Category Archives: EITI Mongolia

EITI at the Subnational Level in Mongolia: Challenges and Opportunities in Resource-Revenue Transparency

Bérangère Maïa N. Parizeau, MAAPPS // Mar 6, 2015

The information in this blog entry is synthesized from the article “Implementing EITI at the Subnational Level,” published by the World Bank in October 2011. This comprehensive report analyzes subnational resource-revenue reporting for extractive industries in Ghana, Indonesia, Mongolia, Nigeria, the Democratic Republic of Congo and Peru. The emerging understanding of the report is that subnational level EITI resource-revenues reporting will need an appropriate operational framework to function properly and provide benefits to the Mongolian population. In this report, I will focus on key information about subnational reporting in Mongolia synthesized from this report.

The Mongolian public believes that EITI subnational reporting may help control the country’s rampant corruption. Civil society activism and Civil Society Organizations focusing on mining activities in Mongolia are mushrooming. This is very exciting for a more dynamic social accountability process. The government of Mongolia passed Resolution No. 272 in 2006, which legally binds companies in Mongolia to report directly to subnational government agencies. Subnational resource-revenue reporting in Mongolia is funded by multi-donor trust fund (MDTF ). In Yemen, local training for subnational resource-revenue reporting was also done by MDTF, and more specifically by the World Bank funds.

“According to an International Monetary Fund report (IMF 2007), there appears to be a trend toward stepping up the use of SNG revenue sharing.”1 pp.7

The issues of tracking and managing mining company off record donations to intergovernmental tiers in Mongolia is complex. It is an important aspect of the recent discrepancies in subnational resource-revenue reporting. These donations are the main source of revenue for producing areas in Mongolia. In-kind donations are not recorded through the banking system, and therefore not included in official subnational EITI reports. There is a problem with the EITI subnational regulatory frameworks which does not create incentives to report the total amount of donation due to a possible reduction in statutory transfers from the central government tax pool to subnational governments. This is an administrative problem that has the potential of being addressed effectively.

Donations may take the form of the construction of infrastructure projects, like hospitals and schools for example. Although donations are key sources of revenue for EI producing localities in Mongolia, these donations have no legal basis, they are voluntary. Another important dimension of resource-revenue reporting at the subnational level in Mongolia is monetary flow from exploitation licences. Furthermore, in Mongolia, large distances between mining localities and the lack of internet access facilities in remote regions slows down the process of subnational reporting which has to be done by post.

The subnational reporting of mineral royalties varies from country to country because each country operates under different conditions, a unique geopolitical landscape, legal system, and revenue-sharing formula. In Ghana and the Cajamarca region of Peru, subnational reporting of extractive activities is accompanied with governmental expenditures. In my opinion, subnational reporting should not only include governmental expenditure, but should also include the socio-economic and environmental impacts of the mining industry on the local population and the environment. Reporting in a transparent way on environmental concerns and issues of human rights appears to be dialectical considering the threats associated with climate change.

[1]https://eiti.org/files/ Implementing%20EITI%20at% 20subnational%20level.pdf

WILL SUB-NATIONAL REPORTING ENHANCE TRANSPARENCY?

Jocelyn Fraser, PhD student in Mining Engineering // March 2, 2015

Over the past few weeks, we have looked at efforts to implement – or plan for – sub-national reporting (SNR) in a number of EITI countries. [1] While there are many country-specific differences to consider, some common questions illustrate the challenges member countries will face as they endeavour to comply with new EITI disclosure requirements.

The costs of sub-national reporting. Who will pay to implement sub-national reporting? How will local capacity constraints be addressed? Who will cover the cost of third-party verification? Will there be funds to incorporate extractive activities – such as artisanal and small scale mining – not currently included in some countries’ national reports?
Definition of materiality/thresholds for reporting. What types of payments will need to be tracked at the sub-national level? Should donations and social investment be included? Should there be a common threshold for reporting or will each member country make their own determination? Some countries account for non-material transfers as a demonstration of transparency: should this be a requirement for SNR? In cases where SNGs have direct access to resource revenue, how will material amounts be included in the country report?
The process for sub-national reporting. How are local governments to account for resource revenue payments? In the absence of proper accounting protocols, a common nomenclature and reporting templates, how will readers be able to compare results from various reporting regions within a country? What guidance and quality assurance will be provided by the EITI? Are central governments prepared to communicate how they determine the percentage of resource-revenue to distribute, as well as the timeline for how often, and when, money is distributed?

Existing EITI requirements do not require disclosure on how resource revenues are used and sub-national reporting does not mandate this as a part of the new EITI standards. Yet, in terms of transparency, this is a critical issue. For sub-national reporting to be relevant for local residents, it will be important to demonstrate that money from the extractive sector is invested to address environmental, social and governance (ESG) issues and legitimate community needs. Without an explanation of how resource revenues build healthy communities, there can be little expectation that residents will trust government and for-profit companies to act in a manner that benefits communities hosting extractive operations.

[1] For a more fulsome discussion of sub-national reporting issues and case studies on a number of EITI countries see Aguilar, Caspary & Seilar (2011) http://siteresources. worldbank.org/INTOGMC/ Resources/EITI- WBMiningSectorWEB.pdf

Sub-national reporting in Mongolia: a Necessity or a Myth?

Lotus Ruan, MAAPPS // Feb 26, 2015

In our last discussion, we debated over why subnational reporting matters to Mongolia. In other words, what might be some of the incentives for local governments, extracting companies, and social organizations to take one step further in introducing this new measure to Mongolia?

To answer this question, it would be useful to look at why countries are willing to participate in EITI practice at the national reporting level at the first place. There is no doubt that the EITI practice has been successful since it was launched in 2002. We witnessed substantive growth in the number of its member countries and of reporting companies in each country. While EITI’s principle and purpose is to increase the “public understanding of government revenues and expenditure over time” which could help inform the public choice of “appropriate and realistic options for sustainable development,” it somehow becomes a benchmark for investors when they are making decisions whether to invest in certain country or not. Perhaps this is also one of the reasons why even fragile states with corrupt governments such as Yemen would strike to keep their EITI membership and fight for a higher status.

As far as I’m concerned, the motivations for Mongolia and other countries to proceed with sub-national reporting can be explained in a similar vein, that is, sub-national reporting can assist the country in curtailing corruption at both national and subnational levels and thus win her a better international reputation and in attracting companies to invest in certain regions. In this blog entry, I’ll mainly focus on the first motivation.

While Mongolia has made a successful ad peaceful democratic transition from a communist one party regime based on the Soviet model two decades ago, it still has a long way to go in terms of fighting against corruption and increasing accountability in its newly established democracy system. In such as less develop system, the discovery of natural resources and wealth more often than not brings both economic opportunities and governance challenges.

Whereas Mongolia’s recent discovery of copper, gold, coal, and uranium deposits is bound to attract foreign investment, past experience has showed that natural resource wealth in the context of poverty and weak institutions can lead to corruption, conflict and insecurity. In the case of Mongolia, we already see that a mining development is generating concerns about its potential damage to the country’s environment and its traditntal agricultural setting, a lack of infrastructure and water resources, a rise of corruption, and an increasing economic inequality.

The EITI practice at a national level has undoubtedly helped Mongolia with its transparency level in extractive industries. Meanwhile, the country has implemented other measures to fight against corruption as well. The establishment of an Independent Authority Against Corruption in 2007, the Mongolia National Audit Office, and the like all contribute to maintain the country’s revenue transparency and expenditure transparency.

Institutionally speaking, the Mineral Resources and Petroleum Authority of Mongolia is responsible for implementing the mineral law, issuing mining licences, archiving geological data and conducting surveys and research. However, given the high risks involved in mining activities, companies are still tempted to pay bribes and politicians are often bending the rules and regulations applying to the sector in certain companies’ favour because of their corrupt networks. For Mongolia, this creates a rising concern for international organizations and local communities as well as a sense of insecurity among investors. According to World Bank, Mongolia’s regulatory framework is somewhat weak in the areas of public participation, sanctions, informal mining.

For Mongolia’s policy-makers, implementing sub-national EITI reporting can better hold local officials and companies accountable. By focusing on the sub-national level, EITI can actually deliver reports and discourse disagreed payments and intergovernmental transfers to citizens and concerned groups and thus have a stronger impact on its oil/gas and/or mining-producing regions where there is usually a lack of trust among local community, civil society, and potential investors.

I’ll elaborate more on the second motivation in my next blog post.

Behavioural Patterns of Civil Engagement

Christina Toepell, MAAPPS // Feb 23, 2015

With all of us sharing best practices in sub-national reporting and trying to slowly find solutions for Mongolia, the issue of the needs and preferences of civil society in Mandal Soum still creates a big question mark. The past weeks have seen us researching on local and sub-national reporting in 13 different countries, slowly understanding the opportunities and pitfalls of new projects and getting more and more excited to implement best practices in Mongolia. But what about civil society in Northern Mongolia? Do they think corruption is an issue? Do they believe public participation can tackle this issue? Would they see a potential sub-national report even as relevant or needed? While not forgetting that one civil society never exists and individuals all have different desires, it is important to dive into behavioural patterns and take a closer look at perception of corruption and civil society involvement in Mongolia.

The major conclusion I draw from analyzing sub-national reporting in the Philippines is its inherent believe that civil groups and individuals can elicit change and can have an impact on society as a whole. Understandingly, this has not always been purely positive when examining the myriad of uprisings in the past years and decades. It is certainly important for our cause. My feelings are backed by reports from Transparency International Philippines. NGOs and the media are two of the three least corrupt bodies in public opinion and perception, implicating a stable acceptance of organized interest groups and a solid control mechanism through media reporting. With this proactive nature of a cultural group, sub-national reporting initiatives are easier accepted by stakeholders. This might certainly explain the relative ease with which sub-national reporting was implemented in Compostela Valley on the Southern island of Mindanao. But what behavioural challenges and opportunities would a sub-national reporting scheme face in Mongolia?

Civil society rights and transparency score relatively high in Mongolia. According to Freedom International, Mongolia enjoys high freedom of civil liberties. Freedom of expression and belief and organizational rights are both valued and cherished. Looking at Open Society Forum, a Mongolian public opinion and policy research think tank, transparency and disclosure of forms have increased in the past years. However, only by consulting Transparency International’s Corruption Perception Index, we understand the feelings and beliefs of civil society. Examining the corruption perception of Mongolian institutions, NGOs rank very high. With only 16% of Mongolian respondents believing that they are corrupt, NGOs are the second least corrupt institution, as perceived by civil society.

For us most relevant, however, is belief in the impact of public involvement. 46% of Mongolians agree or strongly agree that ordinary people cannot make a difference in the fight against corruption. This poses significant challenges on all initiatives working on transparency, and makes a potential implementation of sub-national reporting even harder. I fear that public society would miss the relevance of reporting initiatives and would dismiss them too soon. If we are to go through with a sub-national reporting initiative, the behavioural approach cannot be neglected. We need to put additional effort and care into how to approach civil society and how to nudge individuals into being involved in the project, into believing that their impact matters.

EITI’s Mongolian Case Study

Stephanie Zimmerling, MASc Mining Engineering // Feb 20, 2015

The EITI has published an interesting read on Implementing EITI as the Subnational Level (https://eiti.org/document/implementing-eiti-subnational-level). The document is from 2011, and therefore may be somewhat outdated, however, includes the EITI’s ‘Rationale for Subnational Implementation’. The Rational highlights increased transparency and knowledge of revenues from the extractive industry at the local level. EITI anticipates that this increased knowledge will empower citizens to hold governments accountable and be knowledgeable to criticize decisions made by their local government. The report includes case studies of emerging countries reporting EITI at a subnational level. Included in the report are Ghana, Indonesia, Mongolia, Nigeria, the Democratic Republic of Congo (DRC), and Peru. As a first step of this year’s project, reports have been produced internally on Ghana, Indonesia, the DRC and Peru with the goal of ultimately informing subnational reporting in Mongolia. While we have a developed a strong understanding of the situations in our countries of choice, we still have yet to breach the hurdles facing Mongolia.

This report expands on the early efforts Mongolia has made with regards to subnational reporting, where companies have disclosed unilaterally direct subnational payments. The report expands upon Mongolia’s taxation system and highlights the dependence of the regional and local governments on the central government for revenue transfers. The report provides additional details on the system in place for revenue distribution from the extractive industry. While some money is transferred from the central government, revenue collected from mining companies at a regional level is dominated by donations made by the extractive industry to local governments. There is currently no efficient reporting system to capture these donations and the EITI report has revealed this payment flow holds the most discrepancies. Accounting and administering donations can be very complex as donations are typically made off-budget. In Mongolia, the central government discounts transfers made by mining companies to ensure equality among non-mining regions. As a result, the subnational government is discouraged from reporting these revenues and the money is therefore unaccounted for.

In 2008, 6 districts of Ulaanbaatar, 18 aimags (provinces) and 57 soums (districts) reported their company receipts. All three EITI reconciliation reports released to date (2011) reveal large discrepancies in data accounting. Company payments largely exceeded government receipts indicating that the government did not report all revenue collected from the mining industry. These discrepancies are predominantly the result of donations made regionally. This has been identified by the EITI as one of the main challenges with subnational reporting in Mongolia.

Sources:

Aguilar, J., Caspary, G., & Seiler, V. (2011). Implementing EITI at the Subnation Level.