Countries that depend on revenues from oil, gas and mining are facing a triple crisis. In this blog, I highlight three areas where transparency can help shore up hard won gains in sector accountability through these difficult times.
For resource-rich countries, the Covid-19 pandemic is posing a triple crisis. First, it is placing a huge strain on public health systems as countries struggle to cope with the growing spread of the virus across the world. Second, the oil price crash is making oil production significantly less profitable with a massive fall in investment and exploration. Third, the slowdown in the global economy is reducing demand for oil, gas and minerals with resultant price fluctuations. All these factors are having a major effect on public finance, with revenues declining rapidly while demands on public expenditure increase sharply.
Many observers worry that national commitments to improved governance will diminish in response to – and recovery from – the global health and economic crisis. There are concerns about heavy-handed government responses and the erosion of civic space leading to reduced accountability. There are also fears of increased corruption risk, with the weakening of oversight institutions and prospect of shady deals. And there are fears about diminishing transparency, with the possibility of reduced commitment to openness and the publication of data as other priorities take precedence.
The EITI’s mission is to foster improved transparency in the oil, gas and mining sector. The 2019 EITI Standard sets out a common set of reporting requirements for all 53 member countries. Governments and companies in each country implement these provisions, which set a high bar for reporting and have the potential to move the needle on extractives governance. Yet, these gains are potentially at risk as governments and companies are under pressure to recover investments rapidly in the face of economic downturns. Such actions should not come at the expense of efforts to promote the long-term contributions of natural resource wealth to the wellbeing of citizens in resource-dependent economies.
Reliable data on extractives sector revenues, production, exports and employment will help governments make sound policy decisions and better manage the crisis. Furthermore, at least three provisions recently introduced into the EITI Standard offer the opportunity for governments, companies and civil society organisations to safeguard progress made on transparency and counter the risk of corruption in these challenging times.
Reading between the lines: Contract transparency
Governments and companies who commit to publishing contracts in accordance with the EITI Standard offer stakeholders the information to understand and monitor compliance with the terms, obligations and payments arising from extractives projects in their countries. When contracts are disclosed, they can more easily be compared, scrutinised and enforced.
By committing to contract disclosure, for example through membership of the EITI’s Contract Transparency Network, governments can help protect the interests of citizens and create a level playing field for investment that will benefit resource-rich countries over the long term.
Yet amid the current economic crisis, constraints on investment capital and the fear of budget shortfalls may lead governments to conclude extractives agreements with less favourable or inconsistent provisions. A virtuous cycle – where contract disclosure fuels public scrutiny, promotes better oversight and strengthens enforcement – may be forfeited by weaker contract negotiations and tapering commitment to contract disclosure. This could undermine the transformative potential of this new requirement and emerging good practice.
Data-driven dialogue on how the extractives sector can contribute to a country’s economy is essential for sound policy making, especially in times of crisis such as we are currently witnessing. Knowing the terms of extractives contracts can inform public debate on extractives revenues and cement understanding of the extent to which contractual obligations can reasonably be amended. Where force majeure stipulations in contracts come into play, knowing the terms of existing contracts is key to ensuring accountability.
Contract transparency is becoming the norm, and we look to EITI implementing countries to champion this benchmark, which comes into force in January 2021. To date, 34 EITI countries have disclosed at least some contracts and 16 companies have made a public commitment to support contract transparency. A decade ago, only nine EITI member countries had laws relating to contract transparency. Today, 24 have such legislation in place. Even through difficult times, there is potential to further build on this momentum.
Trading up: Transparency in commodity trading
A second new EITI requirement concerns commodity trading transparency. Over half of the USD 2.7 trillion revenues disclosed by EITI countries come from the sale of the state’s oil, gas or minerals to trading companies. With commodity prices under pressure, deals between traders and state-owned enterprises (SOEs) present a potential opportunity for corruption.
Commodity trading transparency is particularly relevant in the turbulent commodity markets that we have witnessed in recent months. The oil price shock and upsurge of storage costs may drive countries to enter into hasty short-term deals which could jeopardise long-term national interests. This risk is most evident with SOEs whose activities are not always open to public scrutiny and where politically exposed persons have an opportunity to make short-term gains to the detriment of public benefit.
Furthermore, governments’ stimulus and recovery packages are promoting new technologies and supporting a transition to low carbon economies. Stronger transparency standards and international cooperation are needed to ensure that the procurement of minerals critical to the energy transition also contributes to the sustainable development of resource-rich countries.
While commodity trading transparency is still in its infancy, publishing data on trading transactions can help mitigate the aforementioned risks. In accordance with the EITI Standard, SOEs or other government agencies in charge of marketing the state’s oil, gas and minerals must fully disclose the revenues they collect from sales of such resources. This typically means that SOEs will disclose the volumes of commodities sold and the revenues received, broken down by buyer.
Going local: Transparency in revenue allocations
A third provision of particular relevance in the current context concerns subnational revenue allocations. The EITI Standard requires the disclosure of significant transfers between national and subnational government entities when mandated by a national constitution or other revenue sharing mechanisms.
In countries such as Ghana, the Philippines and Colombia, subnational authorities have provisions to this effect, sanctioning the transfer of a significant share of extractives revenues. EITI reporting reveals whether local communities receive these transfers. Furthermore, contract disclosure can reinforce transparency over subnational transfers, as it enables the contractual terms of such transfers to be made public.
A reduction in resource revenues due to the triple crisis may have an adverse impact on subnational transfers, leaving communities more impoverished or vulnerable. Subnational transfers could also be affected by the diversion of resources to meet urgent national priorities, such as the response to the health pandemic. Local communities may suffer from reduced expenditures as a result. It is therefore imperative that this matter remains current and transparent, so as to record variations in transfers and keep the dialogue open with civil society and communities.
Transparency offers a lifeline
Current circumstances pose risks to the good governance of the extractives sector. But these can be mitigated if EITI countries and supporting companies publicly uphold their commitments to the EITI Standard. EITI reporting shines a light on economic transactions and extractives revenues, which can be made available for high-priority public health and welfare needs.
Beyond promoting transparency, EITI implementation can:
- Foster public debate and ensure the general public knows the facts, for example through media coverage.
- Provide data that can be used to undertake fiscal modelling and support decision-makers who need to make difficult choices under conditions of growing adversity.
- Protect civic space and ensure an active role for civil society, to make sure decision-makers are accountable for their actions.
Data is fundamental for gaining a clearer picture of the economic impacts of the triple crisis. But data alone cannot help to mitigate these impacts. For transparency to be meaningful, it must be seen as the bedrock for informed, inclusive and sustainable policy-making.
This blog is based on the Sussex Development Lecture by Mark Robinson held in April 2020.