Getting transparent with the extractives industry: the EITI

Presently 5 billion people live in countries rich in oil, gas and minerals. With good governance, the exploitation of these resources can generate large revenues to establish growth and reduce poverty. When governance is weak, however, it may result in or even cause poverty, corruption, and conflict. Increased legislation aimed at improved corporate financial transparency and the success of the Extractive Industry Transparency Initiative (EITI) are an indication of a growing sense of urgency in confronting long existent problems in natural resources rich countries. New US financial reporting requirements in the Dodd Frank Act will require all extractive companies listed on US stock markets to report payments made to governments in the countries where they operate. Similar legislation is expected in Europe. Michel Barnier, the European Union’s internal market commissioner recently announced EU plans to introduce country-by-country reporting for the extractives as well as forestry sectors.
The impressive number, seniority and diversity of speakers and participants at the 5th EITI Global Conference in Paris, which took place at the beginning of March, reflected this growing belief that transparency indeed does matter. Of course, as stated by many of the speakers at the conference, transparency is not an end in itself. It does not ensure good governance nor bring essential infrastructure and benefits to the countries concerned. Many additional tools such as a sound investment climate, inclusive revenue sharing, tax collection, licensing transparency and increased participation of local communities are required to reallyaddress the challenges of good management of the extractive industries. Furthermore, problems in these sectors including resource scarcity, rising food and oil prices and the Deepwater Horizon oil spill, will affect us all whether from an industrial or emerging economy. The EITI came into existence in 2002,when Tony Blair, the former UK Prime Minister, announced it at the World Summit for Sustainable Development in Johannesburg. EITI is a global standard that aims to strengthen governance by improving transparency and accountability in the extractives sector through public reconciliation of payments made by companies and revenues received by governments. What is so special about the EITI is the shared responsibility of the various actors: governments, companies, investors and civil society are all involved. Over the years, 35 countries have started implementing EITI standards. Of those, 24 countries have achieved EITI candidate status. To become an EITI candidate, an implementing country must meet the four EITI indicators. Once these have been met, EITI implementation involves a range of activities to strengthen resource revenue transparency. A country becomes compliant when it passes an independent assessment of the progress achieved, -an EITI validation – in a two-year period. With six new EITI compliant countries as of this month, 11 are now EITI compliant. In addition, 50 of the world’s largest oil, gas and mining companies support and actively participate in the EITI process through their country operations in participating countries, commitments at international level and industry associations. The EITI has won the support of

over 80 global investment institutions that collectively manage over US $16 trillion (as of July 2009). A large number of civil society organisations are also involved in the EITI process. Apart from the joint aim of bringing about positive change in resource rich countries, each of the participants has its own valid reasons to participate. For companies and investors, the business case is clear: increased transparency provides them with the necessary confidence to invest in much-needed long term infrastructure and helps them to make a valuable contribution to a country’s development. In turn, governments are supported and strengthened in their efforts to improve their management of resources. Another very strong feature of EITI is that it puts country ownership at the heart of the process. When a country voluntarily implements the EITI standards, the whole country has to comply.This applies also to (Chinese) non-MSCI and state companies that traditionally tend to fall out the sphere of influence of investors and civil society. The problems that exist within the extractive industries also apply to other natural resources sectors, like forestry, fishery and agriculture. Accordingly, these sectors should be covered as well. Finally, it remains to be seen whether different multi-stakeholder initiatives like the EITI and legal mechanisms will interconnect effectively from the start. However, we do not consider that to be a valid reason to oppose them. In the end, it is the result that counts. As such, we very much welcome all serious initiatives that help to confront long existing problems in natural resources rich countries.

Kristel Verhoef is an ESG Analyst at SNS Asset Management and Frank Curtiss is Head of Corporate Governance at Railpen Investments