International Network for Economics and Conflict

The Extractive Industries Transparency Initiative, (EITI) launched in 2002, now has 35 participating countries that have committed to publish annual, independently verified reports on all mining, oil and gas payments made by companies to governments and all revenues received by governments from these extractive industry companies. The EITI is based on the premise that making public reliable information about extractive industry payments will make corruption and theft of ‘resource rents’ difficult; and will enable informed debate amongst citizens and politicians about how to use resource wealth. While initially some governments could object to joining on the grounds that EITI was ‘a bad boys club,’ Norway is now a fully engaged member, the United States has just announced that it will participate, and Australia stated it will pilot test the system. The participants in EITI also include Liberia, East Timor, Sierra Leone and Côte d’Ivoire which, as post-conflict states, depend more than most on effective management of their resource wealth to establish the foundations for sustained economic growth. Citizens, journalists, and government officials, in all the EITI countries now have access to some information on what extractive industry companies are paying to the government, and what the government is receiving.

However, examination of country EITI reports reveals several shortcomings in reporting.  What do the reports tell us beyond the headline numbers, i.e. total revenues and the size of any discrepancy between what companies report paying and what governments report receiving. What do they tell us about revenue trends, or about the significance of these revenues in total government receipts? How many countries have a pattern similar to Tanzania whereby the largest contribution documented in their first report was through companies collecting payroll taxes on behalf of the government? What is the value of ‘social investments,’ training levies, or research and development contributions made by extractive industry companies? Where, and to what extent, do oil, gas and mining companies make payments to local governments?

While some of these questions can be answered for some countries, none can be answered for all.  Most EITI reports are difficult to read, and almost impossible to interpret.  Every country publishes reports using a different format, and applies its own categories for the payments reported and for the companies included.  Some country reports present data for every company, some aggregate the information so that payments from individual companies are not disclosed. Some include oil, gas and mining companies that are at the exploration stage, some only include companies that have started production. Some provide more explanation of the data than others.

Overall, despite the thousands of pages of data, the information content is limited. The strength of these reports is in the obstacles they present to crude corruption around revenue payments through the focus on professional, accounting-based reconciliation of government and company records.  The weakness is in not providing data and supporting information that could facilitate informed debate about the management of the extractive sector and the use of resource revenues. Revenue Watch Institute recently 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.”

There is now an opportunity to change this.  EITI is still voluntary, insofar as countries choose whether to join EITI - though once a government has made this decision, companies operating in that country are required to provide information. However, under the 2010 Dodd-Frank Act of the United States, and the October 2011 proposal by the European Union (EU) for amended rules on company reporting,  most extractive industry companies should, in the future, be required to submit information, country by country, on the payments they make to governments.  As of November 2011, the rules for implementing Section 1504 of Dodd-Frank are not yet agreed, though a draft has been released for comment, and the comments indicate that the rules will be hotly contested.  Because both the United States and European Union initiatives are legal instruments, they necessitate a clear definition of what will be included, and will generate information that should be comparable between companies, countries and over time.

The emergence of legally binding disclosure rules that will affect all the oil, gas and mining companies that are listed on US or EU stock exchanges (and extractive industry companies registered in the EU) provides a huge incentive to EITI to move away from its current loose specification of what should be reported. EITI should develop a two-tier system under which a core set of data must be reported in a standardized way, whilst leaving individual countries free to add supplementary reporting requirements to meet local circumstances. Moving forward, for supplementary categories, such as payments made for infrastructure improvements; value-added tax payments; payments related to transport operations, customs duties and pipeline transit fees or payments made to local government; and ancillary payments, such as personnel training programs and technology transfer, social payments by companies, – some  of which are included in some EITI reports – it would be useful for EITI to develop standardized reporting templates that countries could choose to  ‘opt-in’ to.

If EITI incorporated the Dodd-Frank specification of what payments to governments must be reported by extractive industry companies as a core requirement, this would include:

• Shares of production transferred to host governments (in cash or in kind)
• Shares of production transferred to state-owned companies (in cash or in kind)
• Taxes on profits
• Royalties
• Dividends paid to the host government
• Bonuses (such as bonuses paid when an exploration contract is signed, or discoveries made, etc.) [1]
• License and other fees related to extractive industry activities
• Other significant taxes paid to host governments. 

This Dodd-Frank data set includes the key revenue streams to host governments from oil, gas and mining. If all reporting could standardize around this as a basic dataset for published information, with scope to expand on a country by country basis, then the goal of enabling the citizens of resource rich countries to know what their governments are receiving would be brought forward. Journalists, civil society groups and individuals would find it easier to learn to interrogate the data and to make comparisons. Moreover, the rigorous definition imposed by the US Securities and Exchange Commission, should have the effect of improving the consistency and reliability of data.

However, neither Dodd-Frank nor the EU rules will include essential contextual information - notably, whether, and how much, oil, gas or minerals companies are producing.  EITI should include this in its core dataset requirements, as well as reporting payments made to, and received by, governments using the Dodd-Frank specification.  Companies should also provide a brief commentary on their activities (exploration, production, de-commissioning, asset sales, etc.) and how much they produced in the reporting period. Armed with this information, the public will be empowered to use political processes to press for the use of resource wealth for development purposes. Moreover, with this type of reporting, companies will feel the need to explain why, as is often justifiably the case, government revenues per unit of production vary from country to country, as do exploration and production costs and risks.

In resource-dependent post-conflict countries, in particular, it is necessary to have an informed public dialogue about how extractive industry wealth is used. Oil, gas and mineral resources offer a one-off opportunity, albeit often an opportunity lasting several decades, to build the human, physical, legal and institutional infrastructure that will provide good lives for citizens. As an important recent book  highlights [2], governments must make good decisions on a series of key issues, including regarding the terms under which resource extraction companies operate, the management of revenues, the ratio of spending and saving revenues and the ways in which saving and spending are managed for resource wealth to be a blessing not a curse. Some decisions will not be popular.  Effective transparency through a reformed EITI process will help build the basis of public understanding that is the starting point for debate, dialogue, understanding, and accountability.

[1] See Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules, page 80982 [2] See Paul Collier and Anthony J. Venables, ‘Plundered Nations? Successes and Failures in Resource Extraction,’ September 2011.  See also Jill Shankleman’s review of the book: http://www.newsecuritybeat.org/2011/11/guest-contributor-jill-shankleman-book.html

*This post was supported by Sondra Appelson, intern at the Woodrow Wilson International Center for Scholars and student at Georgetown University.