Commodity Price Volatility and Inclusive Growth in Low-Income Countries
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Chapter 18. The Role of Transparency and Civil Society in Managing Commodities for Inclusive Growth and Development

Author(s):
Rabah Arezki, Catherine Pattillo, Marc Quintyn, and Min Zhu
Published Date:
October 2012
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Author(s)
Antoine Heuty

Introduction

In 2008, aid flow to sub-Saharan Africa reached US$36 billion per year. Natural resource rents, by contrast, stood at US$240 billion. Over three-quarters of Africa’s subsoil assets have yet to be discovered. If such estimates are confirmed, oil, gas, and mining are likely to represent the single most significant untapped source for financing development in resource-rich low- and middle-income countries. Capturing these mineral rents and putting them to effective use will require many resource-rich countries to strengthen institutions and policies. Civil society, parliamentarians, and the media all have a critical role to play in ensuring revenues are used for the public good.

Countries that are rich in oil and minerals but poor in economic and political governance pay a high price for their lack of transparency and accountability, as a recent report on Angola by the International Monetary Fund documented. For the period from 2007 through 2010, the IMF found US$32 billion in unaccounted-for government funds, equivalent to a quarter of Angola’s annual GDP. In response, the government is preparing a report on the discrepancy between receipts from Sonangol, the national oil company, and the budget.

This incident follows previous allegations of corruption involving western companies (Global Witness, 1999), which led to significant reforms to increase the transparency and openness of Angola’s licensing process (Heller, 2007). Despite its vast wealth in natural resources, Angola ranked 148th out of 187 countries in the United Nations Development Programme’s 2011 Human Development Index (UNDP, 2011). The mismanagement of the oil sector there and in other resource-rich LICs shows the costs of opaqueness. The lack of transparency also undermines the ability of governments to use revenues from the extractive sector to stabilize their economies against commodity price volatility. After the financial crisis of 2008–09, price volatility forced the government of Angola to accept financial support from international financial institutions.

Transparency, the “increased flow of timely, good-quality and reliable economic, social and political information which is accessible to all relevant stakeholders” (Bellver and Kaufmann, 2005), is a critical component for improving the quality of institutions responsible for the management of natural resources (Arezki, Hamilton, and Kazimov, 2011). The IMF report on Angola illustrates the role that international financial institutions and international civil society organizations can play in enhancing transparency in the management of oil, gas, and mining revenues. However, it also emphasizes the poor access of civil society, parliamentarians, and the media in Angola and other resource-rich countries to the necessary information about oil, gas, and mining to hold their governments accountable.

Civil society organizations have played a central role in the design of transparency norms for the extractive sector. Since 1998, groups such as Global Witness, Human Rights Watch, and the Revenue Watch Institute have led a global campaign calling for companies and governments to disclose petroleum and mining revenue data (Global Witness, 1998; Human Rights Watch, 1999; Tsalik, 2003). In 2002, a group of civil society organizations formed a coalition called Publish What You Pay (van Oranje and Parham, 2009). Its current membership numbers over 600 organizations in 30 countries.

The IMF and the World Bank have also contributed to the transparency agenda through the World Bank’s Extractive Industry Review (Salim, 2004; World Bank, 2004), the review of the International Finance Corporation’s Sustainability Framework, and the IMF’s (2005)Guide to Resource Revenue Transparency. This guide codifies principles for resource-rich countries in handling resource revenue and tailors the IMF’s Code of Good Practices on Fiscal Transparency to the specific needs of resource-rich countries. It identifies and explains generally recognized best practices for transparent resource revenue management.1 International financial institutions have a critical role to play in advancing transparency in oil, gas, and mining fiscal management.

In 2002, British Prime Minister Tony Blair announced the Extractive Industries Transparency Initiative at the World Summit for Sustainable Development in Johannesburg. Countries’ voluntary commitment to the initiative implies the regular disclosure of resource revenue payment and receipt data from companies and governments, respectively. The EITI has been implemented by 35 countries and is supported by the majority of large extractive companies, a wide pool of donor countries, and a significant group of investors.

Recent innovations may offer new opportunities to strengthen the governance of oil, gas, and mining revenues for the public good. The 2010 U.S. Dodd-Frank Act requires petroleum and mining companies listed on the Securities and Exchange Commission to disclose how much they pay to governments. In October 2011, the European Commission adopted a legislative proposal that would require EU-based companies to disclose their payments to governments for oil, gas, minerals, and logging on a country-by-country and per-project basis.

Although the last decade has seen significant progress, too many countries still fall well short of their potential. In the more than 50 countries that are classified as resource rich by the IMF, more than 1.5 billion people are living on less than US$2 a day. The record of resource-rich countries with weak institutions shows that governments fail to earn what they should from their natural resources and fail to maximize the impact of the revenues on development. In Nigeria, as oil revenues doubled between 1981 and 2006, annual per capita income fell by US$300. Timor-Leste has a US$8 billion oil savings account, but close to 50 percent of its children under the age of five are stunted from malnutrition. Without better management of revenues, the dividends of natural resources are often poverty and conflict.

This chapter makes the case for transparency as a critical element for managing commodity price volatility and fostering inclusive growth. It provides a framework for understanding the role of oversight actors in managing the oil, gas, and mining sectors. It demonstrates that transparency is important, not only because it can facilitate fiscal policies that lessen the effects of commodity price volatility and raise resource allocation efficiency, but also because it can empower citizens to ensure that the benefits of growth are redistributed and not captured by a favored few. A critical assessment of existing transparency initiatives and a review of innovations in natural resource governance show opportunities to enhance the role and impact of parliaments, civil society, and the media in managing these natural resources for development.

Why Transparency and Oversight Actors in Natural Resource Management Matter

Increasing dependence on revenues from hydrocarbons in a growing number of countries tends to undermine transparency and accountability. In many oil-producing countries, the share of hydrocarbon revenues in the government budget has significantly increased over the last 10 years. The number of commodities-dependent LICs and MICs rose more than 30 percent between 1996 and 2010, from 46 to 61 countries (Haglund, 2012). For example, in the Democratic Republic of the Congo, the share of oil revenues in total revenues and grants increased from 50 percent in 1995 to 70 percent in 2009. The contribution of resource revenues to the budgets of resource-rich countries in sub-Saharan Africa increased from 11.7 percent of GDP in 1980 to 24 percent of GDP in 2005. In contrast to the case in resource-dependent countries, fiscal revenues of resource-poor developing countries in sub-Saharan Africa have experienced little change over the same period—more evidence that extractive revenues are driving growth of total fiscal revenues.

Isham and others (2005) found that countries that are rich in point source natural resources tend to have weaker institutional capacities. Sala-i-Martin and Subramanian (2003) illustrate the negative correlation between resource intensity and economic growth in Nigeria. The Revenue Watch Institute’s Revenue Watch Index (2010), which assesses the information that 41 resource-rich governments disclose about oil, gas, and mining, found that a majority of countries provide limited public information on their natural resource sector. Brautigam, Fjeldstad, and Moore (2008) established a link between developing countries’ reliance on revenue from natural resources and weak institutions. Fiscal opacity in oil-producing countries directly stems from the way the state finances itself. Normal channels of public accountability are often missing in resource-dependent countries because the government has an autonomous source of revenue not dependent on taxing its citizens. This approach implies greater public and parliamentary oversight over the collecting and spending of the resource rents. A more radical approach would involve directly redistributing windfalls to citizens and then taxing citizens to finance public expenditures to restore the social contract (Devarajan and others, 2011).2

In a majority of countries—with notable exceptions such as the United States—natural resources are public assets. Article 1 of the International Covenant on Civil and Political Rights states that “all people may, for their own ends, freely dispose of their natural wealth and resources” (Wenar, 2008). The government is the custodian of natural resource wealth. The specific challenges of countries rich in oil, gas, and mining provide a compelling rationale for comprehensive citizens’ oversight of natural resource management. As Kaufmann and Bellver (2005, p. 2) explain:

[The] social contract between the state and its citizens by which citizens grant power to the executive and demand accountability in return lies at the core of the development process. Yet in countries where state capture or predatory leadership remains a challenge, transparency reforms are likely to be resisted by certain groups in society and within the institutions themselves. In these cases, entry points for reform would lie in civil society and in building new alliances with the potential beneficiaries of disclosure.

Understanding the implications of secrecy and the fragility of the social contract in resource-rich developing countries requires disentangling multiple asymmetries of information between extractive companies, governments, and citizens. Governments from LICs generally have much less geological and economic information regarding their natural wealth, which creates a power disequilibrium when negotiating the terms of a resource deal.3 The lack of openness of governments around oil, gas, and mining (Revenue Watch Institute, 2010) further unbalances the relationship between citizens and governments and within the government itself. The asymmetry of information undermines accountability and creates incentives for officials to use their power for personal gain rather than the public good. Within the government, information asymmetries also fuel capture by state-owned companies and resource ministries, which undermines the rational allocation of public resources.

The lack of transparency in oil, gas, and mining management has direct adverse consequences for managing commodity price volatility, economic growth, and development. Government spending tends to move with commodity prices in oil-, gas-, and mining-dependent countries (Cuddington, 1989). The procyclical fiscal stance in a number of resource-rich countries limits their ability to respond to commodity price shocks. Arezki, Hamilton, and Kazimov (2011) have underscored the role of political institutions in mitigating against volatility. The asymmetries created by the lack of transparency help explain its adverse impact on fiscal policy.

For instance, inadequate information regarding the oil sector in Nigeria prevents the Ministry of Finance from making sound revenue forecasts. It also politicizes decisions by the parliament around the oil price benchmark, which underpins the revenue envelope in the budget. As a result, the difference between estimated and actual oil revenues in Nigeria reached 39 percent in 2011. The case of Nigeria also highlights the interconnectedness between transparency and accountability in natural resource governance. The inability of governments to develop countercyclical fiscal policy undermines public investment effectiveness and hurts economic growth.

Weak transparency and oversight also result in the inefficient allocation of resources and lower economic performance. Corruption is the most obvious case of waste and mismanagement of resource windfalls at the expense of growth and development. Arezki and Bruckner (2011) found that oil rents were correlated with corruption in a group of 30 oil-exporting countries between 1992 and 2005. Lack of transparency enables politicians to approve “white elephant” projects (Robinson and Torvik, 2005). Resource-rich countries’ tendency to underinvest in education (Gylfason, 2001) provides further evidence of how resource dependency undermines policies for public investment. The need for resource-dependent economies to diversify their sources of growth has sometimes led to the development of opaque and unaccountable investment funds and institutions. In Kazakhstan, the National Welfare Fund Samruk-Kazyna failed to channel the windfall into productive investment outside the resource sector, and it fueled a financial and real estate bubble, forcing the government to bail out the banking sector (Heuty, 2011).

The nexus between transparency, accountability, and inequality illustrates the role of citizens’ empowerment and oversight over oil, gas, and mining management. Berg and Ostry (2011) found a direct link between economic growth performance and income distribution in Cameroon, Ecuador, and Nigeria. In all three cases, the opacity of the resource sector enabled capture of the rents by the political elite at the expense of long-term economic growth. Following Gupta, Davoodi, and Alonso-Terme (1998), Gyimah-Brempong (2002) has demonstrated the link between corruption, economic growth, and income inequality in 21 African countries principally rich in oil, gas, and minerals.

The linkages between natural resource windfalls and economic and development outcomes stress the key role of transparency and accountability against commodity price volatility and of increasing the efficiency of public spending. Empowering citizens, parliamentarians, and the media is also a critical condition for safeguarding against capture by the elite and for ensuring a more transparent distribution of the rents. The next section reviews existing transparency initiatives, particularly the EITI, to assess their current and potential impact on growth and development.

Do Existing Transparency Initiatives, Particularly the EITI, Help LICs Improve Economic and Development Outcomes?

In the past five years, transparency and accountability in the management of extractive resources have come to the forefront of the policy agenda at the national, regional, and international levels. This is a testament to the efforts of international civil society, progressive companies, and supportive governments. Proper governance of the extractive sector is now seen as critical to the economic success of resource-rich countries. Since its launch in 2003, the EITI has emerged as a global norm for revenue transparency in oil, gas, and mining. It has now been implemented by a majority of resource-rich countries, including Indonesia, Iraq, and Norway. The United States also recently committed to implementing the initiative.

The EITI monitors and reconciles company payments and government revenues at the country level. Each implementing country creates its own EITI process, which is overseen by a multistakeholder group composed of participants from the government, companies, and national civil society. An international board and secretariat oversee the application of the methodology and the credibility of the process. EITI represents a major opportunity for opening up the resource sector and revealing the windfall from oil gas and mining. The EITI reconciliation process identifies discrepancies and potential sources of revenue leakages that support inclusive growth. For instance, the first Liberia EITI report identified a US$100,000 underpayment by a company that was subsequently recovered by the government. Nigeria’s 2005 report showed that over US$500 million in oil taxes had not been collected or had gone missing—more than seven times the amount the government spent on agriculture that year. In Tanzania, EITI showed that companies paid lower taxes than the withholding tax on income payments to employees in 2008.

Beyond revenue transparency, the EITI multi-stakeholder process provides a framework for policy dialogue and for aligning incentives among all stakeholders. Unlike Poverty Reduction Strategy Papers (PRSPs) or Environmental Impact Assessments, the EITI gives civil society a seat at the table and a vote in critical decisions. A survey of civil society organizations participating in EITI (Dykstra, 2011) has shown that the civil society participation and policy dialogue enabled by the multi-stakeholder framework are the most successful aspects of EITI. Civil society participation directly addresses the information asymmetry across stakeholders and limits potential collusion against the public interest. The multi-stakeholder forum also offers a space for discussing the discrepancies identified in the audit report, which helps citizens hold their government to account and can help strengthen the social contract and public trust over government stewardship of natural resources.

Country ownership over EITI and the flexibility of the methodology enable governments to tailor implementation to their specific needs as long as the minimum criteria of the initiative are respected. Liberia decided to include forestry into the scope of the national process, and Nigeria has added a physical and process audit that enables more complete analysis of the oil and gas sector in the country. Nigeria and Liberia have also passed EITI legislations that codify their innovations and further affirm the commitment and sustainability of the initiative.

The first Iraq EITI report published in 2011 innovated by applying the reconciliation process to export sales. The report reconciles the volumes and values of the crude oil sold by the government with the amounts received and paid by the buyers. By doing so, Iraq has become the first country to integrate export sales into the EITI regime. However, it contains no data on payments made by producing companies, which is a major gap in comparison to other EITI reports and the requirements of the initiative.

Most big oil producers earn far more revenues from export sales than royalties or taxes. Typically, national oil companies receive payments of large quantities of crude oil because they have retained ownership over some or all of the production or because they receive the oil as profit from the operating companies. Two categories of transactions then ensue. First, the state company must decide to whom they want to sell (options include a wide range of foreign refineries, commodity traders, or domestic refineries) and the price of that oil. This determines the amount that the national oil company earns in return for selling its oil. Second, the national oil company will revert a portion of these earnings to the state treasury through direct payments, dividends, or other payment types. How much they transfer, when, and to whom has major revenue implications for a major oil-exporting country. Iraq EITI also underscores the lack of similar reporting in other countries—especially given the scale of the transactions—and the need for complete information not just about sales, but also about how these earnings become state revenue.

Implementing the EITI can also play a “signaling” role to encourage investment, reduce the cost of borrowing, and stimulate economic growth. Esanov and Heller (2011) have shown that the spread of Nigerian yields above U.S. Treasury bonds dropped from 13 to 6.9 percent between 2002 and 2003 and continued to decline steadily through 2006 as Nigeria implemented the EITI and adopted a number of strong transparency measures. This finding is consistent with Glennerster and Shin’s (2008) finding that countries that choose to become more transparent experience lower borrowing costs.

However, assessments of the EITI (Ölcer, 2009; Kolstad and Wiig, 2009; Shaxson, 2009) question its impact on resource-dependent countries. The diversity and scale of the benefits anticipated from transparency initiatives such as the EITI (trust, anticorruption, public service delivery, participation, and so on) illustrate the expectations that accompany transparency initiatives (Mejia Acosta, 2010). Gillies and Heuty (2011) have also underscored the absence of a clear model of change for understanding the causality between transparency and a variety of outcomes and have discussed the measurement issues that undermine a robust examination of the actual impact of transparency interventions such as the EITI. A critical assessment of the EITI also suggests five reasons for its limited impact on economic and development outcomes.

Because of its international credibility, the EITI is sometimes implemented by governments to receive international rewards. As a result, the design and implementation of the EITI may be focused more on the asymmetries of information between external actors and the government than on citizens. In practice, the EITI was a condition for participation in the Heavily Indebted Poor Countries Initiative in a number of countries, including Cameroon, Chad, the Democratic Republic of Congo, the Republic of Congo, and Sierra Leone. Although such “governance conditionality” may create the necessary impetus for reforms, it requires the existence or the development of a genuine domestic constituency and demand for transparency to be sustainable. The mainstreaming of EITI information into the media and its use by parliaments appears quite limited. The EITI criteria require publication of results in a variety of public media. However, communication campaigns often summarize for publication a large set of raw financial data which is difficult for citizens to understand.

The ability of civil society, media, and parliamentarians to use available information to hold their governments accountable is a critical condition for the EITI to have an impact on economic growth and development. Parliaments often lack understanding of the applicable fiscal formulas, which precludes their analysis of petroleum or mineral investment agreements. And civil society groups often lack the expertise required to use the information disclosed in the reports published through the EITI in various countries.

Political constraints and capture of the EITI process can weaken the credibility and relevance of the initiative. For example, Azerbaijan publishes regular information on its natural resource fund and on the fiscal transfers of revenues to its regions (Revenue Watch Institute, 2010), yet the government does not provide citizens with opportunities to discuss the management of revenues from oil and gas and the quality of public spending in the country. On the other extreme, the cooptation of civil society by the government can compromise the legitimacy of the EITI exercise. Gauthier and Zeufack (2011) discuss the conflict of interest created by the generous compensation given to all members of the EITI multi-stakeholder group in Cameroon.

The quality and usability of EITI reports are low and prevent disclosures from being used. Gillies and Heuty (2011) analyzed revenue data from the 50 reports published by 23 countries and concluded that “until EITI reports are produced regularly, contain comprehensive and reliable data and have a basic level of comparability, their value as a source of information will remain compromised” (p. 38). The weak quality and user-unfriendliness of the reports is not surprising given their externally oriented nature—countries with strong reports receive the same levels of credit as those with weak ones.

The current scope of the EITI and other transparency initiatives is a major impediment to empowering citizens from resource-rich countries to hold their governments accountable on how they use the windfalls from oil, gas, and minerals. The EITI is restricted to revenue transparency, which captures only part of the money generated by the extractive sector. It often does not involve scrutiny of fiscal revenues from the granting of licenses and concessions, the management of collected revenues (particularly natural resource funds and state-owned companies), and the actual distribution of the rent through the budget process. Kolstad and Wiig (2009) emphasized that the EITI may only chase corruption from the revenue to the spending side of the budget, which significantly weakens its capacity to limit leakages and stimulate efficiency in resource allocation. The magnitude of off-budget mechanisms can further diminish the relevance of a narrow focus on money flowing through the budget. In Venezuela, the combination of Petróleos de Venezuela, S.A. (PDVSA) spending on social programs, Fondo de Desarrollo Nacional (FONDEN) development investments, and other transfer mechanisms represented over one-third of the total oil rent in 2006, which was equivalent to 37 percent of the government expenditure executed through the national budget (Manzano and Scrofina, forthcoming). The Natural Resource Charter4 offers detailed guidelines for fostering transparency in natural resource management. It builds on existing initiatives such as the EITI and the Ecuador Principles to provide the tools and knowledge necessary for governments and civil society groups to avoid the mismanagement of diminishing natural riches and ensure the realization of their benefits now and in the future. The charter represents a more comprehensive approach to oil, gas, and mining management than existing initiatives. However, it still lacks a clear operational framework for driving reforms in resource-rich countries.

The EITI is also unable to foster greater transparency in the management of natural resource funds—a subset of the so-called sovereign wealth funds—which would help resource-rich countries develop more significant fiscal buffers against commodity price volatility. SWFs managed US$4 trillion in assets as of December 2010. The Organisation for Economic Co-operation and Development expects assets under SWF management to reach US$10 trillion by 2015. About 70 percent of the assets managed by SWFs comes from oil, gas, and mining windfalls (Preqin, 2010). The financial clout of these funds, the lack of transparency in many of them, and the fear that some governments may invest their assets with political or geostrategic rather than purely financial objectives have attracted the attention of market participants and politicians alike. In October 2008, a group of 26 SWFs committed themselves to transparency, good governance, and accountability standards by signing a voluntary code of principles, called the Generally Accepted Principles and Practices for SWFs, also known as the Santiago Principles.

The key transparency elements of the framework require SWFs to disclose their legal framework, define and disclose their policy purpose, and publish their funding and withdrawal arrangements. However, the implementation of the principles is left to the discretion of individual SWFs, which explains the wide diversity of compliance with the framework. For instance, SWFs in Bahrain, Kuwait, Qatar, and Russia provide scant information about their compliance with the principles. In Africa, only 3 out of the 15 SWFs (in Botswana, Equatorial Guinea, Libya) are signatories to the Santiago Principles (Triki and Faye, 2011). The African resource-rich governments that signed the Santiago Principles rank very low against its benchmarks.

The framework provides another example of external accountability toward the market rather than to citizens of resource-rich countries (Heuty, 2011). Because natural resources are public assets, their proceeds and management should also be subject to public scrutiny. The rationale for secrecy in the management of natural resource funds appears unfounded. A recent report by the International Forum of Sovereign Wealth Funds (2011) noted that “some Members still face constraints regarding the information they can disclose” and implicitly recognized that only half of the 26 members of the group “confirmed that transfers and withdrawals are determined as part of the annual budget process” (pp. 14–15).

In February 2011, the EITI International Board adopted more rigorous requirements for the initiative. Will the new rules address the gaps of the current framework and increase the impact of the initiative? The new framework establishes stricter rules that will foster civil society’s role and participation in the EITI and improve the timeliness and usability of the information disclosed in EITI reports (Saunders, 2011). Countries will now have to create a multistakeholder group that includes civil society representatives from the onset of the process, which will guarantee that civil society is involved from the earliest stages, including in the design and approval of a work plan. After achieving “compliant status,” countries have to produce a report each year using data from the previous two fiscal years. The new rules also clarify the definition of materiality thresholds for resource payments and requires more comprehensive reports—including information on subnational transfers, barter deals, and social payments where relevant.

The application of the new framework should strengthen the relevance of the EITI and facilitate greater involvement of civil society in the process. However, EITI reports are most useful when they break down revenues by company, revenue stream (royalties, profit tax, etc.), commodity (oil, gas, etc.), and project. Company-by-company and project-by-project data can help identify the cause of reporting discrepancies and may indicate whether contracts between governments and companies are fair and beneficial to local populations. Twelve countries implementing the EITI voluntarily disclose their data by company,5 but many countries do not, and the new rules still do not require it. Such limitations curtail the usefulness of EITI reports and do not integrate the legislative implications of the Dodd-Frank Act in the United States and the EU legislative proposals regarding disaggregated reporting.

Recent Transparency and Accountability Innovations Suggest New Options for Harnessing Transparency to Inclusive Growth and Development

Country-by-Country Reporting in the United States and the European Union

Recent transparency and accountability innovations—often driven by civil society organizations—offer an opportunity for improving the management of oil, gas, and mining for the public good. In July 2010, the U.S. Congress passed Section 1504 of the Dodd-Frank Act, a measure requiring all companies registered with the U.S. Securities and Exchange Commission to publicly report how much they pay governments for access to oil, gas, and minerals in each country in which they operate and for each project. In 2011, the European Commission issued draft directives requiring companies listed on the EU stock exchanges and large private companies based in member states to disclose payments made to governments for oil, gas, minerals and timber, again on a country-by-country and per-project basis. Together, these standards would cover roughly half of global extractive sector market capitalization.

These reporting rules will go a long way toward closing a door on corruption in this area. The EU proposals especially, for their recognition that reporting rules for companies must account for revenues that are material to subnational and local communities, will help ensure that citizens are able to monitor development directly and empower investors to properly assess development risks.

But disclosure of official royalty, bonus, and tax payments as required by the U.S. law and EU proposals is not sufficient to ensure positive returns on development for resource-rich countries. Equally important are regulations and safeguards to ensure that oil, gas, and mining companies are paying governments what they owe. Research shows that in addition to government corruption, the tax evasion and avoidance practices of multinational enterprises represent an enormous loss of income to developing countries, potentially on the scale of over US$1 trillion a year (Dev and Freitas, 2011). Extractive industry companies are among the most vigorous users of tax havens and aggressive tax planning strategies. And there is reason to believe that resource-rich countries, especially in Africa, experience outflows of illicit capital at greater rates than developing countries overall.

Detailed, reliable financial information from companies, in addition to their disclosure of on-the-books payments to governments, can help tax authorities and citizens ensure that companies are meeting their fiscal obligations. For this reason, the international Publish What You Pay campaign and others have recommended that mandatory country-by-country reporting standards should extend beyond payments to governments to require that companies publish data on profits, production volumes, sales, intragroup trade/financing, assets, and staffing information in all countries where they have a trading presence. Were this information public across jurisdictions, oversight in general would increase enormously, and developing countries in particular would be in a better position to judge whether they are getting a fair return on the sale of their natural resources.

The Emergence of a Contract Transparency Norm

Under pressure from civil society and parliamentarians, governments are making extractives contracts public. Contract transparency is critical to enable citizens to assess whether they are getting a good deal for their resources. The Revenue Watch Institute (2010) has made the case for contract transparency and deflects the arguments for secrecy. Publish What You Pay and other civil society organizations have called for the establishment of a contract transparency norm to ensure greater public scrutiny of the deals that are signed between governments and extractive industry companies. Liberia, Peru, and Timor-Leste have been disclosing their contracts without deterring investment in the natural resource sector. A number of additional countries have made firm commitments to publish their most important oil and mining agreements.

Following a strong advocacy campaign from local civil society groups, the new constitution of Niger mandates publication of all oil and mineral contracts in the country’s official gazette.6 Sierra Leone passed a new petroleum act that requires publication of all oil contracts. Ghana’s Ministry of Energy has made the country’s most important petroleum agreements available for download online. The Democratic Republic of the Congo has published dozens of its mineral and petroleum contracts. Guinea passed a new mining code that requires the publication of all contracts, both in the official gazette and on a government website. And in Iraq, the Kurdistan Regional Government published all of its petroleum production-sharing agreements. Countries that have already put contracts online or in print must ensure that the practice is maintained and that new agreements are subject to the same public scrutiny. Civil society and researchers must take advantage of disclosure and use the contracts for better analysis.

Broader transparency and broader citizens’ engagement can also have significant financial returns for the private sector. Henisz, Dorobantu, and Nartey (2011) found that close to two-thirds of the market capitalization of 26 publicly traded gold mining companies was a function of on-the-ground stakeholder engagement practices and political risk, whereas only 37 percent was a function of the value of gold they control.

Sovereign Wealth Funds Governance

Broadening the scope of transparency initiatives can empower citizens to play a more active role in monitoring oil, gas, and revenues put into natural resource funds. Greater citizen and parliamentary oversight provides a complement to the Santiago Principles, which can improve the management of SWFs against commodity price volatility and ensure funds are used for the public good. The recent creation of the Public Interest and Accountability Committee in Ghana (see Box 18.1) illustrates the role civil society can play in ensuring more effective fiscal management of natural resources.

Strengthening Demand for Transparency at the Local Level

The development of transparency mechanisms to monitor the transfer and use of oil, gas, and mining rents at the subnational level can increase domestic accountability and facilitate greater connection between governance reforms and improvements in service delivery and development outcomes. Although the chain of causality between disclosure of resource revenue and actual service delivery (health and education) is admittedly very complex and difficult to track (Gillies and Heuty, 2011), the expansion of multistakeholder initiatives such as the EITI at the regional and local levels can foster new modes of accountability toward citizens.

National governments are distributing a larger share of the revenues from oil, gas, and minerals to state and local governments, and, with this distribution, greater responsibility to provide basic public services. These revenues, however, are not always transferred in a transparent manner or on a regular schedule, and the capacity of state and local governments to manage the funds is often low.

In Peru, where the EITI is implemented at the national level but no template for its adaptation at the subnational level exists, the organization Grupo Propuesta Ciudadana (GPC) has developed a comprehensive system for monitoring the transfer and use of the oil, gas, and mining rents redistributed to regional governments and municipalities. GPC has also collaborated with regional authorities to build government officials’ capacity to forecast revenues and mitigate the impact of volatility. In Indonesia, the Centre for Regional Information and Studies created a local multistakeholder platform in two new oil-producing districts (Blora and Bojonegoro) to ensure regular budget disclosure. In both countries, local initiatives increased the predictability of transfers and put pressure on the government to use windfalls for development. For instance, Bojonegoro’s education budget increased by 27 percent in 2011. This local transparency and accountability mechanism provided a model and motivation for Indonesia’s EITI candidacy at the national level. Such initiatives are part of a broader effort to increase social accountability to stimulate the “demand” for good governance and better public service delivery.7

Box 18.1Ghana’s Public Interest and Accountability Committee

In 2007, commercial quantities of oil were found off the coast of Ghana. Oil started flowing in December 2010. With proven reserves of 500 million barrels and estimated peak production of 120,000 barrels per day, Ghana is poised to become a minor oil-producing country. In April 2011, the Parliament adopted the Petroleum Revenue Management Act (PRMA) to regulate management of money earned in Ghana’s new oil production sector. The law commits the nation to saving a minimum of 30 percent of its oil revenues in Heritage and Stabilization Funds that will both protect the economy against oil price volatility and put aside earnings from this finite resource for future generations.

Under the bill, the remainder of oil revenues will not be relegated to overseas accounts, but will be invested in productive sectors of the Ghanaian economy. Civil society participation in the debate on oil revenue management resulted in the adoption of strong transparency and governance provisions. The PRMA established rigorous rules for reporting on oil fund assets and investments and created an independent regulatory body, the multi-stakeholder Public Interest and Accountability Committee (PIAC), to monitor compliance with the law.

The objectives of the PIAC are threefold. First, it will “monitor and evaluate compliance of this act [PRMA] by government and other relevant institutions.” Second, it will “provide a space and platform for public debate… on whether the use of [oil] revenues conforms to development priorities.” Third, it will “provide an independent assessment on the management and use of petroleum revenues” (Government of Ghana, 2011, p. 24).

The role of the PIAC is advisory, and it has no formal powers to force government to alter its spending policies. Potentially, it does have significant leverage with government, because the committee consists of 13 high-standing members of Ghanaian society with a sizable public backing. Represented on the committee are religious, traditional, and professional bodies; civil society and community-based groups; trade unions; and the Ghana Extractives Industries Transparency Initiative. The committee publishes biannual reports on the performance of government and concerns in society.

New Technologies for Transparency and Accountability

New technologies can also increase the timeliness, usability, and relevance of the information disclosed through the EITI and other transparency initiatives. Over 50 reports have been produced by EITI countries, and these reports contain valuable data on oil and mining revenues, but they are underutilized by citizen groups due to capacity constraints and by investors due to the low quality of the reports. The Revenue Watch Institute has created an online database for viewing and sharing report data and analyzing the quality of reports. This tool8 presents EITI report scorecards and permits the user to see country summaries, view analysis by indicator, and compare results by country. The connection between EITI figures and new sources of data, such as revenue figures reported in IMF Article IV consultation reports, would enhance citizens’ ability to hold their governments accountable by comparing what is reported through the EITI process and the flow of funds entering the budget.

More regular, systematic disclosure of data—standardized and in an electronic format—by the IMF could also allow citizens to compare the figures to the revenues going to SWFs, kept by national extractives companies, or diverted to other off-budget instruments. This knowledge could generate a strong debate about money from oil, gas, and mining placed into natural resource funds and kept by national extractives companies. The Dodd-Frank Act will generate additional company data that can inform advocates and investors and fuel policy debate about revenues from the extractive sector. Innovative approaches can also empower citizens through mapping of fiscal transfers.

Conclusion

We are at the beginning of an era of new opportunities to create transparent, accountable, and effective management of oil, gas, and minerals in countries that are rich in natural resources but, in many cases, are fragile and poor. The EITI has emerged as a strong revenue transparency norm. The credibility and relevance of the process requires the active and knowledgeable participation from civil society. The growth of the Publish What You Pay civil society coalitions has been instrumental to the progress of the EITI. Yet the impact of transparency initiatives on economic growth and development has been limited. To address the asymmetries of information between citizens, governments, and companies, a more comprehensive and systematic set of transparency and accountability norms is warranted.

Strengthening the capacity of civil society, parliamentarians and media is a prerequisite for bridging the gap between transparency, accountability, and socio-economic change. An environment allowing citizens to use available information to hold their governments accountable is also a major condition for greater impact. International financial institutions and donors have a responsibility to foster oversight actors and encourage governments to allow their citizens freedom of information and expression.

Broadening the scope of transparency initiatives will help develop a coherent and harmonized global transparency norm for oil, gas, and mineral management. A number of governments of resource-rich countries have started to disclose extractive contracts on a routine basis. Systematic disclosure of contracts and comparison with data available from the EITI and country-by-country legislation in the United States and Europe would help curb corruption and increase financing for development in LICs. More progress is needed to make state-owned companies and SWFs transparent and accountable, as existing frameworks limit oversight over large resources that flow out of the budget process and prevent citizens, parliamentarians, and the media from tracking the money.

Revenues from oil, gas, and minerals far outstrip foreign aid and have far greater potential to finance poverty reduction and development objectives. Those revenues must be harnessed and put to good use. Empowering civil society, parliamentarians, and the media is fundamental to transforming natural wealth into well-being.

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The author is grateful to Karin Lissakers, Akram Esanov, Alexandra Gillies, Patrick Heller, Rebecca Morse, Robert Ruby, and Johannes Schreuder for their support and comments.Antoine Heuty is Deputy Director with the Revenue Watch Institute.
1The guide’s set of good practices is divided among four pillars, including clarity of roles and responsibilities for legal frameworks, fiscal regimes, revenue flows and borrowing, national resource companies and subnational governments; open budget processes for multiple aspects of fiscal policy and resource revenues; public availability of information regarding financial information from budget documentation to debt and assets to fiscal risks; and assurance of integrity regarding internal controls and audits, tax administration, company oversight, and company and government revenue flows.
2The Revenue Watch Institute has developed a series of case studies (forthcoming) on existing systems of cash transfers in Alaska, Bolivia, Mongolia, and Timor-Leste (www.revenuewatch.org/cashtransfers). The Center for Global Development has developed an initiative and a paper series on “oil-to-cash” (www.cgdev.org/section/initiatives/_active/revenues_distribution).
3The Revenue Watch Institute, the International Senior Lawyers Project, the IMF, the World Bank, and other international institutions provide technical assistance and capacity building to governments to improve their capacity to negotiate extractive deals.
4The Natural Resource Charter (www.naturalresourcecharter.org) is a set of principles for governments and societies on how to use the opportunities created by natural resources effectively, drafted by a group of leading academics and practitioners in the field of natural resource governance.
5The Central African Republic, the Democratic Republic of the Congo, Ghana, Guinea, Liberia, Mongolia, Niger, Nigeria, Norway, Peru, Sierra Leone, and Timor-Leste.
7See Gillies and Heuty (2011), pages 36–37, for a more detailed discussion of social accountability tools.

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