Fighting corruption in a global economy: transparency initiatives in the oil and gas industry.

I. INTRODUCTION

II. GROWTH OF THE ANTICORRUPTION MOVEMENT

A. OECD and Other Conventions

B. Civil Society Growth III. EITI--DEVELOPMENT

A. The Challenge

B. History

C. The EITI Framework

1. Basics

2. Six Criteria

3. Misunderstanding on Terms: Voluntary Versus

Mandatory

D. Benefits IV. EITI--EXAMPLES

A. Nigeria

B. Azerbaijan

C. Other Countries

V. EITI--ISSUES

A. Legal Implementation

B. Contract Confidentiality

C. Civil Society Involvement

D. Whitewash

VI. EITI--SKEPTICAL VOICES VII. EITI--INTERNATIONAL ADVISORY GROUP VIII. THE FUTURE OF REVENUE TRANSPARENCY

IX. CONCLUSION

X. APPENDIX 1

XI. APPENDIX 2 XII. APPENDIX 3 XIII. APPENDIX 4

I. INTRODUCTION

It is a privilege to be able to speak to you today. I want to start by expressing my thanks to Professor Steven Zamora for inviting me to this exciting event. The timing is superb: I just returned from a meeting on oil and gas in Baku (Azerbaijan) last week and will share with you some new information--hot from the press.

I can well recall visiting Houston for the first time for a conference on the Oil and Gas Industry twenty five years ago when, as Division Chief at the World Bank, I tried to promote an investment in a miniscule petroleum project in Chad. At that time I was not successful. The known deposit was considered too small, the political situation too unstable, and the global appetite for energy resources still too moderate--the time was not yet ripe for my program.

Then I visited Houston again in 1995, as founder of Transparency International. My objective was to convince the top management of Enron that there were dangers of corruption, and to obtain some funding for our embryonic NGO in Berlin. This time I was mildly successful but only with the second half of my objective.

II. GROWTH OF THE ANTICORRUPTION MOVEMENT

Today I want to talk again about the oil and gas sector, and more specifically about an initiative to increase the transparency surrounding revenues flowing into countries blessed with valuable natural resources. Since its inception, Transparency International has been the leading member of a growing and accelerating movement against corruption, and has been actively engaged in improving fiscal oversight and tackling the supply side of bribery all over the world. (1) Transparency International has been heavily involved with others in civil society organizations, governments, and industries in the development of the Extractive Industries Transparency Initiative (EITI). (2)

Last year, I was asked by the British government to chair an International Advisory Group to help design EITI's future. EITI does, of course, cover solid minerals as well as hydrocarbons, but, being in Houston today, I shall focus primarily on oil and gas.

Before proceeding to the discussion of EITI, however, I would like to paint the background picture. Different constituencies see EITI in different lights, but it is principally an exercise aimed at better governance and improved fiscal management at the national level in resource-rich states.

A. OECD and Other Conventions

Today, it is hardly conceivable that until about six years ago, governments in most industrialized countries allowed their citizens--in particular their exporters--to bribe foreign officials. (3) In fact, through generous tax deductions of bribes, these governments even subsidized and promoted corrupt behavior of their corporate sector in global markets. (4)

A major exception to this scandalous reality was the Foreign Corrupt Practices Act of 1977 passed by the United States under the leadership of President Jimmy Carter. (5) The other industrialized countries did not follow the American example. (6) Today it is necessary to recognize that a system of widespread grand corruption has evolved in the globalized economy; this corruption is one of the main causes of poverty, conflict, violence, and even terrorism--particularly in the developing world. This fact is especially true in the valuable extractive industries sector where corruption and mismanagement have frequently turned the blessing of natural resources into a curse. (7) It is important to acknowledge that this sad state of affairs is the joint responsibility of the North and the South, of the private sector and the state sector alike.

Accepting this joint challenge is the first step in finding a joint solution. It was with this philosophy that Transparency International managed to build awareness of the all pervasiveness of corruption, its deadly impact, and the need to act against it. On this basis, it managed to build the political and practical coalitions for change. The coalition included all responsible stakeholders in business and government, in the industrialized world, and in poor countries. (8)

The good news is that this has succeeded. The Organisation for Economic Co-operation and Development (OECD) was persuaded to pick up the baton. After many and often contentious discussions in Paris, in 1997, the OECD's Convention on Combating Bribery of Foreign Public Officials was signed by thirty-five exporting countries and entered into force in 1999. (9)

This was a watershed. Since that time, practically all institutions, governments, and international organizations, along with much of the private sector, have joined the fight against corruption.

Of course it will take years for the ugly system, which has been allowed for decades to become too deeply ingrained in the global economy, to be brought under control. Therefore, it is important that arrangements be made for a peer-review process to determine whether a country has implemented the Convention on paper by incorporating its provisions into anticorruption legislation and whether those laws are being enforced effectively.

In the meantime, many other international conventions have come into existence; most prominently, the United Nations Convention Against Corruption of 2004 that entered into force last month and has particular importance because of its global reach. (10) On a regional basis, some international conventions broke new ground, including the Inter-American Convention against Corruption of 1996, (11) the Convention of the Council of Europe of 1998, (12) and the African Union Convention of 2005. (13)

All of these conventions and their enforcement resulted from effective cooperation of government institutions, the private sector, and civil society organizations (CSOs). This is particularly reflected in the U.N. Global Compact, where more than 2,400 major companies have pledged to live up to the basic principles of corporate responsibility, including the tenth principle against corruption. (14) The cooperation between civil society and the private and public sectors makes it possible to promote a greater contribution of the private sector for a better world.

B. Civil Society Growth

This high level of activity at the official level has been largely facilitated by a remarkable growth in civil society movements against corruption. As in other areas of ineffective global governance, the CSOs play an increasingly constructive role supporting traditional actors of governance in finding solutions that may elude the government because of limited reach or mandate.

In the area of fighting corruption, Transparency International has grown beyond our wildest dreams; it now has independent National Chapters in almost 100 countries. (15) Other NGOs, made up of very brave people, have emerged, often at local levels and with little protection against authoritarian and often violent authorities, in countries ravaged and impoverished by the scourge of corruption. Also, other highly focused groups have grown to address specific types of corrupt behavior.

One such organization is Global Witness, a small organization based in the United Kingdom that concentrates its attention on the relationships between corruption and natural resources, often involving civil conflict. (16)

III. EITI--DEVELOPMENT

A. The Challenge

The 1999 Global Witness report, "Crude Awakening," (17) brought the situation in Angola to widespread international attention and triggered the formation of a civil society alliance. Initially composed only of Global Witness and Transparency International-UK, the alliance has rapidly expanded to the "Publish What You Pay" campaign. (18) It called for action, not only in Angola, but more widely, to ensure that revenues from natural resource extraction reached transparent official budgets and that governments could be held to account for their proper expenditure. (19)

For many years, multilateral agencies such as the World Bank, attempted to strengthen public financial management in client countries, and the IMF had been pressing for sound fiscal controls. (20) There was widespread recognition that natural resource extraction could be either a blessing or a curse. On the academic front, numerous studies analyzed the dangers of allowing the advent of extracted riches to lead to economic decline, administrative disorganization, and even state failure. (21)