Governance issues throughout the value chain

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Governance issues throughout the value chain
Workshop Implementing the EITI in Lusophone
Countries

• Eleodoro Mayorga Alba
• COCPO World Bank
• Oslo, October 2006

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Background

• Extractive industries should contribute to
  sustainable development and effective poverty
  reduction.
• The EITI is a joint effort to introduce sound
  governance and transparency principles in the
  economy of oil mineral producing countries.
• It is a process - involving the government,
  industry and civil society - expected to be
  improved over time. It offers to the parties
  involved the opportunity to work together!

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A statistical evidence ?the poor economic
performance of the resource rich countries
GDP growth 1990 - 99
EI as of exports
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Addressing the  Paradox of Plenty 

• The main factors that explain the unsatisfactory
  economic growth in resource rich countries are
  related to institutional frameworks and wrong
  economic policies.
• Technical procedures and macro-policies to manage
  volatile revenues and to invest in sustainable
  development are known
• However they are not easy to implement because
  the lack of governance and transparency.

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Key Issues identified in the Review of World
Bank Role in EI

• National Performance
• Governance
• Revenue Transparency
• Communities
• Ensuring communities benefit
• Protecting the rights of people
• Disclosure and meaningful consultations
• Mitigating local and global environmental and
  social risks

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Risk ? The Dutch Disease

• ..The problem faced by a nation's economy when
  the discovery of a natural resource raises the
  value of that nation's currency, making
  manufactured goods less competitive with other
  nations, increasing imports and decreasing
  exports. The term originated in Holland after the
  discovery mid-60s of North Sea gas.

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  Risk ? Inflation and currency destabilization

• If windfall gains are not reallocated outside the
  economy, there is serious risk of inflation.
• The export boom will involve a surge of foreign
  exchange which reduce the relative price of
  tradable products relative to the non-tradable
  products.
• As a consequence, capital and labor will move out
  of local manufacture, calling for subsidies and
  protectionist measures.

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Risk ?Budget expansion and vulnerability
dictated by the oil price

• The fiscal policy in oil or mineral dependent
  countries is complicated by the uncertainty of
  revenues as well as by the fact that resources
  are exhaustible.
• A pro-cyclical behavior in public expending,
  often beyond the government capacity to plan and
  manage, will lead to wasteful spending.
• When prices fall, expenditure reductions lead to
  social instability.

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Risk ? Overestimating the absorptive capacity

• Many of infrastructure, education, health
  investments that have been waiting for government
  funds could now materialize ..but at what
  speed?
• How to measure the absorptive capacity? in other
  words, how to only execute good sustainable
  projects.

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The key to social stability is to improve the
income distribution
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Transparency gt Why it matters?

• In all countries, oil rents are seen as property
  of the nation. Thus mechanisms to collect,
  distribute and use the rents should be clear and
  acceptable to all.
• These mechanisms are an essential part of a
  transparent budget process able to link fiscal
  choices to the projected revenues.
• Ultimately, citizens should be fully aware of the
  channels used either through public
  investments, subsidies, or transfers to use the
  rents and how receive the benefits.

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An effective management of EIs require actions
throughout the value chain
Awarding of Contracts
Monitoring of Operations
Collection of Taxes -
and Royalties
Distribution of Revenues
Utilization in Sustainable
Projects
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Best Practices

• 1- Awarding of Contracts
• Transparent and competitive procedures to
  contract new blocks
• The impact of price changes on fiscal terms
• The companies and their different corporate goals
• How to explain differences in tax terms to the
  general public?
• The participation of the state company
• The request for local content

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Best Practices

• 2- Monitoring of Operations
• The capacity of the national company or the state
  contracting agency
• The development of National data Centers
• The enforcement of technical, economic and
  environmental regulations
• Transparent calculations of volume and prices

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Best Practices

• 3- Collection of Taxes and Royalties
• Accounting procedures in EP contracts to
  determine bonus, royalties, income taxes and
  dividends
• Share of rents allocated to the national oil
  company
• Existence of a single oil account at the
  Central Bank
• Regular audits of the NOC and the oil account

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Best Practices

• 4- Distribution of Revenues
• Avoiding the  Dutch disease 
• The Pre-allocation of revenues good or bad?
• Oil funds for  stabilization  or for  future
  generations 
• The investments of the national oil company
• Transparency and Governance issues who manage
  the funds, who decide investments, who controls
  ?

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Best Practices

• 5- Utilization in Sustainable Projects
• A national development plan including a Poverty
  Reduction Strategy that is democratically
  adopted.
• Improved procedures for the preparation,
  execution and control of the national budget.

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LEITI and the Value Chain
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EITI alone is not sufficient but it is an
important step

• 1- It creates a platform of communication between
  government authorities (at national and regional
  level), the industry (oil, mining companies of
  different sizes) and Civil Society (press,
  unions, local and international NGOs)

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Different models are being pursued
Core EITI Reconciliation of payments and
revenues. Capacity building in Govt. and
civil society.

• Sector governance
• program
• EITI Plus
• Institutional / regulatory
• Reform
• Sub-national distribution of rents
• Strengthening of licensing systems
• Revenue management

EITI Plus Reconciliation Capacity
building Financial audits of companies and
govt Process audits Public info campaigns
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Expected Deliverables

• EITI Focused Programs
• EITI Light Reconciliation of payments and
  revenues. Capacity building in govt and civil
  society.
• EITI Plus Reconciliation of payments and
  revenues process audits financial audits of
  state-owned companies public information
  campaigns.
• Sector governance program EITI part of a broader
  sectoral reform program which includes
  institutional reform strengthening of licensing
  / cadastre systems capacity building revenue
  management etc.

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• 1- Sign up
• Issue government announcement
• Commit to work with civil society
• Appoint implementation leader
• Compose and publish workplan
• 2- Preparation
• Establish multi-stakeholder committee
• Engage industry and civil society
• Remove obstacles to implementation
• Agree reporting templates
• Approve auditing company
• Ensure full industry participation
• Ensure company gov. accounts are properly
  audited
• 3- Disclosure
• Verify company and government disclosure to
  auditor
• Approve audit quality
• Identify discrepancies and recommend improvements

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Progress in SSA countries
Sign Up Angola (-) Chad () Rep. of Congo
() Niger ()Sao Tome ()Sierra Leone
Preparation RD-Congo (Cte ) Eq. Guinea (Cte
-) Ghana (Cte ) Mauritania (Cte )
Disclosure Cameroon Gabon (p)
Dissemination GuineaNigeria
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Issues

• EITI requires effective participation of the EI
  companies and civil society
• Contracts include confidentiality clauses
• Many African countries have severe restrictions
  on the independence of civil society.
• There are very few high-capacity groups focused
  on corruption / transparency issues
• Different approaches needed for oil and gas, and
  mining countries
• Growing linkage to aid policy, debt relief, etc.

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Capacity Building

• To continue implementing the EITI, it is critical
  to accelerate the training activities.
• Workshops have been organized at the national
  level to review the principles and criteria of
  the Initiative, and to understand the auditing
  and conciliation reports.
• Also, at the international level workshops are
  bringing representatives from different countries
  to allow exchanges of lessons learned.

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Governance and Transparencysome Best Practices

• The EP contracting authority is responsible for
  monitoring the companys payments
• The EITI helps in establishing a stakeholders
  platform for evaluating and disclosing the amount
  of revenues
• All revenues are deposited in an Oil Account,
  opened by the Central Bank in an outside Bank,
  whose transactions (deposits and transfers) are
  disclosed and audited.
• The Oil Account could only make transfers to the
  Budget(s) or to a saving account (Petroleum
  Fund). These accounts can not be used as
  guarantee.
• Amount transferred to the Budget should be
  established in macro-economic program and needs
  Congress approval.

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• Thank you!