”—the idea, prevalent in Latin America in the 1990s, that opening up to world trade would be more advantageous if combined with creating a deeper regional market, to reap economies of scale. This idea lay behind the founding in 1991 of Mercosur, a group originally comprising Argentina, Brazil, Paraguay and Uruguay.  But the left-wing governments in charge of those countries for much of the past decade have turned Mercosur into a different kind of enterprise. “Today it is almost wholly a political front” with “protectionist internal tendencies which frequently collide with Mercosur’s original principles,” according to Luiz Felipe Lampreia, a former foreign minister of Brazil.  This was underlined last year when the other members suspended Paraguay (because of the impeachment of its left-wing president) and admitted Venezuela, then governed by Hugo Chávez. Under Brazil’s aegis, much of Chávez’s anti-American ALBA block is being absorbed by Mercosur. On May 9th Brazil’s president, Dilma Rousseff welcomed Nicolás Maduro, Chávez’s chosen successor who was narrowly elected as president last month, and affirmed their “strategic partnership”. Brazil is also seeking closer ties with Cuba, which this month offered to send 6,000 doctors to the country.  Brazil’s two main regional partners, Argentina and Venezuela, have slow-growing, state-controlled economies, and their policies flirt with autarchy. That makes them captive markets for Brazilian construction companies and exporters of otherwise uncompetitive capital goods. Brazil had a trade surplus of $4 billion with Venezuela last year.

In the wider world, Mercosur has signed regional trade agreements only with Israel, Egypt and the Palestinian Authority. Argentina has stalled a proposed trade deal with the European Union, on which talks began in 1999. Brazil’s bet has been on the Doha round of world trade talks. It was cheered when Roberto Azevêdo, a Brazilian diplomat, was chosen this month to head the World Trade Organisation (WTO). But many trade specialists consider the Doha round all but dead and the WTO increasingly irrelevant….

In its short life, the Pacific Alliance has proved to be a brilliant piece of diplomatic marketing. Now it has to add substance

Latin American geoeconomics: A continental divide, Economist, May 18, 2013, at 38

See also ALBA

Hackers in Demand: industrial espionage

keep calm and self destruct

American firms wage private cyber-combat against Chinese rivals…precisely that scenario is being considered by former senior American officials, who report that intellectual property (IP) is being stolen on an unprecedented scale, and that passive defences no longer work.  Annual losses from the theft of American IP are probably on a similar scale to America’s total exports to Asia, at around $300 billion a year, concludes a report by a Commission on the Theft of American Intellectual Property, a private initiative led by Dennis Blair, Barack Obama’s first director of national intelligence, and Jon Huntsman, a former ambassador to China and unsuccessful contender for the 2012 Republican presidential nomination. “Extraordinary” numbers of commercial and government entities are bent on stealing American IP. Between half and 80% of them are Chinese, depending on the sector, commissioners say. They also

To date victims have been loth to retaliate. Companies do not want to be seen as “weak” and fear being singled out for punishment as they seek access to Chinese markets, says Mr Huntsman. Companies under attack also face legal constraints that defy common sense, says Admiral Blair. Victims face prosecution if they accidentally damage hackers’ American-hosted computers when trying to recover stolen files, let alone if they deliberately tell files to self-destruct.

Changing the law to permit aggressive counter-measures would be controversial…, recommendations include denying repeat offenders access to America’s banking system, or blocking IP abusers from making big American investments.

Intellectual property:Fighting China’s hackers, Economist, May 25, 2013 at 31

The Art of Selling Weapons: defense industry

image from wikipedia

[When governments buy weapons] it is standard to supplement the main deal with a side contract, usually undisclosed, that outlines additional investments that the winning bidder must make in local projects or else pay a penalty. Welcome to the murky world of “offsets”.

The practice came of age in the 1950s, when Dwight Eisenhower forced West Germany to buy American-made defence gear to compensate for the costs of stationing troops in Europe. Since then it has grown steadily and is now accepted practice in 120 countries. It has its own industry newsletter and feeds a lively conference circuit. The latest jamboree, hosted by the Global Offset and Countertrade Association, was held in Florida…. Yet its very structure serves to mask a build-up in the unrecognised financial liabilities of companies. It also, critics argue, fosters corruption, especially in poorer parts of the world.

Avascent, a consultancy, reckons that defence and aerospace contractors’ accrued offset “obligations”—investments they have promised but not yet made—are about $250 billion today and could be almost $450 billion by 2016. The industry’s own estimates are lower, but all agree the trajectory is upward.

Offsets come in two types. Direct offsets require investment in or partnerships with local defence firms. The idea is to develop self-sufficiency. Turkey, for instance, now meets half its own defence needs thanks to such arrangements. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, donating to universities and even supporting condom-makers. Here the stated intention is to achieve more general economic or social goals.

Both types of offset are controversial. Economists view offsets as market-distorting. The World Trade Organisation bans their use as a criterion for contract evaluation in all industries except defence. Anti-corruption groups see them as a clever way to channel bribes. Even if many offset deals are clean, they are widely seen as a “dark art”, admits an industry executive. “Offset” has become a dirty word; the industry now prefers the euphemistic “industrial participation”.

The practice is frowned upon in some advanced economies. The European Commission is trying to impose a ban on all offsets in EU-to-EU contracts, and on indirect offsets when the supplier is from outside the union…

America has long been officially against offsets, though it practises something similar at home under the Buy American Act of 1933, which requires foreign arms-makers to source much of the work locally… And as embassy cables published by WikiLeaks make clear, America’s diplomats are sometimes closely involved in its firms’ discussions with foreign governments, including even squeaky-clean Norway’s, over proposed offsets.

In less developed countries, where defence spending is generally rising, offsets are booming. One appeal is that they can be recorded as foreign direct investment, boosting the government’s economic-management credentials. The two biggest arms-buyers in the Gulf, Saudi Arabia and the United Arab Emirates, have long-standing, sophisticated offset programs…Brazil and India are catching up…

This growth is fuelling a thriving offsets industry. At one end are dozens of small brokers who hawk ideas for offset projects to arms-makers and their clients. With the right contacts in government and the armed forces, even small outfits can service the largest defence firms. Take Dolin International Trade & Capital, a one-man operation run by Dov Hyman from his home in suburban New York. Mr Hyman cut his teeth as a textile trader in Nigeria. Today he advises African governments looking to use offsets while helping multinationals craft offset packages.

Further up the chain are a few sophisticated outfits that structure complex deals and arrange financing. The best known is London-based Blenheim Capital. These are assembling ever more creative packages, including, for instance, helping procuring countries to use contractors’ offset obligations as collateral for loans, backed by the “performance bonds” that firms set aside to cover unfulfilled obligations.

These middlemen are offsets’ most vocal defenders. Mr Hyman cites reams of examples of deals that he believes brought great benefits for purchasing countries’ economies. The best of them are “beautiful solutions”: for instance when arms-sellers satisfy offset obligations by guaranteeing credit lines for local manufacturers, thus reducing their financing costs. Using a multinational’s good standing in this way is “an efficient means of making possible transactions that otherwise wouldn’t be viable,” he argues.

However, some projects take contractors disconcertingly far away from their core competence. Take the shrimp farm set up in Saudi Arabia in 2006 with backing from Raytheon, a maker of radar systems and missiles. Praised at first as a model offset, it reportedly struggled to keep its pools properly maintained in searing temperatures and eventually went bust.

Moreover, the academic literature on offsets suggests that the promised benefits are elusive. There are some technology-transfer success stories: for instance, China has boosted its defence-manufacturing capability by requiring offsets when buying kit from Russia. However, research by Paul Dunne of Bristol Business School and Jurgen Brauer of Augusta State University has found that such deals are generally pricier than “off-the-shelf” arms purchases and create little new or sustainable employment. The offsets associated with the giant South African arms purchases of the late 1990s have created 28,000 direct jobs, claims the country’s government. Even if true, it is well below the 65,000 first envisaged. India’s auditor-general recently concluded that some offsets have produced no value for the country.

Judging performance is hard because of a lack of openness. Asked for confirmation of the fate of the shrimp farm, the Saudi offset authority said it kept “minimum information” on projects after their founding and suggested contacting its commercial backers. Raytheon declined to comment and suggested contacting the Saudis. DevCorp, another backer, did not respond. A study published in February by Transparency International, an anti-graft group, found that a third of governments that use offsets neither audit them nor impose due-diligence requirements on contractors.

Worse, accounting rulemakers have failed to impose any requirement to disclose offset liabilities. Companies can thus choose how, or whether, to put them on the balance-sheet. Defence firms have lobbied successfully for offsets to remain classified as “proprietary”, so they do not have to disclose their obligations. In some ways things have got worse: the Commerce Department’s annual report on American contractors’ offsets no longer even breaks out the numbers country-by-country.

This murkiness makes it hard to determine who really pays for offsets. On the face of it, the defence companies do. But Shana Marshall, an offsets-watcher at George Washington University, believes that they build the cost into their bids (pdf). Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities.

A study in Belgium found that the country ended up paying 20-30% more for military gear when offsets were factored in. If the costs are largely borne by taxpayers, the benefits accrue to individuals and institutions chosen by the procuring government. This make offsets a good way to conceal delivery of public subsidies to interest groups, according to Ms Marshall.

A number of deals have been exposed as, or are suspected of being, corrupt. A commission has been set up to look into South African contracts dating back to 1999; the government has already conceded that offset credits changed hands at inflated prices. Since 2006 prosecutors in Portugal have been investigating offsets connected with a €1 billion ($1.3 billion) submarine contract with Germany’s Ferrostaal, HDW and ThyssenKrupp. Three Ferrostaal board members and seven Portuguese businessmen are on trial, charged with fraud and falsifying documents.  EADS, a large European contractor, is facing multiple inquiries over its sale of 15 Eurofighter planes to Austria. Prosecutors in Vienna and Munich are looking into allegations that millions of euros in kickbacks flowed through a web of offshore firms and side-deals, linked to offset agreements worth €3.5 billion, twice the value of the main contract. (In other words, EADS was supposed to generate €2 of business for Austrian firms for every euro it received for the planes—an unusually high ratio even in fiercely bid contracts.) Tom Enders, EADS’s chief executive, told Der Spiegel, a German magazine, that he “knew nothing about the shadowy world of dubious firms allegedly behind this.” The company says it is co-operating fully with prosecutors and that an internal investigation has so far found no evidence of punishable activity.

Prosecutors are also looking into whether AgustaWestland, part of Finmeccanica, an Italian defence firm, paid bribes to secure the sale of 12 helicopters to India in 2010. Finmeccanica’s former chief executive and the former head of AgustaWestland are due to go on trial next month. According to Italian court filings, suspicious payments allegedly flowed through a sham offset contract for software with help from a Swiss-based consultant. The helicopter-maker and the charged individuals deny wrongdoing.

Industry figures point out that all but the Indian case are at least five years old. They argue that corruption is harder to get away with today because of stricter anti-bribery laws and enforcement in America and Europe. Companies’ general counsels pay much more attention to offsets than they did a decade ago, says Grant Rogan, the head of Blenheim Capital.

Even if graft really is on the wane, offsets’ complexities make it hard to measure the true cost of defence deals. Procuring governments may apply generous “multipliers” to give extra credit to projects they deem exceptionally beneficial, especially if they are keen to buy the kit in question. As a result, defence contractors often find their liabilities turn out to be a lot less than their nominal obligations. A $5 billion sale of military kit might come with, say, $4 billion of gross offset requirements, but after multipliers it might only cost $500m to fulfil. A book on the arms trade, “The Shadow World”, by Andrew Feinstein, describes a contract Saab won in South Africa: to receive more than $200m in credits all the planemaker was required to do, the book says, was to spend $3m upgrading pools in Port Elizabeth and marketing the town to Swedish tourists. Saab says the tourism project cost much more, and suggested that it was up to the authorities to decide what value they put on what it achieved.

This sleight-of-hand helps to explain why industry executives are better disposed towards offsets in private than in public, says Ms Marshall. They say they could happily live without them, but they do not lobby to have them banned. Indeed, some big contractors see their ability to craft a package of attractive offsets as a “source of competitive advantage”, as Boeing’s boss, Jim McNerney, puts it.

The largest such firms will employ dozens of offset specialists to give them an edge in bidding. Lockheed, another American contractor, has about 40. As long ago as 2005 the firm was touting its leadership in offsets to win Thai contracts, according to a leaked diplomatic cable.  A downside for the companies is that dealing with national offset agencies can be frustrating. And though the companies’ offset liabilities are smaller in reality than on paper, they can still be daunting: one American contractor, for instance, has $10 billion of nominal obligations in a single Gulf state that will cost $1 billion-2 billion to fulfil, according to a consultant (who will not say which firm or country)….

How long can the offsets boom last?  But in the shorter term, their growth will be fuelled by American and European contractors’ intensifying efforts to sell outside their shrinking home markets, to big developing countries whose defence budgets are growing…. Remarkably, offsets are now said to be the main criterion in contract evaluation in Turkey and some Asian countries—more important than the price or the technical capability of the defence equipment itself.

The defence industry: Guns and sugar, Economist,May 25, 2013, at 63

Deforestation in Cambodia: rubber barons and their bankers

cambodia illegal logging--Illegal logging in the Cardamom Mountain, Koh Kong Province, Cambodia, 2007 Image from wikipedia

Along Route 7 in Cambodia’s remote north, dozens of small tractors known as “iron buffaloes” are plying a dilapidated piece of highway. Under cover of darkness, they transport freshly cut timber into nearby sawmills. The drivers wear masks, their tractors fitted with just one dim lamp at the front. Each carries between three and six logs which locals say were felled illegally on or near the Dong Nai rubber plantation, owned by Vietnam Rubber Group (VRG).

Illegal logging and land-grabbing have long been problems in Cambodia. A new report entitled “Rubber Barons” by Global Witness, a London-based environmental watchdog, has highlighted the issue once again. Dong Nai features prominently in the report, which claims that luxury timbers like rosewood, much in demand for furniture in China and guitars in the West, were culled as a 3,000-hectare (7,400-acre) section of forest was illegally cleared.

Global Witness says that local and foreign companies have amassed more than 3.7m hectares of land in Cambodia and Laos since 2000, as governments have handed out huge land concessions, many in opaque circumstances. Two-fifths of this was for rubber plantations, dominated by state companies from Vietnam, the world’s third-largest rubber producer.

The report claims that VRG and another Vietnamese company, HAGL, are among the biggest land-grabbers, and have been logging illegally in both Cambodia and Laos. It says that, through Vietnam-based funds, the two companies have received money from Deutsche Bank, while HAGL also has investment from the IFC, the private-sector arm of the World Bank. The two Vietnamese companies have denied any wrongdoing. Deutsche Bank and the IFC say they are studying the findings.

The report says that the two companies have failed to consult local communities or pay them compensation for land they formerly used. The companies routinely use armed security forces to guard plantations. Large areas of supposedly protected intact forest have been cleared, in violation of forest-protection laws and “apparently in collusion with Cambodia’s corrupt elite”.

Global Witness is urging authorities in Cambodia and Laos to revoke the two companies’ land concessions, which cover 200,000 hectares and are held through a network of subsidiaries. It thinks both companies should be prosecuted.

Logging in South-East Asia: Rubber barons, Economist, May 18, 2013

See also Bankers with Chainsaws

 

Business Models of Piracy: the pirates of the Niger Delta

Armed_guard_escort_on_a_merchant_ship

The decline in Somali piracy (which, according to a recent World Bank report, may at its peak have cost the world up to $18 billion a year in extra shipping expenses and lost trade) is partly the result of increasingly sophisticated co-ordination by international naval task-forces. Shipping companies are also making their vessels harder to attack thanks to a range of defensive measures, such as razor wire around decks, high-pressure hoses and maintaining speeds that make boarding hazardous. Armed security guards on many of the ships transiting pirate-infested waters have helped too.But the pirates could still make a comeback. The cost of deterring them is high. Shipping companies may lower their guard if they think the threat has passed, and patrolling naval forces could be needed elsewhere. And although Somali piracy has faded, west Africa has seen a surge in attacks on ships passing through the Gulf of Guinea.

Tom Patterson, a maritime security expert at Control Risks, a consultancy, says these pirates, who largely come from militant groups in the Niger Delta, have a different business model to their Somali counterparts. They tend to hold ships for about two to five days, removing as much of their cargo as possible (usually gas oil) and then auctioning it to the highest bidder. Hostages are taken if potentially valuable. This week five Poles and Russians, held since April 25th when pirates attacked the German-operated City of Xiamen container ship off Nigeria’s coast, were released, doubtless after a ransom payment.

International naval forces are unlikely to intervene. Nigeria has a decent navy of its own which claims to be upping its efforts to contain piracy. But foreign diplomats believe that some military officials turn a blind eye to thefts in return for a share of the spoils

Hijackings on the high seas: Westward Ho!, Economist, May 18, 2013, at 67

Tax Havens Under Attack

Tortola BVI

[In] the Cayman Islands,  corruption would have been high on the list of election issues in a society where “everybody expects that you are going into politics to make your money”, as a former auditor-general recently put it. But there is plenty more to worry Caymanians and the inhabitants of Britain’s other remaining scraps of empire in the Caribbean: Anguilla, the British Virgin Islands (BVI), Montserrat and the Turks and Caicos Islands. Tourism and international finance have brought prosperity but the “twin pillars” are showing cracks. Fiscal fumbling has compounded the problem and has strained relations with Britain, which has long provided an economic backstop. The region’s two big tax havens, Cayman and the BVI, are under attack as never before.

The world economic slowdown hit these small, open economies hard…. In some cases Britain has pushed for income taxes to supplement the fees and indirect taxes that the territories rely on. But these do not go down well with footloose offshore types. Under pressure from the Foreign Office, Cayman’s government last year proposed a 10% levy for foreigners, who make up half the 38,000 workforce. This was scrapped when businesses squealed. Wary of scaring away business, the BVI has not raised the $350 fee for incorporation since 2004.

Avoiding fee rises is seen as important at a time when tax havens are under bombardment, especially from Europe. The five territories, Bermuda and others have been arm-twisted into backing a multilateral scheme for the automatic exchange of tax information. A longer-term threat is the growing international call for public registration of the “beneficial” (ie real) owners of companies and trusts. Standards must be applied evenly, says Orlando Smith, premier of the BVI, “otherwise, businesses will simply go to other jurisdictions.”

Offshore optimists note that China and Russia, whose citizens are big users of Caribbean havens, have not signed up to the information-sharing pact. But remaining attractive to clients while complying with ever more stringent international rules is “an increasingly difficult needle to thread”, says Andrew Morriss of the University of Alabama. No wonder the territories are trying to diversify away from finance, which in the BVI’s case accounts for 60% of government revenues. Anguilla is looking at fishing, Cayman toying with medical tourism. But hip replacements will not be as lucrative as hedge funds.

Britain is gently encouraging these efforts, while recognising that, as an official puts it, “There isn’t a long list of options.” It is trying to improve governance, too. After it threatened to veto a Cayman port project which had been awarded to a Chinese company without an open tender, bidding was restarted. Britain retains the power to block laws, suspend constitutions and dismiss governments. The Turks and Caicos constitution has been suspended twice, most recently in 2009 after an inquiry found “a high probability of systemic corruption”. This led to three years of direct rule by the British-appointed governor.

Putting your man in charge is one thing, putting money on the table quite another. To avoid it, Britain will have to play its hand carefully. It has to be seen to join the likes of France and Germany in taking a firm stand against offshore financial shenanigans, especially now that the prime minister, David Cameron, has made tax and transparency themes of this year’s G8 agenda. On May 20th he told Britain’s dependencies to “get [their] houses in order”. But if the havens lose their cash cow, they might have to go cap-in-hand to London. “Taxpayers Bail Out Tax Havens” is the last headline Mr Cameron wants to see.

The Caribbean: Treasure islands in trouble, Economist, May25, 2013, at 35