Extractive Industries Transparency Initiative (EITI)

ICGFM International Consortium on Governmental

Financial Management
2010 Winter Conference

December 7, 2010

EITI globally - and implementation at country-level:

Current status, emerging results and lessons
Andre Ufer – Operations Officer
Sustainable Energy – Oil Gas and Mining
The World Bank

1
Why an Initiative for Natural Resources ?

2
Fisheries and the Mining / Oil: Sector Specificies

 Public Good / Non-private good

 Harvest method must be regulated
 Limited resource / finite resource
→ Maximize Employment, Income over the long run
 For fish, this means achieving (maximum)
sustainable yields
 For mineral resource economies, this means
maintaining the total capital stock constant

3
 Origins

 Mounting evidence of “paradox of plenty”

 Increased awareness about corruption
 Rising influence of large, international NGOs
 Around 60 IMF member countries with resource
revenues of macroeconomic significance
 Trigger: BP’s case in Angola, and its
subsequent cancellation of license
 EITI launched in Johannesburg 2002

4
 The context – What is the underlying issue
that EITI seeks to address? (1/2)

From perpectives of different standpoints ….

• To help resource-rich developing countries in their own
national efforts to better manage natural resources :
 avert “resource curse” effects of oil gas and mining wealth
 help build accountability – through transparency / CSO
role
 increase private/public investment for mutual benefit
• From international/domestic oil, gas and mining industry lens:
 concrete action to help reduce investor risks (on low-
governance perceptions or corruption risks)
 meaningful addition to CSR strategies for companies
• From a development lens (World Bank, CSO etc contribution):
 a participative yet standards-based development path
 A methodolgy and tripartite
5 model that works
 The context – What is the underlying issue
that EITI seeks to address? (2/2)

The “Paradox of Plenty” .. a.k.a. “Resource Curse”

• Oil/gas and mining wealth in many developing countries

• Yet the potential for good has not been realized

• Many oil or minerals-rich developing countries have seen:

 in LAC Region, high levels of mistrust - even conflict
low per-capita growth - lower than in other countries
 potential for private sector investment not realized
 oil gas and mining sectors not yielding expected benefits
 distortions in the economy
 low on human development; environmental damage
 social and political instability
6
 The context - Importance of good sector governance
of natural resources - and of transparency therein

 Good governance of oil, gas and mining can help mitigate this ….

 Good governance has multiple features:

 Clear and stable laws and regulations
 Rule of law
 High level of capacity and skills in government
 Fiscal monetary and budget discipline
 Even and consistent application of laws and fiscal regimes to all
 Open dialogue between government and civil society
 Public sector/private sector balance
 Transparency EITI “space”

7
Status today

8
Supporters

9
 How does EITI work?

Administrator / auditor
Companies Govt agencies

Govt agencies
produce consolidated
More info requested report
Produces a report for
to reconcile
national stakeholder
discrepancies
group.

National Stakeholder
Group

10
 Benefits to Governments

 Clearly demonstrate to the people, the benefits derived from large,

sometimes controversial projects such as large-scale mines, off-shore
oil drillings, pipelines, gas storage sites and energy projects.
 Transparent management of revenues and payments can improve the
credit-worthiness of governments and improve foreign investment
climate & attract FDIs.
 Effect can be positive across the economy as less risk for investors,
means more returns to the country.
 EITI has a strong international brand – it is now recognized by
companies; International Financial Institutions; G8, G20, investors and
donors, as a symbol of sound public financial management.

11
 Benefits to Companies

 One of the major long term risks to investments, is the

perception that a Business isn’t paying enough back to the
people.
 Increased transparency reduces this perception, thus
operational risks, which in turn reduces Business costs.
 Improved relationship with institutional/private investors, now
mean being a good “Corporate Citizen”.
 Reduces reputational risks by ensuring that EI-business is able
to maintain an ongoing social license to operate.

12
 What prompts the decision to adopt EITI

• “The reformers” – who see EITI as a logical part of sector governance

or anti-corruption reform
 civil society groups and companies demand for transparency
 aligned with donor engagement
• “Clean slate” – countries with historically poor record on governance
seeking a clear break with the past - via EITI
• “Internal demand” –
• “The investors” – countries which are keen to signal a higher standard
to attract global investors to develop EI resources
• “Peer pressure” – other countries in the region have adopted EITI,
raising competitiveness pressure on a country to sign up
• “Get it right from the start” – countries with newly-found EI resources
determined not to suffer the resource curse

13
 Emerging results : Nigeria example

 An in-depth EITI process chosen by Nigeria beyond normal EITI - also covered
review of oil flow and sector processes and financial payments
 Comprehensive audit reports and findings were publicized April 2006
 initial US $250m unexplained difference in payment and receipts
 many areas for improving payments processes identified
 other far-reaching recommendations on oil production/flows
 Wide publicity in media - better understanding by public of EI financial flows
 EITI differences were investigated further - and largely resolved
• detailed “remediation action plan” to tackle other recommendations
• Incremental revenue collections reported ($1 bn) from revised tax returns
 On-going follow-up by civil society
 Donors are beginning to support remediation action plan (e.g. oil metering)

14
 Emerging results : Ghana example
• Two EITI Reports produced so far by Ghana - by national audit firm

• Mining-related - but likely to be extended to new oil discoveries too

• Report findings were positive - no differences in payments/ revenues

• But other key EITI Report findings

Strong focus on sub-national distribution in EITI scope
Many weaknesses identified – especially delays in redistribution of
revenues to district councils (in one case 11 months gap)
Funds redistributed to district councils not always used for
sustainable development activities in mining communities
Revenue administration weak: lack capacity to assess company
costs and tax statements – with over-reliance on self-assessment
15
 EITI has achieved strong momentum …. (1/3)

 Global recognition of EITI:

• EITI is now the standard on transparency in oil, gas and mining -
with clear consensus on EITI goals and methodology
• Wide range of supporting entities and countries:
 Oil, gas and mining majors; civil society; bilateral donors; MDBs
 reference to EITI in global for a (UN; G20, G8) - and in USA legislation

• EITI under the spotlight in recent months due to validation milestone

 deadline of March 2010 for many countries (22 original EITI candidates)

 two countries (Equatorial Guinea and Sao Tome) delisted from EITI

 general sense that EITI “credibility” as a standard is being upheld

16
 EITI has achieved strong momentum ….(2/3)
 also at country level (after EITI Board decisions April 15-16, 2010):

• 31 countries are now EITI-implementing:

 3 now validated and EITI-compliant (Azerbaijan, Liberia, Timor Leste)
 Many others (e.g. Mongolia; Nigeria; Ghana) have completed validation
 only a handful not yet ready for validation (e.g. Yemen, Madagascar)

• Overall - good progress but slower-than-plan: seen as learning experience

• Hence recent EITI Board decisions on extending validation deadline

 extensions granted to all countries - except Sao Tome and Equ. Guinea

• EITI becoming more widespread - e.g. Norway and Albania in Europe -

and Indonesia and Colombia in other Regions

17
 EITI has achieved strong momentum ….(3/3)

 Section 1504 of the US Dodd-Frank Act requiring

USSE listed companies to report payments to third
Governments
 IASB (International Accounting Standard Board) is
currently working on a possible country-by-country
reporting requirement
 Ongoing EU consultation on country-by-country
reporting by multinational companies:
Specific transparency obligations for companies which are active in the extractive
industry (minerals, oil, and gas)in third countries. The main goal of such disclosure
would be to provide more transparency about the payments made by the extractive
industry to governments in third countries

18
 Key lessons from “on the ground” experience
of EITI implementation - and summary
• political commitment to EITI by Government is the key to successful EITI
• collective, tripartite buy-in is just as essential an ingredient (industry; CSOs)
• some “scramble” in EITI and validation process - risk of “timeline over quality”
 first-time effort does require time – even with the best will and TA support
 EITI may still be an “off-line” – not mainstream - effort in some countries
• nonetheless EITI has begun to show results as noted - especially in:
 EITI disclosures (revenue data in public domain for first time)
 multi-stakeholder approaches are mostly working (and building trust)

 In sum, working example of a global voluntary initiative – with teeth

 Ahead, key global EITI policy issues under discussion - in particular:
 the need for policy stock-take – e.g. on 2-year time allowed for validation
 the need for more quality, consistency and usability of EITI-reported data
 achieving sustainable EITI in countries, embedded in national systems
 achieving strong demand-side accountability – strong CSO role

19
 Also general agreement that longer-term outcomes
and impact of EITI is still a work-in-progress
For example by measured changes from EITI in indicators like:
• stronger demand for accountability – stronger/enabled CSOs
• changes in governance or anti-corruption ratings (TI Index, CPIA rating)
• specific links with national anti-corruption institutions in countries
• sovereign and corporate ratings (affecting foreign/domestic investment)
• effective mining or oil/gas contract compliance – or more effective mining
or oil/gas tax administration and tax revenue collection
• lower social conflict (via better sense among communities of benefits)
• effective policies and institutions to manage oil, gas and mineral resources

 COCPO is leading the support to International EITI Secretariat effort to

measure EITI results and impact – building on MDTF results framework

20
The momentum on EITI brings new questions
EITI CRITERIA:
 Independent reconciliation /
audit of payments made and
revenues received.
 Publication and widespread
dissemination of results.
 Comprehensive coverage, i.e.
all companies including state-
owned and local companies.
 Full engagement of civil society
in the process.
 Public, financially sustainable,
time-bound plan of
implementation.
21
BUT WHAT ABOUT?:
 Transparency of licensing?
 Were “fair” terms and conditions
negotiated?
 Are long-term revenue and
benefits for country optimal?
 What companies did pay vs.
what they should have paid?
 What companies said was
produced vs what actually was?
 Environment / social linkages?
 Revenue allocation e.g. to sub-
national level and communities
 … and the “expenditure side”
 By design, EITI is narrowly-focused on disclosure –
but is really part of a larger EI governance picture

Companies Disclose Government Discloses

Payments Receipt of Payments

Government Spending

Independent
Award of Regulation Implementation of
licenses
Verification of Revenue
Sustainable
&
& monitoring of
Tax & Royalty Distribution
Development
contracts Payments & Management Policies
operations

Oversight by a Multi-
Stakeholder Group
The EITI provides a forum for dialogue - and a platform for broader reforms
22
 Building on EITI: national platform for ..

Core EITI: Ongoing sector

governance reforms
 Reconciliation of payments and for oil/gas +mining:
revenues.
• Embedded EITI
 Capacity building in govt and civil
society. •Institutional /
regulatory reform
EITI “Plus”: • Strengthening of
licensing systems
 Capacity building
• Revenue mngmt.
 Financial audits of companies /govt
•Sub-national
 Process audits
revenue distribution
 Public information campaigns
•Benefits streams

23