Extracting more from EITI

Helmut Reisen, Dilan Ölcer 17 February 2009

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The Extractive Industries Transparency Initiative (EITI) has been highly promoted as a tool for increasing transparency and curbing corruption, as part of the international soft law on which the international community increasingly relies (Aaronson 2008). The initiative calls for the full publication and verification of company payments and government revenues.

The rise of China has added to perceived energy scarcity and intensified the scramble for extraction rights, fuelling resource rents and thus potentially corruption. With revenues from natural resources reaching all-times highs over 2007-08, EITI is one of the international soft law tools most relied upon by the international community to curb corruption and help the 3.5 billion – often poor – people living in countries rich in oil, gas, and minerals benefit from the revenues of their soil. The fourth EITI Global Conference, taking place in Doha on 16-18 February 2009, might want to reflect on why many resource-rich countries have failed to lower perceived corruption.

Figure 1. Corruption perception index before and after endorsement of the EITI principles

Note: The government in the respective countries officially announced the endorsement of the EITI principles at time 0. The Corruption Perceptions Index is scaled from 1 (highest corruption) to 10 (no corruption); the graph indicates changes in the index.
Source: Authors’ calculations based on Transparency International, Corruption Perceptions Index 2008 (www.transparency.org) and EITI (www.eitransparency.org).

Figure 1 shows that governments’ public endorsement of the EITI principles does not, on average, improve corruption perception levels. Moreover, according to the World Bank Worldwide Governance Indicators, control of corruption in EITI countries is worse than in non-EITI resource rich countries, as Figure 2 demonstrates. In fact, EITI countries’ score on this indicator have on average deteriorated between 2002 and 2007. Admittedly, these corruption indices are not limited to the extractive industries, but given the size of those industries in the countries concerned, one would still expect some improvement. Did we expect too much from EITI? Probably – but there are ways of doing better.

Figure 2. Control of corruption

Source: Authors’ calculations based on World Bank Worldwide Governance Indicators (2008).
Note: The box chart shows the control of corruption index score for EITI and non-EITI resource rich countries. The edges of each box correspond to the upper and lower quartiles, with the horizontal line inside indicating the median value for each group of country. The 'whiskers' outside the box shows the upper and lower adjacent values of the data
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Managing expectations and the way forward for EITI

The EITI’s design assumes an EITI-friendly environment. Such an environment would be characterised by a strong commitment to go beyond the EITI’s minimum standards, a strong and free civil society, and a balance of power between government, extractive corporations, and civil society. Provision of information on material payments between governments and extractive corporations has little value in the absence of strong institutions to credibly corroborate this information. The minimum standards of EITI imply a responsibility for civil society that it might not be in a position to assume. Strengthening civil society – through education, representation, and enforceable legal rights – is a precondition for an effective EITI. A free and open public dialogue on issues related to transparency, corruption, and governance of resource revenues is indispensable. Absent these preconditions, EITI will not deliver its potential but rather provide the illusion of transparency.

EITI needs to be stricter on the accounting quality and consistency of EITI reports. The reports published so far (10 out of 24 candidate countries have published reports) are not informative enough to allow for scrutiny by the general public. Disaggregation of revenue streams should be mandatory rather than voluntary, and stricter rules should apply to the definition of materiality. To uncover bribes, the extractive industry should publish the market value of their extraction payments, not just actual payments. Otherwise, under-invoiced extraction royalties may well hide bribes gone elsewhere, such as rich-country tax havens.

Moreover, although identifying material payments between governments and extractive corporations might be a first step in increasing transparency in a sector which has traditionally been veiled in secrecy and managed as an elusive domain of political elites and large corporations, it is about time that EITI-implementing countries consider rendering more light upon the whole value chain – from the awarding of concessions to the public spending of these revenues. The Extractive Industries Transparency Initiative Plus Plus (EITI++), launched by the World Bank in April 2008 and seeking to bring light to entire natural resources value chain, is a good step in that direction. Information on sub-national payments, including corporate social payments, is equally important.

By missing the transnational element of corruption and failing to scrutinise rich countries’ roles as repository of proceeds from corruption, the EITI produces imbalanced accountability for good financial governance. OECD countries could raise the EITI’s effective in a number of ways. Norway submitted its application to become an EITI candidate country in late 2008 and is on the way to becoming the first OECD EITI-implementing country. OECD countries – including those hosting important financial centres – should follow Norway’s example and move from only supporting the EITI to implementing it as well.

References

Susan Ariel Aaronson, “Oil and the Public Interest”, www.voxeu.org, 12 July 2008.


1 The findings are based on analytical and empirical work presented in full detail by Dilan Ölcer, “”, OECD Development Centre Working Paper No.276 , February 2009.

 

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Topics:  Energy

Tags:  transparency, Corruption, extractive industries

Head of Reseach, OECD Development Centre

Research Associate within the Global Development Outlook team, OECD Development Centre

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