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

With the all-too-common linkage between natural resource wealth and civil conflict, it became apparent that something had to be done. This is not merely a matter of economic theory. It is about the prosperity or poverty, health or sickness, indeed life or death of millions of suffering people currently deprived of any share in their national wealth, while the offshore bank accounts of their national elites bulge with dollars, euros, and pounds.

B. History

In early 2002, George Soros lent his support to the NGOs' launching of the "Publish What You Pay" campaign. (22) The U.K. Prime Minister's attention was attracted, and in September 2002 at the Sustainable Development summit in Johannesburg, Tony Blair announced that he would be launching an initiative to promote the transparency of oil, gas, and mining revenues. (23) And so the EITI was born.

Early discussions of the EITI moved away from mandatory company disclosure in published accounts to the development of a program to encourage producing countries and companies to implement a set of transparency principles. (24) At a high level international conference at Lancaster House in June 2003, representatives of governments, industries, and civil societies endorsed this approach and agreed on a set of EITI Principles. (25) A number of countries (including Nigeria and Azerbaijan) volunteered to pilot the approach. (26) Since then, building on a general commitment to transparency in Evian, during 2004 and 2005, the G8 leaders collectively have specifically endorsed EITI at their annual summit meetings in the United States and Scotland. (27) Around twenty countries are now at some stage of endorsement and implementation; I will present a few examples shortly.

At another high-level conference in London in 2005, it was decided to appoint an International Advisory Group (28) to examine the ways in which EITI should be developed for the future. It is my privilege to chair this group of sixteen people from governments, companies (including the investment community), and civil society. This group is supported by a Secretariat provided by the U.K. government as well as the World Bank and International Monetary Fund (IMF).

C. The EITI Framework

1. Basics

At its heart, the EITI is profoundly simple, although admittedly in application it can become more complex. In November 2003, President Obasanjo used his speech on the tenth anniversary of Transparency International in Berlin to announce his government's intention to implement EITI in Nigeria. In doing so, he said that at its center would be three requirements: (1) companies would be required to disclose everything they pay to the government; (2) institutions of the government would be required to disclose everything they receive from companies; and (3) an independent auditor would be appointed to ensure the two sets of figures agree and produce a published report. (29)

This simple description explains the purpose of EITI. Different governments and companies may interpret the details differently, but the principle is clear. The people of a country are given confidence that the money paid for their natural resource is actually reaching the government accounts. Subsequently, outside of the EITI process itself, they can ask further questions about how this wealth is being used.

2. Six Criteria

As work proceeded during 2004, it became apparent that there was a need for an expanded set of criteria to use in determining whether or not a country's or a company's claim of implementing EITI was real or merely window-dressing. At meetings in Paris, hosted by the World Bank and the French government in early 2005, a set of six criteria was agreed upon and confirmed by a second high-level meeting in London in the spring of that year. (30)

These "EITI-criteria" are now the test of reality for implementation at the national level. In outline form they are:

1. Regular publication revenues to a wide audience in a publicly accessible, comprehensive, and comprehensible manner.

2. Application of international audit standards to the data.

3. Appointment of a credible, independent administrator, and publication of the administrator's opinion regarding the reconciliation, including discrepancies, should any be identified.

4. All companies, including state-owned enterprises are to be included.

5. Civil society actively engaged as a participant in the design, monitoring, and evaluation of the process.

6. A public, financially sustainable work plan, including measurable targets, a timetable for implementation, and an assessment of potential capacity constraints. (31)

3. Misunderstanding on Terms: Voluntary Versus Mandatory

Earlier I referred to the Publish What You Pay (PWYP) call for "mandatory" disclosure of payments to governments as opposed to "voluntary" cooperation. These two terms have often been set against one another. PWYP's call is described as "mandatory," whereas EITI is characterized as "voluntary." Actually, as a careful reading of the criteria will reveal, this simplistic contrast is misleading.

The reality is more nuanced. Certainly, it is voluntary for the sovereign government of a country to adopt or not to adopt EITI. But if it chooses to do so, it must ensure that all companies active within its borders submit their data to the independent administrator/auditor of the scheme. Therefore, at the national implementing level, if a country complies with the EITI Criteria--in particular number four (32)--it is not voluntary for a company to participate. Although there is a difference between those which do so willingly and those which have to be drawn in kicking and screaming to the party while lobbying hard to minimize the demands placed on it.

Countries will vary in the methods they use to require engagement with the process: some may use legislation or regulation and others may use simple persuasion. At the end of the day, however, all companies' figures must be submitted.

D. Benefits

Why should the government of an oil or gas producing country want to implement EITI? Both countries and companies will benefit from this increase in transparency. (33) Generally, it can be said that it is good to see companies, governments, and CSOs working together constructively at both the national and international levels. Too often there is friction and mistrust between these parties, and working together on a shared enterprise bodes well for the future. This is particularly true in the extractive industries.

Internally, within countries rich in natural resources, serious schisms can develop between society, government, and industry. Opening up of the books can be used to facilitate a rebuilding of trust. Transparency in the extractive sector will lay the basis for budget accountability. Improved allocation of the funds raised from oil, gas, and mineral extraction into investments that are economically and socially productive and sustainable will lead to significant poverty reduction. Obviously, this will lead to greater political and social stability.

Looking in from the outside world, investors will see a cleaner and more reliable location where they can direct their funds. Direct foreign investment is affected negatively by the perception of corruption, and signs of increasing transparency have a positive effect. EITI can play a powerful role in demonstrating a resource-rich nation's commitment to open management of its wealth, thus encouraging investors to view the country as less risky. Although transparency is only one component in the package of measures necessary to build a truly attractive location for investors, it can certainly have a positive effect within the companies' due diligence processes.

A Nigerian minister, recently commenting for the first time on her country's acquiring an attractive credit rating, attributed a sovereign debt rating in substantial part to the reputational effect of its energetic application of EITI to uncover, for public scrutiny, the previously hidden fiscal flows of the oil and gas industry. (34) Also, donor nations and institutions are constantly on the lookout for signals of improved governance as they seek to protect and give good account for the usage of their taxpayers' money. (35)

Corporate reputation in the contemporary business world is a vital asset. Increasingly, extractive industry companies are recognizing that transparency initiatives can do much to improve that reputation. Companies wish to recruit the best young people, but the youth of the world are increasingly sensitive to questions of corporate responsibility. Investors are becoming increasingly sensitive to reputational issues and view transparency as a positive corporate characteristic, not only from an ethical perspective, but within a broad portfolio of risk assessment measures. Greater transparency will reduce political risk, especially that associated with coups and other regime changes; the greater the openness about business dealings, the less the opportunity for accusations of past corrupt dealings under previous administrations.

Often, companies believe they must adopt unfair or even illegal practices because they feel threatened by competing operators vying for contracts in countries that have unstable or unreliable institutions regulating the sector. In the area of natural resource revenues, EITI provides a level playing field in countries which adopt it and implement it fully.

IV. EITI--EXAMPLES

A. Nigeria