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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 OfficerSustainable Energy – Oil Gas and Mining

The World Bank

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Why an Initiative for Natural Resources ?

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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

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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

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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 model that works

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

The “Paradox of Plenty” ..

• 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

a.k.a. “Resource Curse”

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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”

The context - Importance of good sector governance of natural resources - and of

transparency therein

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Status today

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Supporters

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How does EITI work?

Administrator / auditor

National StakeholderGroup

Govt agencies produce consolidated

reportProduces a report fornational stakeholder

group.

Companies Govt agencies

More info requestedto reconcile discrepancies

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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.

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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.

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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 transparencyaligned 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

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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)

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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 findingsStrong 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 communitiesRevenue administration weak: lack capacity to assess company

costs and tax statements – with over-reliance on self-assessment

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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

EITI has achieved strong momentum …. (1/3)

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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

EITI has achieved strong momentum ….(2/3)

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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

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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

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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

Also general agreement that longer-term outcomes and impact of EITI is still a

work-in-progress

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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.

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”

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By design, EITI is narrowly-focused on disclosure – but is really part of a larger

EI governance picture

Award of licenses

&contracts

Regulation&

monitoring of operations

The EITI provides a forum for dialogue - and a platform for broader reforms

RevenueDistribution

& Management

Implementation of Sustainable

Development Policies

Government Spending

Companies Disclose

Payments

Government Discloses Receipt

of Payments

Oversight by a Multi-Stakeholder Group

Independent Verification of Tax & Royalty

Payments

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Building on EITI: national platform for ..

Core EITI:

Reconciliation of payments and revenues.

Capacity building in govt and civil society.

EITI “Plus”:

Capacity building Financial audits of companies /govt Process audits Public information campaigns

Ongoing sectorgovernance

reformsfor oil/gas

+mining:

• Embedded EITI•Institutional /

regulatory reform• Strengthening of

licensing systems • Revenue mngmt. •Sub-national

revenue distribution•Benefits streams