n 2013, global mining revenues were an estimated $731 billion, or about five and a half times total annual official development assistance (ODA). A huge portion of this mining activity is taking place in the developing world. In Africa, 51 of 54 countries have ongoing or planned oil and gas exploration operations, and export data from 2010 indicates that about fifty seven percent of crude oil exports come from the developing world. Many if not most developing countries are grappling with the potential blessing and the potential curse of natural resource management. If responsibly managed this wealth will fuel progress, but doing so successfully is a significant challenge. Given recent discoveries, extractive wealth will be an increasingly relevant piece of the development puzzle.
These countries face a number of critical questions: 1) How can these resources best be used for the development of a country? 2) What will a country earn from oil, gas and mining activities? 3) What will the government do with all the taxes and fees from oil, gas, and mining activities? 4) What is a reasonable contribution to a country’s development by energy and mining companies? For many years these were questions that were difficult or impossible to fully answer.
EITI and the Transformative Power of Information
In 2003 a coalition of activists from NGOs, governments led by the United Kingdom and a group of energy and mining companies agreed to a set of principles which became known as the Extractive Industry Transparency Initiative (EITI). Since 2003, EITI has expanded to include 46 participant nations including the United States, Norway and the United Kingdom, and other developed countries have expressed interest in joining what began as a developing country initiative. EITI has successfully forged an alliance between diverse stakeholders from business, government, as well as local and international NGOs to push for a complete and transparent accounting of the taxes and fees collected by governments from the extractive sector.
EITI is one response to what is famously known as the “resource curse”. The term refers to the commonly observed paradox of a country or region with significant resource “wealth” becoming poorer, less competitive, less stable and more corrupt as result of the resource endowment. Most commonly, the resource curse is observed in developing countries with weak mechanisms of government accountability and transparency. Canada, Norway, Australia, and the United States have all successfully managed their resource wealth, but had the privilege of relying on a healthy civil society, independent judiciary, free press, and capable and well-run governments. While there have been examples of developing countries that effectively managed mining wealth, including Botswana and Chile, they are the exception not the rule.
The initiative is an example of international standard setting, or “soft law.” The stakeholders in the EITI process hope that information provided through the EITI process will inform and prompt broader reform efforts in countries where it is utilized. EITI is part of a larger trend of transparency and accountability driven by technology, globalized civil society and increased expectations of business and government.
EITI is, above all else, a transparent reporting mechanism for extractive related incomes. Extractive companies operating in an EITI participant country report royalties, taxes and fees paid to federal and subnational governments, the government separately reports all extractive revenues it received, and these numbers are tallied and reconciled by an independent administrator. The data is then published in an accessible and understandable manner, including any reporting gaps, to provide credible extractive resource revenue information which civil society can use to hold governments accountable for their disposition and use.
In order to become an EITI participant, governments must follow a number of steps and requirements, including a public statement of commitment to implementation from a high level official, the appointment of a senior level official to lead EITI implementation, and critically, the formation of a multi-stakeholder group with representatives from government, the private sector and civil society to oversee implementation. The multi-stakeholder group must meet regularly to develop an application for review by the EITI Secretariat, and if accepted, must produce a report within 18 months which is then validated by the independent reviewer. The individual EITI reports are checked with the independent administrator but it is the EITI board that determines if the reports are “compliant” with the EITI Standard. Of the 46 countries that are members or seeking to become members, 29 are currently compliant. EITI leadership and signatory countries must grapple with a number of questions in this process such as: How does EITI respect existing contracts and laws while balancing disclosure and maintaining commercial confidentiality? How can this global standard be applied in accordance with local laws and local realities?
Why EITI Works
Companies see value in EITI because it creates a more broadly supportive and secure operating environment. The EITI country process allows for companies to build “the muscles of trust” with a variety of stakeholders, and increases recognition of corporate contributions to development. Companies make large contributions to domestic tax bases, but also offer indirect benefits through their operation including job creation, capacity built through local supply chains, and local philanthropy. Companies also want to see local tax systems that are fair, transparent and encourage investment. Above all, companies want to see the onus of a country’s development on the country not on companies.
Developing countries see value in EITI because it enhances a country’s international standing as a more stable destination for foreign direct investment while promoting a positive international image. EITI boosts transparency and spreads awareness on how governments are utilizing resource related incomes. A number of multilateral development banks provide assistance to facilitate EITI implementation in developing countries. Specifically, The World Bank has a trust fund to provide technical assistance to country-level EITI network creation, and works with the local governments who convene these networks. Effective EITI implementation is complicated, and donor countries should be pursuing additional opportunities to support this process.
Room for Improvement
One of the central criticisms of EITI effectiveness is that it hinges on the existing conditions within a given country. Countries with strong civil society and an interest in transparent extractive payments will find EITI a meaningful tool, whereas countries with weak institutions and less than sincere desire for change may try to just “go through the motions” to gain acceptance into EITI. In Norway, where civil society and institutional accountability are strong, EITI has robust and consistent implementation. Conversely, EITI has run into challenges in places like Ethiopia, which was admitted as an EITI Candidate Country but has harsh restrictions on civil society and free media which have prevented the EITI board from determining if Ethiopia is compliant with the EITI Standard. If this situation persists, Ethiopia could be delisted from EITI. .
In countries like Azerbaijan, where civil society is being squeezed, there is an understandable urge to “fail” the country to send a message to the government, yet local NGOs say that the EITI multi-stakeholder group is the only free space of expression currently available. In Myanmar, which was just admitted as an EITI Candidate country, civil society, government, and industry are working together for the first time as they jointly produce the national EITI report over the next 18 months. The EITI process will assist the various stakeholders in learning patterns of cooperation while navigating the inevitable disagreements and differences.
Beyond the effects on political inclusion, Myanmar’s admission as an EITI Candidate country has real development implications for the country. In the wake of its economic opening, Myanmar requires hundreds of billions of dollars in investment to drive energy, agriculture, and infrastructure development in the coming decades. Some estimates suggest that offshore gas reserves could be among the richest in the world, and if managed correctly, would be a huge source of national income. In a statement following Myanmar’s acceptance as an EITI Candidate, Zaw Oo, Myanmar’s National EITI Coordinator, encapsulated EITI’s potential value as “a useful tool to design our escape from the resource curse, and an important catalyst for ongoing reforms.” This responsibility ultimately falls with Myanmar’s government and people, but EITI is an instrument which can assist in facilitating the reform and transparency needed for responsible resource management.
Finally, one thing that has not been addressed by EITI, and is beyond the purview of extractive companies paying the taxes, is the issue of what governments “do” with tax revenues? In some instances the local EITI process has started to report this as well this, but the hope is that the availability of detailed extractive revenue information will create a transformative conversation at the country level. The reality is that this process will take longer in some countries than in others.
EITI does serve another important function in developing countries as often it provides the first opportunity for constructive multi-stakeholder dialogue and this in itself can have a positive effect on effective governance. There is hope that EITI, along with other initiatives focused on accountability and data transparency in the extractive sector, can help developing countries overcome the resource curse. Particularly in developing countries with newly discovered oil and gas reserves- including Kenya, Mozambique, and Liberia- there is an opportunity for significant impact. EITI is not a silver bullet, but has prompted a sea change in extractive transparency and will continue to spur dialogue leading to change.
Article Published in Forbes.com on October 3, 2014.