WHITHER WAY? Extractive Industries Transparency Initiative

EFFECTIVENESS OF THE EITI WITH RESPECT TO CORRUPTION     LEVELS IN CANDIDATE AND COMPLIANT COUNTRIES

“Corruption is the abuse of entrusted power for private gain. It hurts everyone whose life, livelihood or happiness depends on the integrity of people in a position of authority”

(Transparency International, 2010)

Does more transparent reporting reduce corruption? In most cases it does. Huntington (1989) defined corruption as “behaviour of public officials which deviates from accepted norms in order to serve private ends”. The definition of corruption, particularly in the reference to private ends in contrast to public ends is apt in the extractive industries, when considering that it relates to God-given public resources. In deciding the impact of EITI on corruption in candidate and compliant countries we must understand that that there are many varieties of corrupt behaviour, so there are multitudinous factors contributing to corruption and as a result so many explanations are offered that it is quite difficult to classify them in any systematic manner (Caiden, 2001).

In the extractive industry, corruption is prevalent due mainly to large rents, which are incomes derived from the gift of nature- in this case: oil and gas or mineral wealth. This large concentrated source of revenue often moulds a country into what has been termed a “Rentier State” (Karl, 1999). Several resource rich countries also view their resources as “strategic commodities” which require that their management is considered in the same realm with national security issues. This classification can cause countries to place a shroud of secrecy on the extractive sectors. Corruption is also prevalent in developing natural resource-rich countries due to the weakness of the accountability systems such as accounting, judiciary and law enforcement. Public choice theory of corruption as described by De Graaf (2007), whereby corruption takes place when public officials, weighs the benefits of corruption with the costs (prosecution, shame) and the probability of the occurrence- as well as makes decisions based on which is higher. In a system with poorly developed accountability systems there is the tendency that benefits would outweigh the probability and consequences of being caught. Where there is adequate information gathering, auditing, and enforcement of prescribed criminal and administrative sanctions, corruption reduces (Anechiarico and Jacobs, 1996).

The social context for corruption whereby societal norms consider certain types of corruption as normal practice prevails because there is a lack of information about the consequences of revenues being diverted into private pockets; for instance, where enhanced transparency and engagement exposes the fact that lost or stolen revenue from the extractive sector could have been used for social welfare. When this happens, society would be more vigilant and press for even greater accountability. Opaque practices in extractive industries generally make it a sector susceptible to corruption. Opaque revenue reporting in extractive industries either provides the foundation for corruption or provides the need to perpetuate corrupt practices. Feedback from stakeholders is stifled, flexibility is minimized, and necessary change is made largely impossible (Ostrom, 1992 and Ostrom, E., Schroeder, L. and Wynne, S., 1993. . Institutional incentives and sustainable development Westview Press, Boulder, CO.Ostrom et al., 1993). When countries increase reporting standards through prescribed measures such as the EITI or domestic initiatives, corruption is harder to perpetuate and reduces.

There appears to be a link between transparent reporting of revenues and a country’s position on the corruption perception index. Transparency International, an international non-governmental organization has published an annual corruption perception index since 1995 (Transparency International, 2010). The Corruption Perception Index (CPI) measures the perceived level of public-sector corruption in 180 countries across the globe. The CPI is a "survey of surveys", incorporating views from 13 separate expert and business surveys.

As a possible consequence of improved transparency, Azerbaijan and Liberia, which were the first two EITI complaint countries, greatly improved their ranking on the Corruption Perception Index after completing their EITI validation. Azerbaijan and Liberia moved up 15 and 40 places respectively in the 2009 CPI compared with their 2008 CPI rankings.

Table 1 : Azerbaijan and Liberia: Improvements in Corruption Perception Index

Country	2007 Rank	Index	2008 Rank	Index	Improvement
Azerbaijan	150th	2.1	143rd	2.3	7
Liberia	157th	2.1	97th	3.1	40

Source: Compiled from Transparency International CPI Annual Reports

Since the CPI is arguably the most recognized measure for corruption in countries, it is worth asking if a CPI ranking has any impact on a country in order to see how potent it is as a means to exert pressure on governments to increase transparency. Rating agencies, political risk analysts and multinational firms in a survey stated that they use the CPI to rate country risk or make foreign direct investment (FDI) decisions (van Vuuren, 2002).  The survey was conducted to measure the factors affecting FDI decisions by companies. Results indicated that corruption perception weighed more than human rights, environmental and labour issues in their decision to invest in a Country.

Table 2: Major Factors Deterring Companies from Investing in Countries

	European companies	US companies	All
Corruption Human rights Environment Labour	38% 28% 34% 35 %	40% 13% 14% 16%	39% 27% 31% 34%

Source: van Vuren, 2002

If indeed this is the case then countries that have compliance would stand a better chance of attracting necessary investment in their extractive sectors. Corruption is also a cause of internal conflict in countries. Even the perception of increased transparency reduces restiveness. EITI’s strategy for MSG provides a platform for government’s engagement with civil society. Without this platform, civil society’s other option may be demonstrations or violent agitation. Reporting revenues also serves as a deterrent for companies who would want to be corrupt. In an environment where payments to government are transparent, companies find it more difficult (but not impossible) to pay bribes. In summary, it is apparent that compliance with EITI potentially causes behaviour change among the three stakeholder groups, government, companies and civil society. 

STRUCTURAL AND OTHER LIMITATIONS OF THE EITI 

The EITI undoubtedly is a timely and much needed catalyst towards getting the best out of the extractive industry by the key stakeholders comprising the resource owners, investors and the owners of the required technological expertise. In addition, the EITI has unveiled the extractive industry such that it is no longer treated as a sector where its activities are only known by a privileged few. The EITI promotes and preaches transparency of revenues generated, but what about the processes occurring before and after the generated revenue? Some inadequacies of the EITI which may act as bottlenecks to the much desired succour it is expected to bring are highlighted below:

i)              Implementation of the EITI does not address the loopholes that could occur in the way in which the contracts were negotiated, concessions granted as well as how the money is spent (Olcer, 2009). Information regarding these processes is not readily available. The EITI focuses on reconciliation of accounts between the government and the corporations, not necessarily the ‘correctness’ of the information provided as the accounts can balance out, but with key underlying details not properly scrutinized. Transparency of the flow of revenues alone is not sufficient in achieving optimum sanitization of the extractive industry.

ii)             For governments to be held accountable there must be in place sound legal and political structures. Non-existence of this can thwart the long-term objective of poverty eradication and sustainable development in these resource rich countries.

iii)            The EITI does not enjoy adequate membership from key players. According to the WTO 2008 report, of the 25 fuel and mining dependent countries, only 11 have signed up to the EITI. Also, only about 40% of home countries of the world’s 50 largest oil and gas extracting companies have signed up to EITI (Olcer, 2009). The extractive corporations are not left out of this small support percentage; only 13 of the world’s 50 largest oil and gas (O&G) extraction companies have embraced the EITI (Ibid). The three largest, which are state owned; Saudi Aramco (Saudi Arabia), Gazprom (Russian Federation), and NIOC (Iran), have not signed up to the EITI (Ibid).

iv)           A significant number of developed countries, despite their support and lauding of the initiative, have not attained candidacy status in the EITI. This weak response by the developed nations can set off insinuations that the initiative is yet another imposition of the developed nations on emerging and developing nations.

In analysing the probability of the effectiveness of the EITI in achieving accountability, three subsets can be considered; while transparency is only a subset of accountability which can be achieved with the gathering of adequate and sufficient information, with another subset being partially addressed with productive multi-stakeholder engagement processes, the third which concerns enforcement of penalties as a result of proven malfeasance is not precisely considered in the EITI given that it is a voluntary initiative. Having stated that, the EITI runs the risk of being a medium of ineffectual transparency with its lack of extensive accountability.

THE HOMERUN

The very popular adage, that “a journey of a thousand miles starts with one step”, can be used to describe the birth of EITI. Over the years, there have been articles and papers written, trying to decipher the reason why the people of many resource-rich countries still live in abject poverty. All fingers have pointed to one major reason, corruption! While it will be foolhardy to think that the birth of one initiative will reverse the trend of activities that have been longstanding in the extractive industry, the EITI is a wakeup call, an indication that some players in this sector are interested in turning things around.

The extractive industry has for long been treated as an ‘untouchable’, were no questions should be asked and no answers given, but with globalization, a lot of changes in this sector are imminent. While the EITI is a step in the right direction towards transparency and accountability, it should not be perceived as a remedy to the ‘resource curse’ and cannot independently have any significant influence on transparency levels in resource rich countries. Some of the issues pertaining to the EITI that have been emphasized earlier in this paper are not intended to act as a call for an outward discard of the EITI, but as a cue that a lot still needs to be done to get the ultimate out of the EITI. The World Bank initiative, the EITI++ is taking further steps in safeguarding the wealth generated from these hydrocarbon resources by including as part of the transparency drive, information regarding the manner in which contracts are bargained, concessions granted, and the money expended. In addition to these, the EITI++ intends to make available, technical aid for every segment involved in the extracting process. As such, increased cooperation of the EITI and EITI++ could provide an even greater impact towards improved transparency levels in resource-rich countries and achieving better management of the wealth generated by harnessing these resources.

On a final note, this paper proffers some recommendations:

• The validation process of the EITI needs to be devoid of any irregularities or obscurities. It needs to seen as transparent and reliable.

• The EITI will need to advance, to incorporate a more detailed reporting, and will need to work hand in hand with other reliable institutions working for the same cause, mainly legal establishments.

• The CSG’s (Civil Society Groups) must be allowed to actively participate in the EITI without fear of intimidation or harassment.
• More developed countries should embrace the EITI beyond offering financial aid by implementing it, as this gesture would demonstrate that this is not another case of  international double standards

NUTSHELL:

This article has examined the effectiveness of the EITI with respect to corruption levels in candidate and compliant countries, also highlighting complex fundamental issues in most resource-rich countries. It also highlights the structural and other inadequacies inherent in the EITI.

According to Maryanne, the EITI is a much-needed and timely catalyst for change in the extractive industries but is dogged by various teething problems. How will you help make EITI a success story? To view Maryanne's professional profile and for more information on this article, please click here..-->