Thank you, Mr. Chairman.
I'm delighted to have an opportunity to appear again before the Standing Committee on Foreign Affairs and International Development. I have for many years greatly admired the work of CIDA and the objectives embodied in CIDA's pursuit of development. We are delighted to have CIDA in the task force on financial integrity and economic development, which we direct.
I'm also pleased to be here with Christopher Lawton, who is an intern at GFI and a graduate student here in Washington. He previously worked in the Canadian government for several years and will be returning there in June.
If I may, Mr. Chairman, I'd like to begin with a story.
I lived for 15 years in Nigeria, buying companies and building a group. In the late 1960s, in the midst of the Nigerian civil war, I had my eyes on a company that I wanted to purchase. It was a company that was owned by an expatriate family. It was a company that had been losing money every year for five years. I offered ten times the book value to buy that company.
Harvard Business School students later studying the case voted unanimously that this was a bad acquisition: I shouldn't buy the company; it was a dog. I had the pleasure of coming down to the front of the class afterwards and saying that not only did we buy it, but we paid off all of its debts in the first year and generous dividends to ourselves for years thereafter.
How did that happen? We purchased raw materials at world market prices. The previous owners of the business had been inflating the cost of their imported raw materials in order to take their profits out of Nigeria. We bought our raw materials at world market prices, earned our profits in Nigeria, and paid taxes on them. Ever since that experience, and many other similar experiences, I've been fascinated by the harm that is done to the capitalist system and to the process of development by the mechanisms through which we shift money across borders.
Now, I don't want anyone to think that I am anti-business. On the contrary, I believe in the free market system. I believe in free trade, free currency convertibility, and free movement of capital. I do add a proviso to that: provided it's legal. It is the illegal components of these financial flows that have fascinated me for many years.
After 35 years in international business, I segued into the think tank community of the Brookings Institution, wrote a book on this subject matter, and then formed Global Financial Integrity. In GFI, we analyze illicit money flowing across borders—illicit financial flows. Our estimate is that approximately $1 trillion a year comes out of developing countries and moves into the richer countries. This money moves through three different means. Some of it is corrupt, that is, it is the proceeds of bribery and theft by government officials. Some is criminal—the proceeds of drug trafficking, racketeering, counterfeiting, and so forth—and some of it is commercial tax evasion.
Many people, particularly in the western press, think this problem is all about corruption in those countries over there. In our analysis, in the cross-border flow of illicit money, the corrupt component is about 3% of the global total. The criminal component is about 30% to 35% of the global total. The commercial tax-evading component, in which we are certainly involved, is about 60% to 65% of the global total.
Now, this reality needs to be taken into consideration when we think about the role of multinational corporations in developing countries. This reality is a key element in our thinking about policy coherence. Policy coherence, of course, is a term that has been around for some years, and what it suggests is that we need to be consistent in the way we promote the activities of our multinational corporations and the way that interfaces with other parts of the policies of governments.
In order to progress policy coherence, I would like to suggest two steps that perhaps impinge upon the hearing we are involved in today.
First, we would urge that extractive industries publish their contracts with developing countries. Whether this can be done retroactively for contracts that are already in place would be problematic, but it certainly is possible to do it with new contracts. With such publication we can avoid a great many of the problems we experience, with strains between multinational corporations and developing countries.
I'll give you an example. There was a copper contract in Zambia under which Zambia received only 3% of the world market price in royalties. A very brave individual named Eva Joly went to Zambia and worked with Zambian officials to declare this contract void, because it was so one-sided. It was such an egregious contract that the contract was upset and renegotiated, and the Zambian government got a much higher percentage.
The second thing we would like to suggest that is relevant to today's hearings is greater transparency in the accounting by multinational corporations for their sales, profits, and taxes paid in developing countries. This really goes beyond the current publish-what-you-pay movement, which is aimed at extractive industries publishing what they pay to governments in royalties, fees, taxes, and so forth.
When we talk about country-by-country reporting, we're talking about something we think should be relevant to all corporations functioning in the developing world. By country-by-country reporting we mean reporting, in each jurisdiction, your sales, profits, and taxes paid. If this were to be required right now, what we would find are many corporations reporting losses or break-even points or very modest profits in a great many developing countries where they operate and at the same time reporting large profits in tax-haven entities where they don't operate. How does this happen? How do you report losses or extremely minimal profits where you have heavy investments and considerable staff and at the same time report high profits in places where you have no facilities and no staff? Of course, it is by taking advantage of the mechanisms available for moving money out of developing countries that this can be accomplished.
Those are just two of the steps that we think can be taken, not only by Canada but by other countries, to improve the relationships of multinational corporations in working with developing countries.
In Global Financial Integrity we are currently undertaking a three-year study, together with a Norwegian research institute and three institutes in the global south—one in Brazil, one in Nigeria, and one in India. We are seeking to analyze the whole of the external equation for economic development for poorer countries. That includes total money into developing countries, total money out of developing countries, and what's left over for developing countries, taking into consideration all licit and illicit flows, such as foreign direct investment, portfolio investment, remittances, hawala transactions, and more. We are seeking to come up with an estimate of the total external equation for development.
Our preliminary data indicates that we will be able to demonstrate quite credibly that the developing world is a creditor to the rest of the world and that there is in fact a net transfer from the developing world to the richer world. This case has already been made quite convincingly concerning Africa. We believe that we will be able to demonstrate it for the developing world as a whole.
This presents the 21st century with a rather large problem: the necessity to curtail illicit money flowing out of developing countries. These illicit funds do not present us with the way to build a secure and growing global market. Our ultimate objective must be to set the conditions for growth and prosperity for all of the world's people.
Thank you, Mr. Chairman.
Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, on behalf of my organization, Canadian Economic Development Assistance to Southern Sudan, the acronym being CEDASS, I thank you for the opportunity to appear before you to provide our perspective on private sector involvement in developing nations.
Our organization, which has been working in South Sudan since 2006, is 100% populated by volunteers. They receive no stipend for their involvement, and they pay their own travel and accommodation expenses when they travel to the Republic of South Sudan.
The majority of our members are from the business and farm community. Notwithstanding that we are a humanitarian organization, we operate deploying a business model that strives for economic viability and sustainability. The simple answer to the question of private sector involvement is that it is imperative. We should assist countries such as the Republic of South Sudan to build their nation and strive for economic independence, while avoiding the well-intentioned mistakes of the past whereby many developing nations have become dependent on international aid.
Although the answer appears simple, the application is not. Allow me to expand on that, Mr. Chairman.
When I appeared before the committee in 2008, I described a project that we intended to set up, which involved the creation of one of the first mechanized farms in South Sudan. As the committee is aware, the Republic of South Sudan became the newest nation in the world in July of 2011, following a referendum that resulted in over 90% of the South Sudanese population voting for independence from Sudan.
The challenges we have faced would take too much of the committee's time to explain. We have faced everything from tribal violence resulting in our compound being attacked, transportation costs and the existence of no roads, environmental challenges, bird infestations, and funding. Basically, when challenges have existed we have faced them, and more importantly, Mr. Chairman, we have overcome them.
In 2011 we achieved a yield of two tonnes of corn per acre, the highest yield of any farm in the country. This year we are targeting 2.5 to three metric tonnes per acre. If we are able to achieve this, we'll have attained one of our main objectives: economic viability. We will then be able to build on this and increase acreage and yield.
One of our volunteers, Mr. Stu McCutcheon, who farms approximately 2,000 acres in southwestern Ontario, is one of our volunteers who spent four months in the Republic of South Sudan last year. He will return again this year. Mr. McCutcheon believes that with the proper application of pesticide, fertilizer, and the proper seed, we can attain three to 3.5 tonnes per acre, which would then be close to, and in some cases equal to, Canadian standards.
Our other objectives are to train the people in the practical application of mechanized farming using Canadian methodology, provide humanitarian aid to the local population with the construction of a health clinic, and expand the training of the local community using a curriculum developed in Canada and with the approval of local educational authorities.
Our organization has called on the advice of Ridgetown College, for example, with some of our past challenges. We envisage a closer partnership with Canadian and Republic of South Sudan educational institutions to provide the foundation in the agricultural economy. Many of the training programs that exist do not recognize the need for long-term involvement by the student and applying the classroom to the farm.
We have developed a good relationship with the World Food Programme over the past several years. The World Food Programme purchases our harvest through its Purchase for Progress program. They will purchase all we can produce, and have approached us to jointly venture in the construction of a storage facility. This would not only assist us but would serve to protect the crops in the region of Jebel Lado, where we are located.
The challenges we have overcome and the successes we have attained have not been easy, but it is the application of the fundamental business principle of striving to achieve economic viability that has focused us to continually re-examine all aspects of our operation and make changes as required. With economic viability, coupled with these principles, we believe we will achieve another main goal, which is sustainability.
It is worth noting some of the achievements of our operation.
Our tractors and combine harvester have been in Sudan since 2008 and 2009. The tractors and combine were used equipment, sourced and shipped from Canada. As a result of our planned maintenance programs, they are still in good working order. By comparison, new tractors brought in to South Sudan in the past had a failure rate as high as 85% in the first year.
We have developed a pesticide program, which is successfully combatting what one farmer described as the most intrusive weeds he has come across.
We've sourced a Canadian seed that complements a complete nutrition management and fertilizer program.
We've developed a fertilizing program that provides this virgin land with the nitrogen and phosphates required to achieve economically viable yields and to prepare additional acreage for cultivation.
We've trained key people in South Sudan in Canadian farming methods and equipment maintenance. Starting this year, there will be training on budgeting. We're in the process of creating an incentive program for our key in-country people. It will be based on accomplishing targeted yields, maintaining equipment, training members of the local community, and achieving cost budgets. The purpose is to provide them with knowledge of the business aspects of farming. We want to inspire them to develop their entrepreneurial spirit and we want to encourage a private sector mentality. This will again assist us in achieving sustainability.
One objective of any private sector involvement in developing countries must be, first, to create a business that makes money. This sounds obvious. However, we are all aware of businesses in the developed world that fail. The opportunity for failure in developing countries is exponentially higher; therefore, the opportunity for higher returns must be present to encourage investments.
Second is to establish training programs for the indigenous people, with no glass ceiling, so that the opportunity to progress through corporate ranks and/or to start businesses is not only allowed but encouraged. This will require that the host government insist on this type of activity.
Third is to be allowed to operate with a minimum of government interference but with government cooperation in cutting red tape.
Fourth is to target a percentage of the profits of the operation to community programs that benefit indigenous people.
Fifth is to recognize that the long-term benefits, and this is most important, have to be directed to the indigenous people.
The private sector does exist in the Republic of South Sudan. However, in many cases, the international involvement is discouraging. The local personnel are not given the opportunity to be trained. There appear to be no management programs. I am concerned that when the international companies have exhausted their involvement, they will exit with no long-term benefit to the indigenous people.
The potential for an agriculture industry in the Republic of South Sudan is huge. In a country where people are literally starving to death, it is ironic that their country contains thousands upon thousands of arable acres of land capable of sustaining a full range of crops. One only need think of Canada's agricultural industry, which was started by individuals planting small areas, to realize the potential if you have fertile land, rain, and heat.
In our watershed, which runs parallel to the Nile, there are 20,000 acres of arable land. Imagine if in the future we were able to farm this area and yield three tonnes per acre. The Republic of South Sudan's deficit in food this year is estimated to be 450,000 metric tonnes. This area alone could yield 60,000 metric tonnes. The climate allows for the potential of double-cropping, potentially increasing the yield even further.
When you have an economically viable and sustainable industry, it creates many other related jobs and companies that support it.
The traditional form of international aid, while in many cases essential, can keep the local communities from being entrepreneurial. They're at risk of developing a dependency on aid and having the urgency of developing their own industry diminished. We have seen an increase in this attitude since the end of the war and since their own country was established. We are seeing an unfortunate trend towards demanding from the international aid community that they provide their essentials and to provide wages based on their desires, not work performance, that are higher than what other nationals living in the Republic of South Sudan, such as Ugandans, Somalis, Eritreans, and Kenyans, will work for. There are many businesses being started by members of these other communities. We would sooner see the South Sudanese develop these small businesses.
Corruption is a major problem in developing countries, and it is present in the Republic of South Sudan. Many South Sudanese feel that the way to wealth is through government, which can provide opportunities to benefit from corruption. To the credit of the Republic of South Sudan, they have appointed an anti-corruption minister. Their stated policy is to bring those who participate in this activity to justice.
It can, however, be a problem, not only for the private sector but for donor countries. From our limited involvement and experience in this area, we believe that a middle class can be established. Local businesses that are seen to be successful without the use of corruption will then diminish this practice, and ordinary people, just like Canadians, will not tolerate corruption in their political leaders. We need to recognize that corruption is present in all countries, developed and developing alike.
We should not take the self-righteous attitude of using the existence of corruption as an excuse not to help. Rather, we must help to build a legitimate, viable, and sustainable economy that will itself help to control corruption. We have many South Sudanese who yearn for this, and we should do all we can to encourage it.
In the agriculture sector, governments are establishing policies that may inhibit the growth of a viable industry. Some countries have a reluctance to use seeds that are targeted to handle problems specific to geographic locations and on-site problems. As the committee knows, the North American agricultural industry has used hybrid seeds for many, many years, and that contributes to our farmers producing some of the highest yields in the world.
While we do not advocate enforcing our policies on host countries, we should by persuasion be convincing host nations of our proven and accepted methods. Not advocating this and recognizing the yields that exist in these host countries is providing an unsustainable subsidy to the agricultural industry.
The World Food Programme, which encourages local production, is all too often approached by local farmers needing $900 per acre to cover their costs. Our sale price to the World Food Programme last year was $400. The difference is simply yield. If the donor country is providing funds for the creation of a viable and sustainable agriculture, it should not be supporting policies that diminish this potential.
In the last 25 years the international community, to its credit, and as a testament to its generosity, has provided billions, if not trillions, of dollars to this continent. I ask you, has it worked?
In conclusion, Mr. Chairman, we wish to make it clear that we are a small organization with limited resources, but we have a group of very dedicated, passionate, and often stubborn volunteers, who have demonstrated that the private sector mentality, coupled with a desire to assist the people of Sudan in building a nation, can work.
Due to funding restraints we are limited in what we can do, but we know what we have accomplished has benefited the local community. If we had the financial resources available, we would do some of the following: accelerate the training and education programs with the establishment of an on-site training school; expand the acreage under cultivation; promote the potential of agriculture in the Republic of South Sudan to the Canadian agricultural community; and develop community-based programs for health and education.
We hope we will be successful to the point that the South Sudanese can take over the farm and continue to grow what we have started. Our ultimate objective, and may I say dream, Mr. Chairman, is to have the local Sudanese people thank us for our assistance in achieving viability and sustainability and tell us they no longer require our help.
I thank you for the invitation and your attention, and I'm happy to answer any questions.
Thank you, Mr. Chairman.