Alaco

27.11.2015 | Extractive industries anti-corruption initiative put to the test

An international effort to promote greater transparency in the oil, gas and mining sectors has made significant progress since it was launched over a decade ago. But the Extractive Industries Transparency Initiative is now facing a major test of its commitment to its values.

The so-called resource curse has been a major obstacle to economic and democratic progress in numerous parts of the developing world.  Many countries in Africa, Asia and Latin America are blessed with considerable energy and mineral reserves yet consistently fail to effectively manage the income from these resources.  Corruption all too frequently lies at the heart of the problem.  Venal officials pocket the proceeds of extractive industries, impoverishing their fellow citizens and silencing critics who seek to hold them to account.

Some domestic and multinational oil, gas and mining operators collude in this theft.  They do this in a number of ways, from turning a blind eye to dubious contracts and unscrupulous middlemen to bribing local functionaries.

In 2002 a coalition of governments, companies and NGOs launched an initiative to make governments and corporations more transparent and accountable.  The Extractive Industries Transparency Initiative, EITI, requires member states to disclose the money they receive from companies, who, in turn, must disclose what they pay.  At the same time, members must facilitate public debate over their respective audits.

Forty-eight countries are now implementing the EITI requirements.  Initially, they are referred to as Candidates, and after fulfilling all the necessary conditions are termed Compliant.  In all, participants have disclosed nearly a trillion dollars’ worth of revenues generated from natural resources. 

Since the launch of the EITI campaign, greater transparency has led to a better understanding of the mechanisms through which resource wealth is diverted from state coffers.  In Nigeria, for example, EITI audits between 2009 and 2011 revealed that one company owed tax payments from oil revenues totalling $8.3 billion – more than the government spent on education over the same period.  As of May 2014, officials had managed to recoup some $443 million of the missing payments and had committed to working with the tax collecting agencies to recover the rest.

An EITI report by the Chad government in 2012 revealed that the country had no system of recording the flow of oil and gas revenues from companies to government accounts.  This meant that officials were unable to monitor the extent to which companies paid what they were supposed to pay, increasing the risk of corruption and mismanagement.  Since then, the government introduced a computerised revenue-tracking unit recording all payments from oil and gas companies. 

Guinea has substantial bauxite and iron ore reserves, but an EITI audit in 2012 revealed that the mining sector accounted for just 17% of government revenues.  The report also showed that the licence registry’s record of licences held by extractive companies was incomplete, and there was uncertainty over the validity of some licences.  The government subsequently reformed licencing practices and the process of contract awards.

In 2013 Liberia also discovered that the procedure for awarding contracts was not being adhered to after examining EITI audit data on revenue payments and contracts within the oil and mining sector.  The authorities conducted what they called a “post award process audit”, which looked at 68 contracts that had been awarded.  They found that 62 had not complied with laws and regulations. 

While the provision of comprehensive and accurate revenue data is key to transparency, public debate over audit findings is central to accountability.  In countries racked by conflict, this can be quite challenging.  In Iraq, the EITI has been helping to organise discussions around the governance of the oil and gas industry.  In perhaps one of the largest gatherings of civil society organisations in the country’s history, up to 600 participants from over 380 nationwide organisations met last November in Baghdad to elect local EITI representatives.

Though the EITI has made impressive progress since its launch, it has not escaped criticism.  For example, in 2013 the campaign group Human Rights Watch urged the initiative to incorporate more human rights requirements.  It acknowledged that the EITI had contributed to greater disclosure of revenues from the oil, gas and mining sectors, but said that it had done little to enhance government accountability.  The thrust of HRW’s argument is that it could be counterproductive to challenge a country’s record on extraction if the government restricts political opposition and freedom of speech because in some authoritarian states transparency becomes an empty gesture and merely gives governments a fig leaf of respectability.

In an open letter responding to the HRW criticism, Jonus Moburg, the head of the EITI Secretariat, said:  “While some basic rights need to be in place to improve governance, we have concerns about taking this too far…  [The HRW view] implies that transparency will only lead to change in ‘free countries’. Transparency can still contribute to change in countries with relatively poor HR record[s].”

Nonetheless, the EITI has taken some action to demonstrate its condemnation of repressive regimes.  Azerbaijan’s recent crackdown on government critics led to it being relegated from Compliant to Candidate status, while Central African Republic, Guatemala, Indonesia, Tajikistan and Yemen have been suspended due to political instability or failure to meet disclosure deadlines.

Criticism has also been levelled at the EITI for its apparent hesitation over whether to include the disclosure of beneficial ownership as a membership requirement.  This is a concern because there is evidence to suggest that corrupt officials often set up shell companies to enrich themselves from the awarding of contracts and licences.

In 2013 the EITI drew up provisions for a beneficial ownership disclosure requirement.  Before going ahead with its implementation, the EITI wanted to test the feasibility of the move with a pilot involving 11 member countries.  The pilot appears to have had mixed results, as a number of participants struggled to draw out ownership information from local companies.  Part of the problem was that members were only encouraged to do so, not required.  EITI spokesman Anders Tunold Krakenes attributed the slow progress on disclosure to the fact that “the countries have been navigating unchartered waters.”

Writing in the EITI’s latest Newsletter, EITI Chair Clare Short acknowledged that some countries in the pilot had real difficulty finding companies’ beneficial owners.  As to whether disclosure should be made a requirement, she said:  “The issue for the EITI is whether we should make something compulsory and set up many countries to fail or whether we should continue to encourage all countries to make progress on the issue. “  EITI points out that if a country fails a single aspect of an EITI requirement, it will lose its Compliant status.

Some activists now fear that the EITI will back-pedal on its commitment to transparency by diluting its proposed requirement on the disclosure of beneficial ownership.  Rachel Owens of the campaign group Global Witness told Alaco that there seems to be “a lack of political will and a huge fear that countries will fail” to deliver on the requirement if it is introduced.  “This is despite the growing evidence that hidden company ownership is the principal means of corruption in EITI countries.  The world is watching to see if the initiative will take a stand in favour of greater transparency and assert its leadership globally.”

Following the pilot, the EITI says that most of the participating countries will continue to disclose information about companies’ beneficial ownership and others are exploring how to follow suit.  According to Short, the EITI recently strengthened its requirements to help bring about long-term reform, but there is a need to be “intelligent and fair in testing the progress countries are making.  The EITI’s future success could like in getting this balance right”.

The impact of EITI’s campaign on boosting transparency and accountability in the way extractive industries operate is undeniable.   What is crucial, is that it continues to set the bar high.