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Home > Business Ethics Viewpoints > Why Transparency Matters and the EITI Route to Achieving It

Business Ethics Viewpoints

Why Transparency Matters and the EITI Route to Achieving It

by Jonas Moberg

How EITI and the Transparency Initiative in Resource Extraction Came About

The origins and the history of the Extractive Industries Transparency Initiative (EITI) date back to the growing sense among some leading economists, in the late 1990s and early 2000s, that a number of developing countries that were rich in minerals and/or oil and gas were not moving forward with anything like the speed that their mineral or oil wealth should have made possible. Studies began to appear detailing how the huge potential benefits of oil, gas, and mining were not being realized and that a worrying number of resource-rich countries were experiencing increased poverty, conflict, and corruption.

There was evidence that the revenues from the extractive industries in these countries were being captured by the elites, with no or very little trickle-down to local communities. Moreover, analysis showed that—with easy money coming from oil or mining revenues—governments in these countries tended to neglect the implementation of proper tax systems capable of capturing revenues from nonextractive sectors, while tensions between regions and between the central government and local communities impacted by mining intensified.

The initial response by NGOs was to seek to pressure western mining companies to “do the right thing” and to disclose secretive payments to governments. Initiatives such as Publish What You Pay targeted corporates in an attempt to bring the light of day into closed, secretive backroom deals between governments and mining and oil companies. In February 2001, in response to this campaign, BP published details of the “signature bonus” of US$111 million paid to the Angolan government for an offshore license, which drew a stinging letter from the head of the Angolan national oil company Sonangol. That experience, coupled with threats from the Angolan government, led the then CEO of BP, Lord John Browne, to conclude that a unilateral approach by a particular company or a particular country to “publish what you pay” was not workable. To be effective, transparency would have to have government backing.

The UK Labour government under Tony Blair saw an opportunity to develop an initiative built on the notion of equal transparency from governments and companies. Prime Minister Blair prepared a speech for the World Summit on Sustainable Development held in Johannesburg in 2002, which laid the groundwork for the founding of EITI in the same year. However, the difficulties between Blair and President Robert Mugabe of Zimbabwe meant that the speech was never given. It was, however, published and the idea was picked up by the UK Department for International Development, leading to the Lancaster House Conference in London in June 2003. At this conference a statement of principles, to increase transparency of payments and revenues in the extractive sector, was agreed. These were the twelve EITI principles, which focused on the need for transparent management of natural resources.

The oil companies then argued for a shift away from putting the onus on companies to report transactions to having governments leading the reporting, which would do away with conflict with the governments in resource-owning countries. A global initiative backed by governments would clearly create a level playing field where particular companies would not simply exclude themselves from potential deals by dint of their commitment to the “publish what you pay” approach. More than 40 institutional investors signed on to a statement of support for EITI, which made clear their belief that information disclosure about resource contracts would improve corporate governance and reduce risk.

Subsequent Development of the Transparency Initiative

This emphasis on the role of governments in reporting in turn led to a handful of countries, including Nigeria, the Republic of Azerbaijan, Ghana, and the Kyrgyz Republic, exploring how these principles might be applied in practice. They were joined by Peru, the Republic of the Congo, São Tomé e Príncipe, Timor-Leste, and Trinidad and Tobago. The G8 group of countries then took up the cause and asked the International Monetary Fund (IMF) and the World Bank to provide technical support to governments wishing to adopt transparency policies. This led to the establishment of the Multi-Donor Trust Fund (MDTF), administered by the World Bank for the EITI, to provide financial support to assist the implementation of transparency policies. This fund has now disbursed some US$60 million in technical and financial assistance.

At the end of the second quarter of 2014 some 45 governments were implementing EITI country reports, with several additional countries working toward implementation and others considering the process. These reports are independently verified. They detail what the various companies in the country involved in the extractive industries are paying in taxes, royalties, and fees, together with the government’s account of what it receives.

In each of the participating countries there has to be an EITI National Commission, which is a multistakeholder group convened by the government concerned. This is a process that leads to practical, meaningful transparencies in resource management. To date there are approximately 800 people across the 45 countries serving on EITI National Commissions. They are responsible for implementing the EITI’s minimum standards, which are set by the EITI from its headquarters in Oslo. It is their responsibility to turn the general EITI principles into an acceptable national process that is relevant to the circumstances of each particular member country.

It is safe to say that the EITI has come a long way from its beginnings in the early 2000s. Over 200 country reports are now published, commenting on more than US$1.3 trillion of payments around the world. A critical mass, in terms of the body of data available on resource extraction and payments, is becoming available, and transparency is slowly becoming a reality. The big challenge now for campaigning organizations, the media, and policy formation is to make sure that these data are drawn on and inform the debate, that the information from the data is turned into reform programs, and that it combats corruption. Most importantly, we need to ensure that these reports and the growing transparency they reflect build trust with local communities and that people see change for the better.

With an additional five or six countries now going through the preparatory period to join the EITI initiative, it is clear that we are now reaching well above half the world’s major natural resource-dependent countries, reckoned in terms of numbers of countries. However, if you pick as your unit of measurement the totality of the world’s mineral and oil and gas wealth, a very different picture emerges. Saudi Arabia, which has 20% of the world’s oil reserves, is not implementing EITI, and nor is Russia, so there goes another massive chunk of oil and gas revenues. On the mining side, EITI is definitely making more headway than it is in oil and gas in driving through transparency from governments and the companies to which they grant extraction licenses.

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Further reading

Articles:

  • Wikipedia article. “John Browne, Baron Browne of Madingley.” Version dated August 21, 2014. Online: http://tinyurl.com/33jkpc
  • World Bank. “Extractive industries transparency initiative: Results profile.” April 15, 2013. Online: http://tinyurl.com/k3y62gq

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