Topic of the month June 2011

Resource-rich yet poor - for many developing countries especially in Africa abundance of natural resources so far has turned out to be a curse rather than a blessing. Corruption in the oil, gas or mining sector is wide-spread, and, what is worse, commodities are a frequent source of violence and armed conflicts. Collected and spent properly, revenues from the extractive industry could in fact contribute a great deal to development and poverty reduction. According to the International Monetary Fund (IMF), in many developing countries the extractive industry’s payments to host governments represent a significant share of total government income. Commodity exports from Africa totaled $390 billion in 2008, nearly nine times more than what countries received in international aid, estimates the World Trade Organization (WTO).

That is why in 2003 as a result of a civil society campaign started in Great Britain, several European governments launched the so-called Extractive Industries Transparency Initiative (EITI) which is also supported by several international organizations, non-governmental organizations, multinational companies and the European Commission. Participating countries must publish on a regular basis which revenues they collect from oil, gas and mining companies and companies in those countries must publish independently what they pay to host governments. The reports are then to be reconciled by an independent group of respective national stakeholders.

From Zimbabwe with love: diamonds from the Murowa mine (Copyright © 2010 Rio Tinto)

“In many resource-rich countries people don't have information about what governments receive so they can hold governments to account,” explains Diarmid O'Sullivan of Global Witness, a British NGO that formed part of the founding campaign for EITI. “So the mere fact that the reports are coming out is already a big achievement.” A recent example is to be found in Tanzania, a country endowed with a variety of natural resources, above all gold. According to its own report the government had received some $30 million less than a dozen major mining companies had reported they had paid. Now a working group of national representatives of the government, companies and civil society is investigating the case. So far, 35 mostly developing countries have declared their intention to implement EITI principles, thereby becoming “candidates”. Once having become a candidate, a country is given some two years to fully implement EITI standards, thereby becoming EITI “compliant”. Since the EITI Global Conference in March 2011 eleven countries are compliant, eight more than a year before.

Apart from increasing domestic accountability EITI also helps governments securing a fair share of companies' income. That is why EITI is part of the EU's global strategy to support developing countries in mobilizing domestic revenues for development, says Christian Peters of the European Commission’s Directorate-General for Development and Cooperation. “Confidential agreements between multinational companies and developing countries, which often lack adequate expertise and legal advice, tend to be unbalanced. Transparency fosters a more predictable investment climate and helps developing countries increasing their income and thus resources available for development objectives – a win-win-situation.” An example is Ghana, whose government realized that it imposed lower taxes on the extractive industry than other countries. Another case in point is Nigeria where the first EITI reports showed that “as a result of chaotic book-keeping” the Nigerian government simply failed to a large extent to actually collect the revenues that companies were obliged to pay, O'Sullivan recalls.

Pipeline in Azerbaijan (Photo: Leif Berge/Statoil)

Of course, EITI also has its weaknesses, starting with the fact that of the more than 50 countries that the IMF considers to be hydrocarbon- and/or mineral-rich to date only nine are EITI compliant. Major oil and gas exporting countries, e.g. Saudi Arabia, Russia, Iran or Algeria do not take part. Besides, “the quality of the data and the regularity of EITI reporting needs to be improved further, and in some cases it remained difficult for independent civil society groups to freely express themselves,” adds Peters. Also, EITI is following a deliberately narrow approach by focusing on revenue-reporting while leaving other corruption-prone areas untracked. "Why shouldn't the EITI requirements be extended to contract and licensing transparency in the future?", asks Christian Peters.

While it is clear that EITI in its present form is not more than a starting point there are promising signs that the global fight against the resource curse is finally gaining momentum. According to a US law passed in summer 2010, listed oil, gas and mining companies from the US now must publish their payments to host governments in developing countries. The European Commission is currently considering a similar directive for the European Union. Those in the industry who fear that too much transparency could weaken their position in an ever-competitive commodities market should take a long-term perspective, suggests O’Sullivan. “Oil and mining companies have a lousy reputation in the Third World. EITI gives them something to show ‘look we are contributing!’” In the end, he hopes, transparency could thus actually turn out to be Europe’s competitive advantage.

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