Category Archives: Weekly Reflections

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

NGOs in Kyrgyz Republic demands more focus on subnational reporting

Bulgan Batdorj, MASc candidate in Mining Engineering // Mar 6, 2015

Kyrgyzstan is not only beautiful but also rich with mineral resources. Development of the country through democracy and free market economics has faced many challenges since its independence in 1991. The economy is heavily dependent on gold mining, mainly from the production of the Kumtor Gold mine. However mining companies are confronted by violent protests from the local people on a regular basis and this is one of the key reasons why foreign investors draw back from investing in the country.

After adoption of a new constitution in 2010 the government promulgated aNational Sustainable Development Strategy to promote greater transparency in governance and especiallyresource governance. TheKyrgyz Republic became a compliant country of Extractive Industries Transparency Initiative (EITI) in 2011 (EITI Secretariat, Kyrgyz Republic 2014) with record of 95% extractive industry revenues covered. In 2012 the country legislated the EITI in its “Law on Subsoil”.

While it is easy to be comforted by the success of national reporting, unfortunately it does not reduce conflict between the local community and the companies. This is why many researchers and NGO leaders emphasize the importance of sub-national reporting of EITI. Mr. Nurlan Djoldoshev of the Soros Foundation in Kyrgyzstan has said that “Improved engagement between the EITI process and local communities is a very urgent issue for Kyrgyzstan. Explaining the EITI rules to local communities through building local MSGs would help to improve the interactions between local citizens and companies. This kind of approach will give opportunity to make EITI really useful and useable tool for people”. Explaining the reasons for protests, he continued that “local citizens strike against any operations of the extractive companies using as a main argument the problem of their ecology and environment protection. They say that their communities do not need revenues from extractive industry because they benefit almost nothing from such business and they believe that the companies will leave them only environmental destruction. So now both government and companies do not know how to improve dialogue with local communities” (EITI SWG 2010).

In many cases, local people are unaware of how the revenues from such mining operations can better their livelihoods. For example, the Kumtor Operating Company pays one percent of revenues to the development fund of Issyk-Kul province yet lack of transparent management and spending of the fund creates hostility among stakeholders. The national government is not active in resolving conflicts between companies and communities. Because of a highly centralized governance structure, it is hard to figure out what comes back to local people after mining revenue is sent to Bishkek.

The government has promised to make many changes with regards to extractive industry governance. As one localization effort the government proposed to establish a “Regional Development Fund” to promote the improvement and maintenance of infrastructure, fund social and economic development and support local events at provincial and district level areas with mining activity (David Gullette 2014). But many are critical of the fund’s progress so far in bringing the much needed consolation and change.

The constant social unrest in Kyrgyzstan is triggered by many causes. The Kyrgyz Republic ranks on 150th out of 177 in the corruption perception index issued by Transparency International and poverty affects almost 40% of the population (World Bank Data 2014). So it is important for the government to focus on subnational reporting and educating the public concerning the mining industry and its contributions to the country’s development.

There are many similarities between Mongolia and Kyrgyzstan. Both countries are landlocked, nomadic, high altitude, post-Soviet democracies. The people in both countries love horses, drink kumis and live in yurts. Theirvalues and cultures are interconnected with the mountains and waterways. So, I pray that both countries succeed in successfully overcoming the challenges of transition, beating corruption, strengthening institutions and improving governance.

The Ongoing Journey to Good Governance in Africa

Carlos da Costa, PhD Student in Mining Engineering // Mar 6, 2015

Africa is a notoriously difficult place to do business. Many investors remain skeptical of their ability to navigate the continent’s often murky operational environments, where weak governance, regulatory failure and unstructured economies have created the conditions for corruption to thrive.

The scale of political graft (a form of political corruption, is the unscrupulous use of a politician’s authority for personal gains) has been particularly noteworthy in extractive industries. As a result, the citizens of many African countries rich in oil, gas and minerals are mired in poverty. Rather than investing resource revenues into infrastructure, health care and education, governments, often in collusion with the private sector, have diverted the proceeds into their own pockets.

Ghana, Angola and Nigeria, for example, are plagued by the resource curse. Combined they are the largest producers of oil in Africa, yet their citizens are among the world’s poorest, with over 50% of their respective populations living on less than $2 a day, according to World Bank figures.

Transparency International (TI), the Berlin-based watchdog, ranked Angola a dismal 161 out of 175 countries in its 2014 Corruption Perceptions Index. The Angolan government frequently commits itself to greater transparency, at least on paper. In 2010 it passed the Public Probity Law, which obliges all government officials to declare their wealth. This information, however, is not made public, a direct contradiction of the legislation’s title. As a result, this act has yielded few positive effects.

Transparency International has ranked Nigeria as the 27th most corrupt country in the world out of 100. The group disclosed this in its 2014 “Perception Corruption Index.” Nigeria was ranked 136 out of 175 countries surveyed in the report. Nigeria’s poor also suffer from the government’s mismanagement of the country’s oil revenues. Unlike Canada, which has used its resource wealth to develop and diversify its economy, Nigeria is still stuck in a mono-export economy. Oil accounted for approximately 95% of Nigerian exports between 1980 and 2010, according to a 2013 report by the United Nations Economic Commission on Africa. Accusations of corruption have plagued successive Nigerian governments and the Nigerian National Petroleum Company (NNPC), the state oil firm, continues to accused of stealing billions from federal accounts.

Ghanaian lawmakers reacted angrily to Transparency International’s latest Corruption Barometer Survey, which ranked Ghana’s Parliament among the most corrupt institutions in the country. In its 2014 “Perception Corruption Index,” TI has ranked Ghana as the 48th most corrupt country in the world. The country was ranked 61 out of 175 countries surveyed in the report. This latest survey, along with past ones, has drawn sharp condemnation from MPs, with some threatening to have the International Corruption Watchdog before the Privileges Committee. According to the MP, the allegations were very damning and Transparency International should produce evidence.

Transparency International has ranked the Ghanaian Legislature as the sixth most corrupt institution on a list made up of other public institutions like the Police Service, the Judiciary, and Political Parties amongst others.

One measure that mineral-rich countries can adopt is the Extractive Industries Transparency Initiative (EITI). This voluntary programme seeks to promote better use of mineral wealth through increased transparency and accountability. It encourages governments and companies to publish their revenues and payments and then submit them to independent auditing. Currently 48 countries, including 22 African nations, are implementing EITI requirements and 17 are compliant; 4 are implementing EITI, not yet compliant; and 1 possesses compliant/candidate status but is temporarily suspended according to the EITI website.

The African Development Bank endorsed the EITI in 2006, but governments and private companies still resort to inventive ways of hiding their buy-offs and kickbacks. While the initiative in itself is not sufficient to eradicate corruption in the extractive sectors, it is generating more information on revenues that was previously either not available or difficult to access.

In addition to the EITI, African governments and multinationals need to define clearly and publicly their rules of engagement. Transparent resource management with well-defined principles and neutral administration will discourage participants from rent-seeking behavior.

While corporate Africa’s reputation for clean business is unflattering, this is changing. As African companies strive to become world class, many are tightening up their governance, buttressing business codes of conduct and teaching their employees about ethics.

Government graft, often with the collaboration of private companies, is choking African economies and is a cancer that African governments need to remove. This requires fostering greater transparency in their dealings with mining, oil and gas companies; developing and enforcing stronger anti-corruption legislation; and creating economic policies that promote diversified, industrial economies and reduced dependency on resources.

Corruption is not simply about ethics. It is also about how a government is set up and managed. Critical elements in fighting the scourge include an active and engaged media and judiciary, and the use of information technology. The underlying causes of corruption (poor pay incentives, ineffective political processes, and a deep-seated acceptance of corruption) need to be expunged. Citizens should demand greater accountability and transparency from their governments.

Sources:

Compaoré, Nadège. Towards Understanding South Africa’s Differing Attitudes to the Extractive Industries Transparency Initiative and the Open Governance Partnership. Johannesburg, 2013.

EITI. Impact of EITI in Africa: Stories from the ground. Oslo, 2010.

EITI International Secretariat. EITI – Extractive Industries Transparency Initiative, Ghana. March 2015.

< https://eiti.org/Ghana/ >.

EITI International Secretariat. EITI – Extractive Industries Transparency Initiative, Nigeria. March 2015.

< https://eiti.org/Nigeria >.

Natural Resource Governance Institute. Natural Resource Governance, Angola.

< http://www.resourcegovernance.org/countries/africa/angola/overview >.

Natural Resource Governance Institute. Natural Resource Governance, Ghana.

< http://www.resourcegovernance.org/countries/africa/ghana/transparency-snapshot >.

Natural Resource Governance Institute. Natural Resource Governance, Nigeria.

< http://www.resourcegovernance.org/countries/africa/nigeria/transparency-snapshot >.

Ocheje, P. D. (2006). The Extractive Industries Transparency Initiative (EITI): Voluntary Codes of Conduct, Poverty and Accountability in Africa. Journal of Sustainable Development in Africa, 8(3), 222-239.

The World Bank Group. Worldwide Governance Indicators (WGI) Project. Country Data Report for Ghana, 1996-2013. Washington, 2014.

Transparency International. Corruption Perceptions Index, Overview. February 2015.

< http://www.transparency.org/research/cpi/overview >.

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.