The relationship between extractives and financing development

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Eddie Rich
The EITI as a tool for bringing the benefits of natural resources to citizens.

Many important points were made at last month’s Financing for Development Conference in Addis, Ethiopia. Moving from declarations to actions will be key especially for resource rich countries to build on their own resource wealth to further development. Image: Conference flickr album (creative commons).

How can we move from fine words spoken at the Financing for Development Conference in Addis conferences to actual results? For resource-rich countries, the EITI can provide a tangible set of policy actions that countries can take to help maximise the value of their extractive resources.

Once in a generation opportunity

Christine Lagarde, the Head of the IMF, knows what she is talking about when she describes the three global meetings in the second half of this year – the Financing for Development Conference in Addis in July; the UN Summit in September to agree the Sustainable Development Goals; and the UN Climate Change Conference in Paris in December – as a “once in a generation opportunity for global development”. Throw in the Open Government Partnership Summit in Mexico in October, the Trade Summit in Nairobi in December, and the EITI Global Conference in Lima in February 2016, and it makes for an intense push over the next nine months on seeking global agreements on some of the biggest challenges of our generation. If we miss this opportunity, getting global agreements on these issues is likely to become more elusive.

Though interrelated, the EITI is of most direct relevance to the recently concluded Financing for Development Conference. It is welcome that the Conference concluded by echoing our Principles and making direct reference to the EITI:

We reaffirm that every State has and shall freely exercise full permanent sovereignty over all its wealth, natural resources and economic activity. We underline the importance of corporate transparency and accountability of all companies, notably in the extractive industries. We encourage countries to implement measures to ensure transparency, and take note of voluntary initiatives such as the Extractive Industries Transparency Initiative.

Even though it stops short of a clear recommendation to implement, in the Addis Ababa Action Agenda arising from the Conference, this is one of the few references to a specific activity to undertake.

More than aid: tax and private finance

Much is made of the need for aid for developing countries to meet the Sustainable Development Goals (USD 148 billion of aid per year will be needed according to the ODI). Yet tax in these countries of over USD 10 trillion per year dwarfs these aid flows. And that is despite them not being very successful at collecting taxes – the very poor countries collect just 13% of GDP in tax companies to 34% in the rich world according to the Economist. It does not take a mathematician to work out that a discussion about Financing for Development that does not have tax at its centre is manifestly missing the point. It is not aid alone that is going to bring schools, health centres, road, water, to most of the world’s poor. It needs taxes. It is not aid alone that is going to bring the 600 million new jobs that are going to be needed in developing countries in the next 15 years. It is private finance and economic growth.

As one African Finance Minister at the Conference said – at last we are talking about the right things. This is a meeting about jobs, investment, and growth; not a meeting about aid.

Addressing the challenges of the extractives sector

The oil, gas and mining sectors raise a particular challenge for development in that countries do not compete in the same way for business. Instead, businesses compete for the opportunity to exploit the resource. As resources do not necessarily sit in well governed countries and since the revenues are large, the sector can be particularly susceptible to capture by a governing elite, corruption, conflict, and other methods of poor returns for development. These challenges disproportionately affect poor countries. These challenges can also be made worse by importing countries concerned about their own energy security and natural resource dependence.

This obviously represents a massive potential loss for development. More openness around how a country manages its natural resource wealth is necessary to ensure that these resources can benefit all citizens.

The EITI is a global Standard to promote open and accountable management of natural resources. It seeks to strengthen government and company systems, inform public debate, and enhance trust. In each implementing country it is supported by a coalition of governments, companies and civil society working together.

The 48 countries implementing the EITI disclose information on tax payments, licences, contracts, ownership, production and other key elements around resource extraction. This information is disclosed in an annual EITI Report (to see all EITI Reports, go to data.eiti.org). This report allows citizens to see for themselves how their country’s natural resources are being managed and how much their government is receiving for them. So far, over USD 1.6trn of revenue have been disclosed in EITI reports – often for the first time.

Transparency can only lead to accountability if there is understanding of what the figures mean and public debate about how the country’s resource wealth should be managed. Therefore, the EITI Standard requires that EITI Reports are comprehensible, actively promoted and contribute to public debate.

The EITI Standard contains the set of requirements that countries need to meet in order to be recognised as first an EITI Candidate and ultimately as one of the 31 EITI countries compliant with the EITI requirements. The Standard is overseen by the international EITI Board, with members from governments, companies and civil society.

How the EITI is delivering finance for development

For all the positives that have come out of the Addis Ababa Action Agenda, it has been criticised for being light on concrete plans. More is needed than fine words and Conferences. The extractive sector is a clear area for potential actions.

The EITI is part of a tangible set of policy actions that countries can take to maximise the value – private and public – from their natural resources. It does this in three ways:

  1. Strengthening government tax collection systems. In countries like Chad where the process has identified how oil revenues should go into the budget or Peru where the EITI shows how payments are made to the regional governments, EITI reports highlight what improvements should be made in a tax collection process to ensure that governments get their due value for the country’s natural resources. This does not only mean that countries get what they should, it also removes the leakages of tax avoidance and evasion that inevitably derive from weak systems. In Nigeria, EITI reports have identified an extraordinary USD 25.3bn of the nation’s oil money to be missing. Over USD 2.4bn has been recovered and the new government has committed to undertake the recommendations of the Nigeria EITI report to recover billions more.
  2. Making countries more attractive investment prospects – meaning more jobs and more private finance. Coming to an EITI country means that a company is investing in a level playing field – the government of an EITI country has stated its commitment to open licence allocation, publication of its policy on contracts and fiscal regimes, disclosure requirements on taxes and royalties, and explanations of how its state owned companies operate. IMF data shows a strong correlation between fiscal transparency and its lending conditions. Furthermore, it is likely that they are encouraging more disclosure of beneficial ownership and contracts. In the DR Congo, barter agreements between the state mining company and a Chinese investor are now public information. In the Philippines, you can find the oil and mining sector contracts online. This provides prospective companies with critical information on investment arrangements and for modelling their likely returns.
  3. Generating informed public debate. Not only does each EITI country have a national multi-stakeholder commission of representatives from government, companies, and civil society, to discuss the policies, revenues and allocations of the natural resource sector, but many countries are also promoting better public registers and databases for the general public to explore the information. Kazakhstan’s EITI has moved from paper to an online portal improving efficiency and accessibility. Norway’s whole oil and gas sector is searchable through maps and tables on this site. These sorts of platforms with strong civil society engagement and access to reliable open data (both EUITI requirements) are leading to better informed debates in EITI implementing countries. In many of the countries, this is already leading to better policies which lead to more value from the resources. Furthermore, this informed debate is promoting greater trust. Myanmar has emerged from decades of opacity blinking into an era of relatively open debate – only agreed, reliable, hard facts can prevent suspicion and mistrust overwhelming policy debate.

The transparency in natural resources agenda has gathered dizzying momentum in the past decade. But there is still much to do to turn the transparency into accountability. Strengthening the link between the EITI and these international processes will help the champion of reform in governments, companies and civil society who want faster development for their citizens. More resource rich countries need to implement the EITI and similar processes for better governance of the sector in their countries. They must give space for civil society to engage in the debate, and development partners need to support citizens financially and technical to get informed. Civil society themselves need to engage and inform debate as well as campaign. And companies need to reflect a desire for justice rather than just charity, by disclosing data to inform debate and create more level playing fields.

Fine words and fancy Conferences don’t put food in bellies. But if they – like the Financing for Development Conference – acknowledge, encourage and catalyse good practices, then maybe, just maybe, they lead to tangible results.

 

This article will be published as part of the think piece series Road to Addis and Beyond: Financing for Social Development published by the UN Research Institute for Social Development (UNRISD). The series brings together a number of short essays that engage with current Financing for Development debates.

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