[Senate Prints 110-49]
[From the U.S. Government Publishing Office]
110th Congress
2d Session COMMITTEE PRINT S. Prt.
110-49
_______________________________________________________________________
THE PETROLEUM
AND POVERTY PARADOX:
ASSESSING U.S. AND INTERNATIONAL
COMMUNITY EFFORTS TO FIGHT
THE RESOURCE CURSE
__________
REPORT TO THE MEMBERS
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
One Hundred Tenth Congress
Second Session
October 16, 2008
U.S. GOVERNMENT PRINTING OFFICE
44-727 PDF WASHINGTON DC: 2008
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COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin NORM COLEMAN, Minnesota
BARBARA BOXER, California BOB CORKER, Tennessee
BILL NELSON, Florida JOHN E. SUNUNU, New Hampshire
BARACK OBAMA, Illinois GEORGE V. VOINOVICH, Ohio
ROBERT MENENDEZ, New Jersey LISA MURKOWSKI, Alaska
BENJAMIN L. CARDIN, Maryland JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania JOHNNY ISAKSON, Georgia
JIM WEBB, Virginia DAVID VITTER, Louisiana
Antony J. Blinken, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
C O N T E N T S
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Page
Letter of Transmittal............................................ v
Introduction..................................................... 1
Fighting the Oil Corruption Curse............................ 1
Findings......................................................... 2
Recommendations.................................................. 5
Discussion....................................................... 9
Resource Curse............................................... 9
The Transparency Cure........................................ 12
Extractive Industry Transparency Initiative.................. 13
United States................................................ 17
Mandatory Securities Reporting............................... 20
Additional Multilateral Efforts.............................. 21
Extractive Industry Transparency Initiative Plus Plus.... 21
G-8...................................................... 21
International Monetary Fund.............................. 22
World Bank and Regional Development Banks................ 24
Extractive Companies......................................... 25
Resource Revenue and Sovereign Wealth Funds.................. 26
Country Reviews.................................................. 28
Africa....................................................... 28
Angola................................................... 28
Chad..................................................... 31
Equatorial Guinea........................................ 33
Ghana.................................................... 36
Nigeria.................................................. 38
Asia......................................................... 42
Cambodia................................................. 42
China.................................................... 44
Indonesia................................................ 47
Timor-Leste.............................................. 49
Vietnam.................................................. 51
Europe and Central Asia...................................... 54
Azerbaijan............................................... 54
Kazakhstan............................................... 56
Norway................................................... 58
Russia................................................... 59
United Kingdom........................................... 62
(iii)
Country Reviews (continued)......................................
Latin America................................................ 63
Brazil................................................... 63
Chile.................................................... 65
Peru..................................................... 67
Middle East.................................................. 70
Iraq..................................................... 70
Saudi Arabia............................................. 73
United Arab Emirates..................................... 75
Appendixes
Appendix I: Administration Responses to Questions from Senator
Lugar.......................................................... 79
Appendix II: U.S. Legislation Pertaining to EITI and Related
Extractive Industry Issues..................................... 85
Appendix III: Summary of G-8 Commitments on Extractive Industry
Transparency................................................... 93
Appendix IV: Excerpt from Accountability Report: Implementation
Review of G-8 on Anti-Corruption Commitments................... 103
Appendix V: Extractive Industry Transparency Initiative U.N.
Resolution..................................................... 111
Appendix VI: World Oil Consumption and Production, by Country.... 113
Appendix VII: Origins of U.S. Imports of Crude Oil............... 115
Appendix VIII: Acronyms.......................................... 117
LETTER OF TRANSMITTAL
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United States Senate,
Committee on Foreign Relations,
Washington, DC, October 16, 2008.
Dear Colleagues: I recently directed minority staff of the
Senate Committee on Foreign Relations to travel to a number of
natural resource-rich developing countries to assess U.S. and
international efforts to address the ``resource curse,'' the
phenomenon whereby large reserves of oil or other resources
often negatively affect a country's economic growth, corruption
level and stability. Overcoming the impacts of this curse helps
promote U.S. policy goals of poverty alleviation, good
governance and energy security.
With the soaring price of oil inflicting economic pain on
American consumers, creating vast pools of sovereign wealth
controlled by often authoritarian regimes, and jeopardizing
gains we have made in poverty alleviation worldwide, the
prudent management of energy flows and their revenues has
formed a critical nexus of U.S. foreign and domestic policy:
failure to secure our interests abroad has threatened
prosperity at home.
Paradoxically, history shows that rather than a blessing,
energy reserves can be a bane for many poor countries, leading
to fraud, corruption, wasteful spending, military adventurism
and instability. Too often, oil money that should go to a
nation's poor ends up in the pockets of the rich, or it may be
squandered on the trappings of power and massive showcase
projects instead of being invested productively and equitably.
In some countries, national poverty has actually increased
following the discovery of oil.
This ``resource curse'' affects us as well as producing
countries. It exacerbates global poverty which can be a seedbed
for terrorism, it dulls the effect of our foreign assistance,
it empowers autocrats and dictators, and it can crimp world
petroleum supplies by breeding instability. The ongoing rebel
attacks on Nigeria's oil facilities, for instance, are a factor
in today's record high crude prices.
This report argues that transparency in revenues,
expenditure and wealth management from extractive industries is
crucial to defeating the resource curse. Achieving transparency
requires a higher profile in U.S. diplomacy and foreign policy.
When oil revenue in a producing country can be easily tracked,
that nation's elite are more likely to use revenues for the
vital needs of their citizens and less likely to squander
newfound wealth for self-aggrandizing projects. When financial
markets see stable economic growth and political organization
in oil-rich states, supplies are more reliable and risk
premiums factored into prices at the gas pump are diminished.
And as official corruption tempted by oil wealth abates, our
foreign assistance dollars can find more fertile ground to
alleviate the suffering of the world's most needy.
I hope you find this report helpful as the U.S. Congress
contends with the complex challenge of securing stable,
affordable energy sources for our constituents, while curbing
petro-authoritarianism, corruption, and privation abroad.
Sincerely,
Richard G. Lugar,
Ranking Minority Member.
THE PETROLEUM AND POVERTY PARADOX:
ASSESSING U.S. AND INTERNATIONAL
COMMUNITY EFFORTS TO
FIGHT THE RESOURCE CURSE\1\
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\1\ This Senate Foreign Relations Committee minority staff study
was coordinated by Nilmini Gunaratne Rubin and includes significant
contributions from Bradley Bowman, Jay Branegan, Neil Brown, Brooke
Daley, Patrick Garvey, Keith Luse, Carl Meacham, Alison McCormick, Ken
Myers III, Michael Phelan, and Marik String. The report includes
substantial input from Congressional Research Service staffers Danielle
Langton and Nicolas Cook.
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Introduction
FIGHTING THE OIL CORRUPTION CURSE
At present, about 3.5 billion people live in countries rich
in extractive natural resources such as oil, gas, solid
minerals and timber. With good governance, these resources can
generate vast sums to foster growth and reduce poverty.
However, many of these countries have weak governance and the
revenues have resulted in corruption and conflict.
At the direction of Ranking Member Richard G. Lugar, the
minority staff of the Senate Foreign Relations Committee
undertook a study of transparency in extractive industries as
part of the committee's oversight responsibilities.
Transparency is a key issue for promoting United States foreign
policy and security interests, including energy security,
combating corruption, and delivering the benefits of natural
resources production for development. The effort is similar in
scope to the ``Embassies Grapple to Guide Foreign Aid'' study
issued in November 2007 and the ``Embassies as Command Posts''
study completed in December 2006.
Through meetings, site visits and document reviews, staff
members tested the viability and efficacy of policy
recommendations for improving three levels of transparency: in
revenues earned by resource rich countries; in expenditures
made by those countries; and in their investment strategies.
Staff also examined the impact of international transparency
efforts such as the Extractive Industry Transparency Initiative
(EITI), the G-8 initiatives, the IMF Resource Revenue Guide,
the World Bank Anti-Corruption and Governance Strategy, and
others.
Staff drew on information gathered on travel to countries
in: Africa (Angola, Chad, Equatorial Guinea, Ghana, Nigeria);
Asia (Cambodia, China, Indonesia, Timor-Leste, Vietnam); Europe
and Central Asia (Azerbaijan, Kazakhstan, Norway, Russia,
United Kingdom); Latin America (Brazil, Chile, Peru); and the
Middle East (Iraq, Saudi Arabia, United Arab Emirates).
Overseas, staff met with foreign government officials,
international organizations, members of the business community,
and representatives of civil society.
In Washington, D.C., committee staff met with officials
from the National Security Council, State Department, U.S.
Agency for International Development, Treasury Department, U.S.
Trade Representative, Commerce Department, Bureau of Land
Management, Mineral Management Service, U.S. Forest Service,
U.S. Geological Survey, World Bank, International Monetary Fund
and Inter-American Development Bank, as well as representatives
from non-governmental organizations, advocacy groups, industry
organizations, energy, extractive and financial companies, and
academics.
Findings
The soaring price of oil is dramatically shifting the
global economic landscape. In many countries, including the
United States, it is hurting growth and inflicting great
economic pain. By the same token, it is rapidly increasing the
nominal wealth of the oil-exporting nations, including many
still classified as underdeveloped (see Appendix VI for graphs
of leading oil producers and consumers). Unfortunately, there
is no guarantee that these countries will enter into a new
period of prosperity. In fact, the opposite may well happen.
Paradoxically, history shows that rather than a blessing,
oil or natural gas reserves can be a bane for many poor
countries, leading to fraud, corruption, wasteful spending,
military adventurism and instability. Too often, oil money that
should go to a nation's poor ends up in the pockets of the
rich, or it may be squandered on grand palaces and massive
showcase projects instead of being invested productively. A
classic case is Nigeria, now the world's eighth largest oil
exporter, where despite half a century of oil production and
half a trillion dollars in revenues, poverty has actually
increased,\2\ corruption is rife and violence persists in the
oil-rich Niger Delta. Having endured some of the worst
consequences of oil wealth, Nigeria is now taking some of the
most deliberate steps to correct the problem.
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\2\ CIA World Factbook.
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The Netherlands found its economy sliding instead of
soaring after it discovered natural gas in the early 1960s,
thanks to a rising exchange rate and a fall-off in
manufacturing, a phenomenon now known as ``Dutch disease.''
Even the states of the Organization of the Petroleum Exporting
Countries (OPEC) are not immune: as a group, their per capita
GNP actually dropped from 1965 to 1998, according to one study.
The influx of ``easy money'' from other extractive natural
resource industries, like gold, copper, or gems, can similarly
thwart economic reform and devastate economies with primitive
fiscal regimes. Governments with authoritarian tendencies can
be insulated from domestic and international pressure by the
steady stream of extractive revenues, sometimes leading to
worse governance over time.
While the ``resource curse'' damages U.S. foreign policy
and humanitarian interests abroad, it also negatively impacts
Americans at home. Social unrest, buoyed by perceived injustice
in expenditure of oil revenue and use of oil as a currency of
conflict, destabilizes the reliability of oil supplies.
Resulting tightening of global markets and attachment of a risk
cost premium to oil price inflate prices at U.S. gas pumps and
result in a massive wealth transfer out of the United States
(see Appendix VII for the composition of U.S. crude oil imports
by country). Instability in the Niger Delta, which has shut-in
nearly as much oil as there is existing spare capacity in the
world, is a case in point of organized criminal and militant
activity weighing heavily on global oil prices. Actions to
support accountability, transparency and anti-corruption
efforts in developing countries with extractive industries such
as oil and gas could have a significant impact on the energy
market. Where there is instability, there are higher prices.
Foreign aid investments to support development in oil exporting
regions can help quell discontent and help assure a stable
energy supply.
The link between energy security, energy prices, and
transparency appears underappreciated within U.S. policy.
Because the resource curse threatens our own security,
economic and humanitarian interests, Senate Foreign Relations
Committee staff assessed the efforts to help remove it. Looking
at more than 20 countries around the world, staff found that
while there is greater awareness of the potential dangers from
sudden oil and other extractive industry wealth, progress has
been spotty at best. Ghana, a recent addition to the list of
resource rich countries with the discovery of significant oil
reserves beneath its coastal waters in 2007, is a country with
a clear view of the potential outcomes of such a discovery. The
situation in Ghana will be watched closely around the world to
see if forewarning of the pitfalls can serve to effect better
governance and cooperative international support in defense of
domestic development and economic growth.
To be sure, there is no simple cure, and without political
will by the exporting country, little can be achieved. The
hurdle for effecting change in several natural resource rich
countries is high. Governments flush with cash from spiking
commodity prices can be emboldened against reform. But where
leaders are ready to face the problem, outsiders can offer
important incentives and advice. One key prescription is to
promote strong anti-corruption measures and to press for more
openness or transparency in how much revenue extractive-rich
countries are receiving, and how they're spending it.
The World Bank and the International Monetary Fund have
both launched efforts to improve accounting and transparency of
extractive industry revenues, to make it harder for government
officials to hide corruption--and easier for citizens to demand
that the money be spent wisely.
Separately, a number of countries,\3\ led by Norway and
Britain, along with energy and mining companies and civil
society groups, have formed the Extractive Industries
Transparency Initiative (EITI), a voluntary program which aims
to certify that natural resource-rich countries, as well as all
the companies operating there, are honestly accounting for the
funds flowing into their coffers. The leaders of the G-8
industrialized countries at their July meeting in Japan
strongly endorsed EITI, as they have nearly every year since
2003.
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\3\ EITI's 11 supporter countries (Australia, Belgium, Canada,
France, Germany, Italy, the Netherlands, Norway, Spain, the United
States, and the United Kingdom) that have provided political, technical
and/or financial assistance and EITI's 23 candidate countries
(Azerbaijan, Cameroon, Cote d'Ivoire, Democratic Republic of Congo,
Equatorial Guinea, Gabon, Ghana, Guinea, Kazakhstan, Kyrgyzstan,
Liberia, Madagascar, Mali, Mauritania, Mongolia, Niger, Nigeria, Peru,
Republic of the Congo, Sao Tomee Principe, Sierra Leone, Timor-Leste,
and Yemen) intend to implement EITI criteria and await validation.
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Yet action falls short. In Vietnam, where 30% of the budget
comes from oil, the World Bank, the United States and other
major donors have made little effort to support extractive
industry transparency. Peru and Equatorial Guinea have signed
up for EITI, but major-country donors are not stepping forward
to strengthen those nations' capacity to manage massive oil
wealth. In Angola, which has the world's highest infant
mortality rate, the United States is terminating an assistance
program to help the country administer its oil billions.
Skeptical Indonesians asked why the United States has not
signed up for EITI.
Staff found an urgent need for concerted diplomacy and
assistance targeted at budget management, expenditure
accountability and reserves fund management. Donor coordination
in these areas is rare and current efforts focused at improving
economic performance frequently ignore the governance
implications of volatile resource income. And China, whose
state-backed companies have a large footprint in many
developing countries, has not yet engaged on these issues.
U.S. diplomats in several of the countries most threatened
by the resource curse are often starved for personnel and
resources. These limited means are often directed by Washington
toward humanitarian needs, leaving resource management issues
on the back burner.
Over time, extractive revenues will level off and
eventually dry up. For some small producers that drop in
revenue is in the near- to mid-term. It is critical that these
countries, with our help, act today to ensure that the revenues
are managed and invested wisely so that the people and their
future are not impoverished after earning billions in this time
of high energy prices. Based on the findings of their work,
staff has made a number of recommendations for action by the
various parties. Among them:
The United States should demonstrate leadership
internationally. It should sign up for EITI and provide
additional financial assistance to that organization's
international trust fund. This low-cost move would pay
large benefits by encouraging more developing countries
to follow. It should explicitly seek to engage China
and India.
The G-8 countries should require that their oil, gas and
mining companies publish country-by-country data on
their royalty, tax and other payments as part of
routine financial reporting, and encourage influential
credit rating agencies and commercial banks to take
explicit account of a country's transparency record.
The international donors who give aid to resource-rich
countries should focus their efforts on improving
revenue management and fighting corruption. Relatively
small amounts of aid money could thus help channel
large amounts of a country's own funds toward poverty
reduction.
The World Bank and the IMF, which make regular assessments
of country performance, should consistently reinforce
the importance of transparency and good governance. The
regional development banks should step up their efforts
on governance and anti-corruption in countries with
significant extractive industries.
The Extractive Industries Transparency Initiative's
secretariat, building on the lessons learned so far,
should provide more technical assistance to
underdeveloped countries that need help in implementing
anti-corruption measures. It should also be more active
in promoting and demonstrating the benefits of
transparency to both countries and companies.
Oil, gas and mining companies, which often express support
for the transparency agenda, should match their anti-
corruption rhetoric with action by voluntarily
disclosing more of their payments to countries where
they operate.
Most importantly, the United States, whose attention to
extractive industry transparency often appears sporadic
and half-hearted, should make this a top priority
throughout the administration, with the State
Department as the lead agency, coordinating closely
with Treasury and USAID. Embassies should develop
country-specific transparency advocacy strategies.
Minority staff found many encouraging anecdotes on the
benefits of improved transparency. However, there is not yet a
compelling body of evidence to prove the case that improved
transparency will bring improved governance and economic
development. Yet the negative impacts of lack of transparency
with the accompanying corruption and ineffectual usage of funds
are clear. It is also clear that the United States Government's
integration of transparency into foreign policy is in it's
initial stages. Innovative public-private partnerships and co-
funding with host governments show promise. Initial efforts
have been impinged by lack of personnel resources in several
embassies, inflexibility in funding, and insufficient
coordination among agencies. The potential of U.S. moral
support, bilaterally and in multilateral fora, is substantial
and will yield results only with the backing of diplomatic
resources.
Recommendations
Committee staff developed recommendations for the next
administration, Congress, the international community and
extractive companies to help nations fight the ``resource
curse'' and advance the U.S. policy aims of reducing poverty,
improving governance and securing our energy interests.
1) The President should put greater emphasis on
promoting extractive industry transparency by
developing a clear strategy and designating
responsibility for implementation of that strategy.
a) The President should outline a clear
strategy to drive our government's push for
extractive industry transparency from bidding
and contracts, through company payments to
governments, to budget transparency and
accountability of spending. Such a strategy
will necessarily draw upon expertise spread
across government agencies. The strategy should
identify the State Department as the lead
coordinating agency and the Bureau of Economic,
Energy and Business Affairs as the lead bureau
responsible for promoting extractive industry
transparency.
b) The President should lead by example and
have the United States become an implementing
country of the EITI. This move would pay large
benefits by encouraging more developing
countries to follow.
2) The Secretary of State should exercise more effort
on transparency issues, and build on international
momentum for extractive industry transparency at the
United Nations, at the EITI secretariat and through our
embassies.
a) The Secretary of State should elevate U.S.
representation to the EITI Executive Board to
the Under Secretary for Economic, Energy and
Agricultural Affairs. The U.S. has capable
representation but at a rank much lower than
the representatives from other countries, which
limits the ability of the U.S. to secure
change.
b) The Secretary of State should clearly
inform embassies of the importance of
transparency efforts and more vigorously
support such efforts in international fora. For
instance, besides simply voting for the
recently-passed EITI United Nations regulation,
the U.S. should have been a co-sponsor.
c) The Secretary of State should develop a
tailored extractive industry transparency
advocacy strategy, according to the conditions
in the host-country. Where appropriate, U.S.
Government representatives need to engage
directly with extractive country governments to
explain the benefits of increased transparency,
identify opportunities to promote change, and,
where appropriate, encourage them to sign onto
EITI.
d) The Secretary of State should review
personnel capabilities at embassies in natural
resource rich states and fill current lapses in
embassy staffing.
e) The Under Secretary for Economic, Energy
and Agricultural Affairs should regularly lead
coordination meetings of U.S. Government
agencies involved with extractive industry
transparency and should track agency actions
and results.
f) The United States should bolster its
support for EITI by immediately depositing its
$3 million contribution to the Multi-Donor
Trust Fund.
3) U.S. bilateral assistance in extractive countries
should be focused on good governance, transparency and
building civil society.
a) Our Ambassadors and country teams should
review their portfolios for critical
opportunities to build capacity in governance,
especially in revenue management, thus
leveraging the most valuable additional asset--
technical know-how--the U.S. can bring to bear
where financing is not the problem.
b) USAID, along with the Treasury Department
and other agencies, should emphasize technical
assistance for extractive industry transparency
in relevant countries, and EITI implementation
in countries that have signed up for the
initiative.
c) Coordination between country teams and
technical agencies in Washington should be
improved and mechanisms put in place so that
U.S. Government agencies are able to respond
promptly and effectively to requests for
technical assistance.
d) As Overseas Private Investment Corporation
(OPIC) is already doing, all U.S. foreign
assistance agencies (USAID, Millennium
Challenge Corporation, ExIm, etc.) should
integrate transparency promotion into their
oil, gas, minerals and timber programs,
projects and policies.
e) U.S. agencies should use public-private
partnerships to provide information technology
and training for platforms, such as
geonavigator and mineral mapping software, to
distribute information so that there would be
``no excuses'' for countries that profess to
want to disclose.
f) U.S. bilateral assistance should also
expand upon public-private partnerships to
engage experts in the private sector for
technical assistance.
g) U.S. bilateral assistance should build
upon co-funding arrangements for technical
expertise where host governments rich in
extractive revenues pay the bulk of costs for
such arrangements.
4) The Secretaries of State and Treasury should
engage China, India and Russia on transparency issues
generally and encourage them to become supporting
countries of EITI. Indian and Chinese companies are
securing extractives contracts around the world,
particularly in Africa. If they do not integrate
transparency into their operations, they could
undermine other international efforts.
5) The Securities and Exchange Commission and the
Treasury Department should encourage the International
Organization of Securities Commissions (IOSCO) to
develop consistent requirements for disclosure of
extractive payments by companies to governments so that
all the major stock exchanges require the same
information. They should also support an International
Accounting Standard for disclosure of extractive
payments to governments.
6) The international donors who give aid to resource-
rich countries should focus their efforts on improving
revenue management and fighting corruption. Relatively
small amounts of aid money could thus help channel
large amounts of countries' own funds toward poverty
reduction.
a) The World Bank and the International
Monetary Fund, which make regular assessments
of countries' performance, should be consistent
in assessment of countries' progress on
transparency compared to their own professed
benchmarks. They also should ensure that their
staffing at key posts reflects commitments made
to those governments in technical assistance on
improved financial governance.
b) The regional development banks should
integrate EITI into their operations. Not all
of the regional development banks have endorsed
EITI and, of those that have, few have fully
applied EITI principles in their projects. The
regional development banks should condition
loans on revenue disclosure and contract
transparency.
c) The International Monetary Fund should
consistently examine the transparency of
extractive industry revenues for all resource
rich countries in its Article IV reviews.
d) The International Monetary Fund should
actively engage and provide technical
assistance to resource rich countries to
implement the IMF sovereign wealth fund
guidelines.
7) The G-8 should show commitment to transparency in
action, not just words.
a) The 2008 G-8 report on its anti-corruption
accomplishments was a good start but it needs
to be done every year at a higher standard of
disclosure and contain commitments to improved
activity during the next disclosure period.
b) The U.S., in conjunction with the other G-
8 nations, should require that oil and mining
companies listed on their stock exchanges
publish country-by-country data on their
royalty, tax and other relevant payments as
part of routine financial reporting, and ask
credit rating agencies and commercial banks to
take explicit account of a country's
transparency record.
c) G-8 countries with significant extractives
industries should sign up for EITI which would
enhance the credibility of the initiative and
encourage other countries to join.
8) Congress should support mandatory financial
reporting requirements on a multilateral basis. This
could be done through the G-8, where repeated
endorsements of EITI and revenue transparency have not
been followed up with concrete action. The SEC could
seek to harmonize such reporting requirements among
major global stock exchanges through the International
Organization of Securities Commissions.
9) Congress should pass legislation requiring that
U.S. foreign assistance to extractive industry
dependent countries include significant support for
transparency.
10) Extractives companies, which have taken the
initiative in some countries but not others, should
step up their engagement to promote transparency and be
more proactive in public disclosure of revenue payments
to foreign governments. Oil and mining companies should
voluntarily disclose their extractives payments to
foreign governments. They should publicly endorse
transparency in bidding and contracts.
11) Oil and other extractives companies should
develop a reporting template for standardized
disclosure of payments to be adopted as a global
standard. Such a template could usefully be developed
in conjunction with the EITI Secretariat.
12) The EITI Secretariat should ensure clear criteria
at each stage of progression to avoid the appearance of
political favoritism in the implementation of EITI.
a) The EITI board should have a mechanism to
issue reports to the UN Security Council and
other appropriate bodies.
b) EITI should improve its efforts to clearly
delineate, to countries and companies, the
benefits of participation.
c) EITI needs to focus more on technical
assistance and make available to countries that
sign-up for EITI a package of technical
assistance to show good will and international
support for the countries' success through
EITI.
d) EITI must redouble its focus on
implementation. While much effort has been
dedicated to expanding the roll of EITI
countries, a few successful countries could
serve as concrete models for the gains EITI
could bring.
13) EITI certification criteria should resolutely
include reporting by state-owned extractive industries
companies. Credit rating agencies should make more
explicit the importance of transparency as part of
governance structures for indicating credit worthiness.
Discussion
the resource curse \4\
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\4\ The ``resource curse'' section draws heavily on a background
memo entitled ``The `Resource Curse': Literature Survey Paper Summary''
prepared by Danielle Langton and Nicolas Cook from the Foreign Affairs,
Defense, and Trade Division of the Congressional Research Service.
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Large amounts of national revenues accrued from the sale of
natural resources\5\ theoretically should generate wealth for
an economy, promote economic progress, and reduce poverty by
providing a source of investment capital for socio-economic
development. According to many studies, however, a majority of
countries that are rich in natural resources and highly
dependent on revenues from such resources, notably those in the
developing world, have experienced negative economic, social
development, and political trends. Surprisingly, they have
worse economic growth and poverty reduction records than many
peer countries that lack concentrations of natural resource
wealth. Furthermore, multiple empirical studies have documented
a wide range of negative correlations between development and
resource abundance, which collectively have been dubbed the
``resource curse.''\6\ The resource curse is the product of
multiple factors\7\ including:
\5\ See Mitchell Rothman, ``Measuring and apportioning rents from
hydroelectric power developments,'' World Bank Discussion Paper No.
419, July 2000; Lars Lindholt, ``On Natural Resource Rent and the
Wealth of a Nation A Study Based on National Accounts in Norway 1930-
95,'' Discussion Paper 281, Statistics Norway, August 2000; and Ahmad
Komarulzaman and Armida S. Alisjahbana, ``Testing the Natural Resource
Curse Hypothesis in Indonesia: Evidence at the Regional Level,''
Working Paper in Economics and Development Studies, No. 200602
Department of Economics, Padjadjaran University, August 2006, inter
alia.
\6\ Sometimes more generally known as the ``curse of plenty'' or,
in a term originated by academic Terry Lynn Karl, the ``paradox of
plenty,'' (The Paradox of Plenty: Oil Booms and Petro-States,
University of California Press, 1997.)
\7\ Sources consulted for the following summaries, which do not
reflect any of the country cases studies that are common in the
literature on the resource curse, include Paul Stevens, ``Resource
Impact: A Curse or a Blessing? A Literature Survey,'' International
Petroleum Industry Environmental Conservation Association (IPIECA),
March 2003; Jeffrey D. Sachs and Andrew M. Warner, ``Natural resource
abundance and economic growth,'' NBER Working Paper 5398, 1995; Indra
de Soysa, ``Empirical Evidence for the Resource Curse,'' Conference on
Transforming Authoritarian Rentier Economies, September; John James
Quinn, ``The effects of majority state ownership of industry or mining
on corruption: A cross-regional comparison,'' CSAE Conference Growth,
Poverty Reduction and Human Development in Africa, March 22, 2004; John
Bray and Leiv Lunde, ``Oil And Mining Revenues: From Curse To Blessing
For Developing Countries?,'' Challenges to Governments, Companies and
NGOs Occasional Paper No. 3/04; Thorvaldur Gylfason, ``Natural
Resources and Economic Growth: From Dependence to Diversification,''
CEPR Discussion Paper No. 4804, December 2004; Thorvaldur Gylfason and
Gylfi Zoega, ``Natural Resources and Economic Growth: The Role of
Investment,'' CEPR Discussion Paper No. 2743, March 2001; and
Thorvaldur Gylfason, ``Natural Resources and Economic Growth: What is
the Connection?,'' CESifo Working Paper No. 530, 2001, inter alia.
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Dutch Disease,\8\ an economic scenario in which revenue
inflows from a dominant export commodity cause the
exchange rate to appreciate, making imports cheap, and
undermine domestic production and economic growth by
decreasing relative competitiveness
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\8\ Dutch Disease is an economic problem named after a decline in
the Dutch manufacturing sector in the 1970s following a rise in gas
exports beginning in the 1960s.
Crowding out of factors of production (land, labor,
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capital) by a dominant commodity export industry
Enclave development, in which a dominant industry, such as
an oil or mineral sector, develops independently of the
wider economy, and does not breed cross-sectoral
growth, diversification, or investment.
Long term declines in national terms of trade due to
dependence on revenues from a dominant export commodity
in a context of static or declining prices for the
commodity, or declining production yields.
Attempts to boost ailing domestic industries in commodity-
dependent countries with low levels of economic
diversification by enacting uncompetitive or otherwise
ineffective industrial policy responses using such
tools as import substitution, subsidies and trade
protectionism. These policy responses cause domestic
industries to become even less competitive and decline
further.
The negative effects of commodity price and revenue
volatility on incentive structures related to policy
and investment decision-making and consumption
patterns.
Increases in state borrowing using future national natural
resource wealth as collateral, often involving the
expenditure of disproportionately large amounts of
credit to meet short term needs.
Growth of often ineffective, state-centric economic policy-
making when there is access to large extractive
industry revenues.
Increases in incentives for corruption and political rent-
seeking when large commodity revenue streams are
available.
Opaque contracting and market processes in extractive
industries, especially in the oil sector, spur and
enable corruption and political rent seeking related to
natural resource revenues.\9\
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\9\ See Terry Lynn Karl, ``Transparency of Extractive Industries:
High Stakes for Resource-Rich Countries, Citizens and International
Business,'' Testimony before the House Committee on Financial Services,
October 25, 2007; Ian Gary and Terry Lynn Karl, Bottom of the Barrel:
Africa's Oil Boom and the Poor, June 2003; Global Witness, Time for
Transparency: Coming Clean on Oil, Mining and Gas Revenues, March 2004
and A Crude Awakening: the Role of the Oil and Banking Industries in
Angola's Conflict, December 1999; Save the Children, Beyond the
Rhetoric: Measuring Revenue Transparency--Home Government Requirements
for Disclosure in the Oil and Gas Industries, March 2005; and Revenue
Watch, Following the Money: A Guide to Monitoring Budgets and Oil & Gas
Revenues, November 2004, inter alia.
Political commentators in the media have also identified
undesirable consequences of resources wealth. Many, for
instance, partially attributed Russia's August 2008, military
incursion into Georgia to Moscow's new-found ability to act in
defiance of international opinion thanks to its oil and gas
revenues. Thomas Friedman of the New York Times has argued that
there is an inverse correlation in developing countries between
oil income and democracy. He wrote that ``a whole group of
petrolist states with weak institutions or outright
authoritarian governments will likely experience an erosion of
freedoms and an increase in corruption and autocratic,
antidemocratic behaviors. Leaders in these countries can expect
to have a significant increase in their disposable income to
build up security forces, bribe opponents, buy votes or public
support, and resist international norms and conventions.'' \10\
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\10\ Thomas L. Friedman, ``The First Law of Petropolitics,''
Foreign Policy May/June 2006.
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While the proportion of countries experiencing such a curse
is high, a small number of natural resource-rich countries have
successfully been able to use natural resource revenues for
social investments and policy initiatives that have generated
markedly positive socio-economic development, which some have
dubbed the ``resource blessing.'' Those countries typically had
a strong government structure, oversight mechanisms, rule of
law and active civil society before discovering or exploiting
their natural resource.
The oil shock of the early 1970's focused attention on the
development prospects of oil exporting countries in a context
of high oil prices and demand. Later research focused on the
impact that large windfall revenues from oil, gas, and mineral
revenues had on governments' behavior. When such windfall
revenues were available, governments often appeared to take
actions that damaged growth and development prospects, and
produced regressive public resource allocation outcomes. In
many poor, developing countries, such negative effects appeared
pervasive and strong, and were often accompanied by
increasingly authoritarian and elite-controlled governance,
state ineffectiveness, rises in military spending, and in some
cases increased conflict, sometimes including civil
conflicts.\11\
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\11\ Such conflicts were alleged to be spurred by contestation over
control of national resource wealth; by suppression of political
opposition by elites currently in control of the state and its
revenues; by discontent over environmental damage caused by resource
extraction activities; and by opposition by indigenes of regions where
the resource is extracted to the transfer of resulting earnings to
other parts of the producing country or to its political elites. Such
conflicts are seen as undermining development because they tend to be
economically regressive and absorptive of resources that might
otherwise be invested in economic development and poverty reduction.
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Increasingly, concern over resource curse effects became
the focus of policy reform research and advocacy efforts aimed
at assessing the impact of large extractive industry projects
on host countries and identifying ways to mitigate potential
negative macro-economic and development consequences. With
attention to such issues on the rise, many firms began to seek
to ensure that their investments and reputations would be
viewed as ethical, and to assess whether resource curse effects
might pose an inherent threat to the economics of their
investment projects. In light of the recognition that the
resource curse was either possible or likely in countries on
the brink of receiving large-scale extractive industry
revenues, the international financial institutions (IFI's) and
donor governments began to support various institutional,
legal, and other measures to prevent or mitigate the resource
curse effects in such countries. These measures also aimed to
prevent or mitigate potential damage to or poor returns for
donor-backed investment projects.
THE TRANSPARENCY CURE
There is no simple cure for the resource curse, and absent
political will by the government of the exporting country,
little can be achieved. But if leaders are willing, or can be
persuaded, to address the issue, economists, policy reformers
and the international financial institutions have offered a
number of promising prescriptions, most of them based on the
principle of transparency. Azerbaijan and Nigeria serve as
examples of the importance of political commitment to improved
transparency. Political commitment of their presidents has
facilitated institutionalization of organizations having
positive impacts.
Extractive industry transparency runs from the issuance of
contracts to extract oil, gas and minerals, through payments
from companies to governments, and on to transparency of
government management of the proceeds. The premise of
transparency promotion is that a small amount of money can be
leveraged by donor governments to ensure that large amounts of
money in government coffers are used prudently.
In several countries that staff visited, the rewards of
donor-driven transparency efforts were evident. For example in
Peru, USAID and the World Bank have partnered in a $450,000
program to bolster technical capacity for EITI and the broader
transparency agenda; with the recent availability of Ministry
of Finance budget figures online, a wellspring of support was
created for a massive crackdown on public corruption.
Since the passage of the Foreign Corrupt Practices Act,
transparency in the dealings of U.S. businesses abroad has been
seen to be aligned with long-term U.S. national security and
economic interests. Likewise, transparency in extractive
industries abroad is in our interests because mineral wealth
breeds corruption, which dulls the effects of U.S. foreign
assistance; inequitable distribution of mineral revenues
creates civil unrest, threatening political and energy
instability and adding a price premium to commodities such as
oil and gas; and energy rich countries can become emboldened
militarily.
Staff found that a strong case can be made that
transparency is in the interests not only of the donor
community but also of international companies operating in
developing countries and of the developing countries
themselves. U.S. energy companies benefit when contract and
revenue transparency is required in countries of operation.
American oil companies often have the best technical
capabilities and operate most efficiently. With a level and
transparent playing field, they will have an advantage over
firms that resort to shadowy accounting or corrupt practices to
gain a foothold in a country of operation. In fact, corrupt
firms not subject to international accounting standards have
the most interest in maintaining non-transparent operating
environments. Moreover, civil unrest can pose a serious threat
to the profits of international and national oil companies, as
has happened in the Niger Delta for years.
For resource rich countries, a transparent operating
environment should also be a matter of self-interest. A good
business climate attracts foreign direct investment and can
lower the cost of market capital. These countries will also be
eligible to secure attractive project financing from the World
Bank. Most of all, transparency helps diminish the chances of
civil unrest. However, host governments are often unfamiliar
with what is required to ensure extractive industry
transparency. As staff witnessed, some resource rich developing
countries are not stepping up to the plate for EITI. In fact,
several countries that seem to have the highest risk are the
most reluctant to sign-up. Staff repeatedly heard country
officials cite their lack of capacity to implement transparency
reforms as their reason for avoiding the EITI program.
For example, transparency may be the single most powerful
weapon the Government of Iraq has to combat its pervasive,
systemic corruption. Stability in Iraq depends on denying
terrorists safe haven, strengthening the institutions of state
to ensure territorial and regional stability, and uniting and
reconciling the country's internal divisions. Oil is an
absolutely essential lynchpin in reaching these objectives.
But, it must be shared equitably and used to the benefit of all
Iraqis or it will cause further strife.
In principle, better governance and less corruption thanks
to greater transparency should result in a more favorable
investment climate, improved fiscal management and ultimately
better economic performance. While some interlocutors offered
anecdotal evidence to support such reasoning, at this early
stage in the progress of extractives transparency, it is
difficult to find conclusive empirical data showing that
greater transparency for resource rich countries leads to
higher GDP growth. However, it is clear that transparent
countries have better credit ratings and pay lower interest
rates as a result. Staff noted that anecdotal evidence
indicates that transparency is positively correlated with
development indicators such as life expectancy and infant
mortality.
THE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE \12\
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\12\ Most information from EITI documents or website, except for
that on the U.S. role in EITI, which is based on previous CRS research
and a conversation with a State Department official.
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The major international transparency effort is the
Extractive Industries Transparency Initiative (EITI) which aims
to strengthen governance by improving transparency and
accountability in the extractives sector. The EITI sets a
global standard for companies to publish what they pay and for
governments to disclose what they receive.\13\
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\13\ EITI website http://eitransparency.org/
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EITI is an effort initiated by the United Kingdom in 2002
following advocacy efforts by a non-governmental effort called
the Publish What You Pay campaign. This campaign seeks the
mandatory disclosure of taxes, fees, royalties and other
payments by oil, mining and gas companies to governments. The
objective of EITI is to encourage and aid efforts by
governments to require the public release of accurate
information regarding all types of such extractive industry
state revenue receipts. EITI efforts seek to achieve that goal
for all countries rich in extractive industry commodities like
oil and gas, particularly those in the developing world. EITI
also seeks to encourage other countries to endorse, fund, or
otherwise support such efforts.
Key EITI goals are to promote public fiscal transparency
and political accountability; prevent revenue-related
corruption; promote the prudent use of national natural
resource wealth to support sustainable economic growth,
development, and poverty reduction; and avoid negative socio-
economic impacts resulting from mismanagement of such wealth.
EITI's revenue data release requirement is intended to provide
citizens and civil society groups with basic but crucial
information necessary to effectively monitor government
stewardship of natural resource revenues; hold decision-makers
accountable for the use of public funds; prevent various
``resource curse''-related phenomena; and signal investors that
a given country offers a transparent, rule of law-based
business environment. EITI also supports efforts to establish
and foster partnerships between governments, civil society, and
the private sector in EITI signatory countries in order to
ensure cooperation and effective, shared efforts by these
stakeholders to achieve accountability.
Operation. Members of the EITI are governments, companies,
civil society groups, investors and international
organizations. The primary mechanism for implementing EITI is a
voluntary agreement signed by a country to abide by EITI
principles and criteria contained in the EITI Validation Guide.
Once a country voluntarily signs on, reporting by all
extractive companies operating in that country becomes
mandatory.
A signatory country must implement four sign-up criteria as
certified by the EITI Board. It must formally commit to
implement EITI goals, work with civil society, and private
sector stakeholders to meet those goals, and appoint an EITI
country implementation leader. It must also produce an
implementation Work Plan approved by a country's EITI
stakeholders and issue certain other documents. It then becomes
a Candidate country. There are currently 23 EITI candidate
countries: Azerbaijan, Cameroon, Cote d'Ivoire, Republic of
Congo, Democratic Republic of the Congo, Equatorial Guinea,
Gabon, Ghana, Guinea, Kazakhstan, Kyrgyzstan, Liberia,
Madagascar, Mali, Mauritania, Mongolia, Niger, Nigeria, Peru,
Sao Tome and Principe, Sierra Leone, Timor-Leste, and Yemen.
A Candidate country has two years to fully implement all
EITI requirements and processes listed in the Validation Guide.
Core requirements are that a Candidate country government
appoint a credible, independent administrator; publish and
disseminate information on all state revenues from the oil, gas
and mining sectors; and substantively engage with its national
stakeholder group. If it is certified or ``validated'' by an
EITI Validator\14\ as having fulfilled these goals, it then
becomes an EITI Compliant country. To remain compliant, it must
continue to implement EITI validation procedures and attempt to
improve its EITI and resulting transparency processes by
implementing lessons learned during validation.
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\14\ A firm selected from a small pool of qualified firms that were
chosen by the EITI Board through an international competitive bid
process in 2007. There are currently seven qualified Validators.
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No countries have been validated by EITI yet, though there
is expectation that Azerbaijan and Nigeria will be validated in
the next year.
Organization and Funding. The EITI process is supported by
a small Secretariat headquartered in Oslo, Norway and is
accountable to the EITI Board. It is made up of a head, four
policy advisers, a communications manager, an executive
secretary, and a three person administrative support staff. The
Secretariat oversees implementation activities generally and
provides advice to and consults with implementing countries;
houses and disseminates information about EITI, country
compliance activities, and the implementation process; and
promotes revenue management and transparency practices. In
September 2006, an ad hoc entity, the EITI International
Advisory Group (IAG), presented a range of policy
recommendations on promoting EITI, assessing EITI country
compliance, and creating EITI processes and organizational
structures and functions. One recommendation was that the
initial Secretariat staff serve for up to three years, for a
term ending in October 2009. If taken up, it is unclear what
will happen to the Secretariat.
EITI is financed, in part, through a World Bank-
administered, primarily donor government-supported Multi-Donor
Trust Fund (MDTF). The activities funded by the MDTF are
approved by a Management Committee made up of the World Bank
and DTF-funding governments that have provided over $0.5
million to the MDTF. The MDTF supports efforts by implementing
countries to meet the EITI criteria, although such countries or
their bilateral donors must fund their own EITI activities
wherever possible. EITI principles are also being promoted in
World Bank country programs generally. The EITI Board meets
several times a year to consider and recommend EITI procedures
and strategies for consideration by the biennial EITI
Conference. The Board also oversees and directs the Secretariat
and assesses the EITI compliance status of implementing
countries and firms. Its members are chosen by the EITI
Conference based upon proposals from EITI implementing and
donor countries, and civil society groups and private sector
entities party to EITI.
United States support for EITI has included repeated pushes
for it to be taken up in G-8 forums (on G-8 commitments, see
below) and in bilateral diplomatic engagement advocates that
countries participate, endorse, or fund EITI. On occasion, the
U.S. helps countries undertake steps to comply with EITI
requirements. The United States also participated in the EITI
International Advisory Group (IAG).
The United States is an active member of the EITI Board,
but has not funded the activities of the EITI secretariat or
contributed to the MDTF. Thus, it is not a member of the MDTF
Management Committee and has no influence over the distribution
of the trust's funds. That may change in FY 2008 because the
State Department plans to provide $3 million in Economic
Support Funds (ESF) to the MDTF, in compliance with the joint
explanatory statement accompanying P.L. 110-161.
In FY 2006 and FY 2007, respectively, the United States
allocated $1 million in bilateral economic support funds (ESF)
for use in assisting countries to implement EITI. The United
States also funds a wide range of other transparency and
accountability efforts that may support EITI goals, but are not
necessarily dedicated specifically to EITI implementation.
Within the Board, key U.S. goals are to ensure that the
Secretariat focuses on assisting Candidate countries to undergo
EITI validation and become Compliant counties and that it not
engage in ``mission creep'' activities, such as broadening the
types of commodities (e.g., tropical forest wood) covered under
EITI. A second goal is to work with the Secretariat to define a
set of recommended legal documents and structures that would
govern and more clearly define the roles of various EITI
entities.
EITI currently lacks a charter and formal legally binding
rules. This makes it difficult for the U.S. delegate to the
Board to formally undertake some functions, such as
participating in the ``direction'' or governance of the
Secretariat when acting as a member of the EITI Board, due to
U.S. legal requirements that govern U.S. participation in
international organizations. Establishing a charter would also
clarify the roles and relative powers regarding EITI governance
matters held by the Board and the Secretariat. Also, U.S.
representation at the EITI board is at a lower level than other
board members. These factors give the U.S. an arms-length
relationship to EITI that contributes to the perception that
the United States is a reluctant participant in the extractives
transparency movement generally.
A common criticism of EITI is that it only addresses
revenues from extractive companies to governments and is not
useful in ensuring that revenues are not lost to corruption or
ineptitude after they are received by the government. Staff at
the EITI Secretariat are sensitive to this criticism but say
that, while their program may not be the full answer to
extractive industry transparency, it is a critical part of the
solution.
Now that a number of countries have signed up for EITI,
committee staff believe that the EITI Secretariat should focus
more on the actual implementation of EITI. Staff recommends
that the Secretariat develop a standardized disclosure
procedure so that EITI country information is comparable. This
would enable international companies to set up consistent
systems and would prevent resource-rich countries from having
to ``reinvent the wheel'' by setting up country specific
disclosure procedures.
In general, staff was surprised that in a number of
resource-rich countries, there was not enough information about
the benefits of extractive industry transparency and little
awareness of EITI within governments, some U.S. embassies, and
with bilateral donors. A senior minister in one country
remarked that he thought G-8 members had given up on EITI since
they did not talk about it anymore.
UNITED STATES
The United States government, at the G-8 and in other fora,
formally supports the EITI and other transparency and anti-
corruption measures, such as the OECD anti-bribery convention
and the U.N. Convention Against Corruption. One of the five
``key objectives'' for U.S. foreign assistance is to ensure
that recipient countries are ``governing justly and
democratically,'' which for developing countries means that
foreign aid is directed to ``support policies and programs that
accelerate and strengthen public institutions and the creation
of a more vibrant local government, civil society, and media.''
Through USAID and other agencies the U.S. funds programs
related to good governance, rule of law, capacity-building for
fiscal management, etc. And the United States has for 30 years,
under the Foreign Corrupt Practices Act, outlawed bribery of
foreign officials by American corporations even while, for much
of that time, European firms were allowed to write off bribes
as a regular business expense. Most recently, in the summer of
2008 the State Department, under a provision of the FY2008
State appropriations bill, issued new guidance to embassies to
revoke or deny visas to high-level foreign officials involved
in extractive industries corruption. In September 2008, the
U.S. voted for a pro-EITI resolution at the United Nations.
Nonetheless, staff found that U.S. Government attention
overseas to ``resource curse'' matters is sporadic, and that
support for extractives transparency measures often appears
half-hearted. At the State Department, there is no clear
direction from the top to make the issue a priority. Staff
found, for instance, that in some countries, including
Cambodia, and Nigeria, U.S. embassy and AID personnel were
actively promoting EITI and other anti-resource curse measures,
while in other countries U.S. engagement on these specific
issues was absent. For example, transparency is critically
important in Equatorial Guinea, yet the United States has
extremely limited personnel and financial resources dedicated
to the issue. Meanwhile, directed funding--often to specific
programs--reduces flexibility to respond to transparency-
promoting opportunities and frequently distracts the attention
of our embassies.
The U.S. representative on the EITI board is the State
Department's Director of the Office of International Energy and
Commodity Policy while other countries send representatives two
or more ranks higher, at the level of deputy assistant
secretary. Rank matters in international diplomacy, as does
ability to demonstrate management authority over a breadth of
issues in the area, such as budgeting and revenue management.
Staff found unpersuasive State's argument that a higher-level
official would not give EITI sufficient attention. At the EITI
board, the U.S. has concentrated on what outsiders consider
arcane legal issues rather than more substantial matters, such
as technical assistance for countries seeking to implement the
reporting and accounting requirements.
The U.S. only recently committed to donate to the EITI
Multi-Donor Trust Fund at the World Bank, and there is some
perception that until 2005, the Bush administration was
dragging its feet on EITI because of oil company opposition.
Following a legislative directive to deposit $3 million with
the EITI Multi-Donor Trust Fund, the Senate Foreign Relations
Committee received a notice on July 31, 2008 from USAID stating
its intention ``to obligate $2,976,000 in FY 2008 ESF to
contribute to the Extractive Industries Transparency Initiative
(EITI) Trust Fund.'' The committee has expressed strong support
for this funding.
Similarly, the U.S. appeared reluctant at the United
Nations, where a resolution was introduced in support of EITI,
which its backers hope will have a similar impact to the U.N.
resolutions supporting a certification system for ``blood
diamonds'' that helped lead to the successful Kimberley
Process. The U.S. voted for the resolution in September 2008,
when it was passed, but did not join Britain, Italy, Germany
and France (among others) as a co-sponsor. Deputy Secretary of
State John Negroponte, in an earlier communication informing
the committee that the U.S. would vote in favor, gave no
specific reason for declining co-sponsorship. In a separate
communication with the committee, State officials called the
resolution ``premature'' and not ``useful.''
The U.S. has supported the repeated G-8 endorsements of
EITI, but follow-up has been weak. The recent ``Accountability
Report: Implementation Review of G-8 Anti-Corruption
Commitments'' details U.S. support for a number of good
governance and transparency initiatives at the World Bank and
other development banks, and notes the anti-corruption
component in many of the Millennium Challenge Corporation's
activities. But with respect to EITI, it states only, ``The
United States provided a total of $990,000 in FY06 funds to
support civil society participation in EITI implementation in
Peru, Nigeria, and the Democratic Republic of Congo, and FY07
funding provides for approximately the same level of support.''
Some elements of the government have wholly embraced
extractives transparency. The Overseas Private Investment
Corporation (OPIC), for instance, signed on to EITI principles
in 2006 and incorporates EITI into its project selection and
design. It will not, for example, finance a project if the host
country prohibits disclosure of revenues and contracts.
Although only a handful of OPIC's projects are in the
extractives field, staff found OPIC to be an excellent example
of how U.S. agencies should be integrating EITI.
Staff found that the Treasury Department's Office of
Technical Assistance (OTA) has made important contributions to
transparency efforts and has potential for greater reach.
Funded partially by Treasury funds and partially by other U.S.
assistance programs, OTA helps host governments improve
financial management, develop clear budgeting procedures, and
in general build the populace's confidence in government fiscal
processes. It sends resident advisors to work directly in a
ministry of finance to develop the needed systems and
procedures. Staff found that this could be highly useful for
resource-rich developing countries needing assistance in
managing and accounting for revenues. While OTA has worked in
such countries as Chad, Nigeria and Azerbaijan, it does not
have a specific focus for extractive industry countries. Staff
found several constraints on OTA advisors doing more work in
extractive industry countries, including a small budget and
difficulty in finding countries with sufficient political will
and commitment to undertake recommended reforms. The biggest
single constraint appears to be that neither OTA nor the
Treasury Secretary has made extractives transparency a
priority. Doing so would raise the U.S. profile on the issue
and contribute to U.S. policy objectives of reducing resource-
related corruption, enhancing the effectiveness of U.S. foreign
aid, and improving energy security.
Staff identified a number of other government agencies that
have international programs that could be brought to bear on
various parts of the extractives ``value chain.'' For example,
the U.S. Geological Survey helps assess world-wide deposits of
non-fuel minerals, helping to make the global market more
transparent; the Minerals Management Service provides foreign
technical assistance on oil leasing procedures and revenue
management; and the U.S. Forest Service provides assistance to
countries combating illegal logging through such means as
satellite monitoring and wood certification. However, staff
found that these various programs are undertaken with little
coordination or strategic direction, and few officials involved
in them had even heard of EITI, much less used it to inform
their policies. Staff found that neither the State Department
nor USAID nor the Treasury Department nor the National Security
Council has the lead on extractives transparency. Staff found
that without more forceful and vigorous direction, U.S.
progress in battling the resource curse, improving energy
security and enhancing global stability will fall short of its
potential.
During their travels, staff also heard many foreign
officials ask why the United States itself has not signed up to
have its considerable oil and gas revenues (the U.S. is the
world's third largest oil producer) ``validated'' by an outside
party as the developing countries are required to do under
EITI. Technically, the United States is not a ``resource rich''
\15\ extractive industry country because extractives revenues
make up a relatively small part of its government revenues and
exports. Because EITI involves some infringement of
sovereignty, such skepticism is to be expected. Staff were
further told that even some countries which have signed up for
EITI feel it is being imposed upon them by the West, which
doesn't play by the same rules.
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\15\ Definition of Resource Rich: 1) average share of hydrocarbon
and/or mineral fiscal revenues in total fiscal revenues at least 25%
over the period or 2) average share of hydrocarbon and/or mineral
export proceeds in total export process of at least 25%. Source IMF
(2007) Guide on Resource Revenue Transparency, Appendix I
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Staff found that compliance with EITI's reporting
requirements should be fairly easy because the U.S. Government
already collects and publishes nearly all the required data.
Bureau of Land Management and Minerals Management Service (MMS)
officials said that all the terms of leases are published,
including royalty release clauses, all bids, including losing
ones, are released, flow data is published, and even
proprietary seismic studies are made public after 25 years.
Compared to other countries, very little is kept secret in U.S.
oil leasing, MMS said. Providing that the agencies involved
would not have to change any of their procedures, submitting
tallies in EITI's revenue categories would be inexpensive. By
voluntarily agreeing to go through the EITI validation process,
the U.S. could take a very low-cost step that would pay large
transparency benefits. It would be an important example to
developing countries, demonstrate that the U.S. is willing to
do what it is asking of others, defuse the charge that it is
discriminating against poor countries, raise the U.S. profile
regarding the transparency agenda, enhance EITI's credibility,
and ultimately support reformers in developing countries who
want to bring their nations under the EITI regime.
MANDATORY SECURITIES REPORTING
United States and multilateral efforts to promote
extractive industries transparency are intended to work within
the bounds of the political will and technical capacity of the
resource-rich countries. With their revenue windfall, some of
these nations are increasingly intransigent in resisting
outside pressure. This has led some to urge that the U.S.
should take steps domestically to promote transparency
overseas, much as the Foreign Corrupt Practices Act was U.S.
domestic legislation to thwart corruption abroad. One such
proposal is to mandate revenue reporting for companies listed
with the Securities and Exchange Commission and working in
extractives abroad.\16\
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\16\ In mid-2008, members of the Publish What You Pay Coalition
proposed to "strengthen" the voluntary element of extractive industries
revenues reporting with a mandatory reporting requirement on oil
companies. Under legislation they helped draft which was introduced in
the House by Rep. Barney Frank (D-MA) as H.R. 6066 and in the Senate by
Senator Charles Schumer (R-NY) as S. 3389, all oil, gas and mining
companies, American and foreign, with securities listings in the United
States would be required to report their payments to foreign
governments as part of their regular filings with the Securities and
Exchange Commission.
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Backers of EITI, particularly the extractive companies,
have long stressed the virtue of its voluntary nature.
Countries are persuaded to join and to submit their books to
outside review because it is in their self-interest to do so,
not because the developed countries or the IFIs punish them if
they do not. (EITI ``candidate'' countries require all
extractive companies operating on their territory, including
their own national oil companies, to report revenue, and so far
no oil company has refused to comply.) A small number of
international oil companies, notably BP and Norway's Statoil,
report country-by-country payments even where it is not
required.
Those who support a mandatory reporting strategy argue it
would expand the benefits of transparency and disclosure to
countries currently outside EITI and other voluntary
initiatives and would provide useful information to investors.
These claims have some merit. Experience with the Foreign
Corrupt Practices Act is instructive. After the U.S. Government
issued written guidelines for company behavior under FCPA,
industry representatives reported that it strengthened the hand
of those firms who sought to resist pressure for payoffs or
other corrupt acts from host governments and officials. And in
general, host governments have not seen this U.S. domestic
legislation as violating their sovereignty. In a global
environment in which oil and gas resources are coming under
increased state control, promoting revenue transparency as a
key element of improved governance may also prove useful for
investors, as evidenced by this being one component of credit
rating scores. Proponents of the SEC approach also claim it
would not be burdensome because the companies should have the
data readily at hand, nor would it be competitively
disadvantageous to U.S. firms since a large number of foreign
energy and mining companies have or are seeking U.S. listings.
However, staff found that others have reservations about
the mandated SEC approach, and in some cases flatly oppose it.
Two principal concerns emerged. First, the number of foreign
companies covered is not as broad as supporters say, leading to
a situation in which U.S. firms are at a competitive
disadvantage. More important from an anti-corruption
perspective, it could encourage corrupt governments to seek
contracts with firms not covered by the legislation, in effect
driving the more transparent companies from the field. Some
foreign firms could simply delist rather than comply. Second,
some believe that such a requirement would undermine rather
than strengthen EITI (one interlocutor said it would ``kill
EITI.'') They argue that producing countries would react
negatively to this forced disclosure as an infringement on
their sovereignty. They would see it as violating the voluntary
aspect that is at the core of EITI and walk away from the
initiative.
Staff concluded that establishing mandatory reporting
requirements on a multilateral basis would be preferable to the
United States doing so unilaterally, providing it is clear that
it would not undercut EITI. This could be done through the G-8,
where repeated endorsements of EITI and revenue transparency
have not been followed up with concrete action. The SEC could
seek to harmonize such reporting requirements among major
global stock exchanges through the International Organization
of Securities Commissions.
ADDITIONAL MULTILATERAL EFFORTS
Extractive Industries Transparency Initiative Plus Plus (EITI ++)
Building on EITI's revenue transparency agenda, the World
Bank has sponsored a program called EITI++ which is designed to
cover the entire breadth of the resource chain, from
extraction, to other stages such as processing, managing
revenues, and promoting sustainable and efficient utilization
of resource wealth. EITI ++ seeks to support committed
governments, notably in Africa, in implementing good policy and
practice throughout the whole process of natural resource
utilization.\17\
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\17\ http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/
0,,contentMDK:21727813pagePK:64257043piPK:437376theSitePK:4607,00.html
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EITI++ would address criticism that EITI is focused on only
one part of the revenue chain--company payments to governments.
However, the name EITI++ has generated confusion about how it
will work with EITI. Such confusion is understandable, since
the World Bank's EITI++ program is not at all related to the
EITI organization. Some countries have wondered if it is worth
signing up for EITI given that EITI++ is being launched.
Staff universally considered the revenue-reporting element
of EITI as limited and the potential value of broadening EITI
to include the elements of EITI++ as an essential next step in
achieving the intended improvements in governance and outcomes
for developing countries.
G-8
While the G-8 cannot directly impose honest government,
their actions to support accountability, transparency and anti-
corruption efforts in developing countries with extractive
industries such as oil and gas could have a significant impact
on the energy market. Where there is instability, there are
higher prices. Foreign aid investments to support development
in oil exporting regions can help quell discontent and help
assure a stable energy supply. While the G-8 has made more than
twenty transparency commitments over the past five years, there
is a clear failure to implement. Rhetoric without action is not
sufficient for responsible diplomacy or policy.
In order to maintain credibility, the G-8 countries must
meet the very standards that they press for the world. Russia
is the only G-8 country reliant on extraction of oil and gas
for a significant part of its economy. While Russia, as a G-8
member, has supported the extractive industry transparency
initiative (EITI), it has failed to enlist. Some in Russia have
argued that the country does not participate in EITI because
the initiative is mainly for developing countries while others
note that, given Russia's status, EITI should be a reasonable
standard that it could reach and surpass.
In fact, the rest of the G-8 should also sign up for EITI
and subject themselves to the transparency required. As
discussed in the United States section of this report, given
the level of disclosure already practiced in the United States,
that would be an easily achievable goal.
The G-8 issued an accountability report on their anti-
corruption efforts following the 2008 Summit that serves as an
initial step towards transparency, which should be expanded and
given much greater detail in the future. It is hardly
comprehensive, and its lack of detail makes it hard for
parliaments and civil society to hold their leaders to task.
As noted in the mandatory reporting discussion of this
report, the G-8 countries should develop harmonized listing
requirements for extractive companies to disclose their
payments to governments. Also, G-8 financial regulators could
encourage influential credit rating agencies and commercial
banks to take explicit account of a country's transparency
record in making their evaluations of credit-worthiness and
sovereignty risk.
International Monetary Fund
The International Monetary Fund (IMF) first published the
Guide on Resource Revenue Transparency (the IMF Guide) in 2004
as a supplement to its other publications on fiscal
transparency, the Code of Good Practices on Fiscal Transparency
(the IMF Code) and Manual on Fiscal Transparency (the IMF
Manual). The purpose of the IMF Guide is to provide more
specific guidance to countries that are rich in natural
resources so that they can implement the practices on fiscal
transparency described more generally in the other volumes. The
IMF Guide focuses on natural resource revenues because they
tend to be large and more complicated than other types of
revenue and are often associated with poor governance and weak
economic growth. Furthermore, the IMF Guide is used as a
framework for the IMF to assess fiscal transparency in
resource-rich countries under the Reports on the Observance of
Standards and Codes (ROSCs). The IMF and the World Bank
undertake ROSCs, at the request of member countries, to
summarize the extent to which they observe certain
internationally recognized standards and codes. Fiscal
transparency is one of twelve areas in which ROSCs are
performed.
The IMF Guide provides detailed fiscal transparency ``best
practices'' for resource revenue management, including examples
of national experiences. It also discusses work being done by
other international agencies, including the EITI, and
incorporates this work into its recommendations. It closely
follows the format and prescriptions of the IMF Code. It is
really an expansion of the Code as regards natural resource-
specific issues.
Like the IMF Code, the Guide is broken down into four main
parts. These address: (1) clarity of roles and
responsibilities; (2) open budget processes; (3) public
availability of information; and (4) assurances of integrity.
EITI figures heavily into the third part, public availability
of information. The first part, clarity of roles and
responsibilities, focuses on the legal framework governing the
relationship between the government, national resource
companies (NRCs), and international companies. It offers
guidance for the basic legal framework, including the
allocation of resource rights, tax and revenue issues,
ownership of NRCs, and intra-government revenue sharing. In
each case, countries are encouraged to proceed with the
specific laws that work best under their existing legal
framework, but they are also encouraged to make the laws
transparent, simple, and leave little or no room for
discretion. The second part, open budget processes, recommends
transparency of budget processes, integrating any resource-
related funds into the overall fiscal policy framework, and
planning to smooth the impact of volatile revenue flows to
ensure long-term fiscal stability.
The IMF Guide is designed to be a key resource guiding
governments' reporting on financial matters beyond current
revenue transactions (the purview of EITI) including spending
of such revenue, resource reserves, and debt against resource
collateral. The Guide describes the EITI criteria and reporting
requirements in this section, and also gives examples of
countries that have adequate resource revenue transparency
outside of the EITI, such as the Chilean mining industry. The
fourth and final part, assurances of integrity, examines some
requirements for establishing good practice in areas such as
data quality, internal controls, and independent external
audit.
Adherence to the IMF Guide is tracked through the ROSCs on
fiscal transparency. As of March 2007, the IMF had performed
fiscal transparency ROSCs on 86 countries, or about half of its
members. The following resource-rich countries\18\ have had a
fiscal ROSC published on the IMF website: Algeria, Azerbaijan,
Cameroon, Colombia, Equatorial Guinea, Gabon, Indonesia, Iran,
Kazakhstan, Mexico, and Russia.\19\ Additionally, the following
EITI candidate countries have had a fiscal ROSC published on
the IMF website: Ghana, Mali, Mauritania, Mongolia, and Peru.
The following EITI candidate countries have not had a fiscal
ROSC published on the IMF website, although they may have had
other ROSC reviews: Congo (Brazzaville), Democratic Republic of
Congo, Guinea, Liberia, Madagascar, Niger, Nigeria, Sao Tome
and Principe, Sierra Leone, Timor-Leste, and Yemen. Given the
voluntary nature of the IMF resource revenue guidelines, there
is no clear tool to encourage resource-rich countries to
actually implement them.
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\18\ As defined by the IMF, based on exports and revenues from the
years 2000-2005.
\19\ For a complete list of fiscal transparency ROSCs, see http://
www.imf.org/external/np/rosc/rosc.asp?sort=topic#FiscalTransparency.
---------------------------------------------------------------------------
The IMF regularly evaluates member countries' economies and
fiscal policies in Article IV consultations. Of concern to
staff was the uneven examination of extractive industry issues
in Article IV reports. In some resource rich countries
consultation reports, extractive industry transparency issues
were not mentioned at all. In others, the IMF board discussion
was inconsistent with the reports. For instance, Angola ($40
billion in oil revenues in 2007) was recently applauded by the
IMF even though an IMF study showed major failures in good
governance criteria.
World Bank and the Regional Development Banks
The World Bank Group undertakes various activities to
prevent corruption in all of its projects, including those in
the extractive industries. The Extractive Industries Review
(EIR) is the World Bank's main tool to address all the
potential problems associated with supporting projects in the
extractive industries, and preventing corruption figures high
on the list.
The World Bank Group management initiated the Extractive
Industries Review (EIR) after the Annual Meetings in 2000. At
those forums, a group of nongovernmental organizations (NGOs)
requested that the World Bank stop supporting extractive
industries because they believed the resulting adverse impacts
far outweighed any positive development impact. The EIR was an
independent review process to evaluate the impacts of World
Bank activities in the natural resource sectors, and make
recommendations about the future involvement of the World Bank
in these sectors. As part of the review process, research was
commissioned, project site visits were made, and regional
consultations were undertaken with industry, government, and
civil society representatives. The EIR advisory group presented
its final report to the World Bank in January 2004, and in
September 2004 the World Bank Group management issued its final
response to the EIR. The Board of Directors agreed that the
Bank would conduct an annual review of progress toward
achieving the objectives outlined in the management response.
The last such review was published in February 2008.
The basic question asked by the EIR was whether extractive
industries projects could be compatible with the World Bank's
goals of sustainable development and poverty reduction. The EIR
found that there could be a positive role for the World Bank in
the extractive industries, but only if it was possible for the
World Bank to contribute to poverty alleviation through the
extractive industries, which could only happen with certain
conditions in place. The main conditions necessary for
extractive industries to have a positive contribution to
sustainable development found by the EIR are: ``pro-poor
governance, including proactive planning and management to
maximize poverty alleviation through sustainable development;
much more effective social and environmental policies; and
respect for human rights.''\20\
---------------------------------------------------------------------------
\20\ Striking a Better Balance: The World Bank Group and the
Extractive Industries. The Final Report of the Extractive Industries
Review. December 2003.
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The World Bank and its private sector arm, the
International Finance Corporation, do not finance extractive
activities unless companies commit to making revenues paid to
the government transparent. Despite endorsement of EITI from
the Asian Development Bank and the African Development Bank,
the European Bank for Reconstruction and Development is the
only other MDB that requires such a commitment. The remaining
regional development bank, the Inter-American Development Bank
has not yet endorsed EITI. With the view that the international
donors who give aid to resource-rich countries should focus
their efforts on improving revenue management and fighting
corruption, staff recommends that all regional development
banks adopt the World Bank/IFC transparency requirement.
Relatively small amounts of assistance could thus help channel
large amounts of countries' own funds toward poverty reduction.
Staff also recommends that, when possible, the multilateral
development banks promote transparency before the resource
revenues actually start flowing from extractive industries.
Staff recommends that the multilateral development banks
condition loans on progress on transparency. Staff also
recommends that the multilateral development banks promote
transparency before the resource revenues actually start
flowing from extractive industries.
EXTRACTIVE COMPANIES
Energy and mining companies expressed clear interest in
supporting transparency in resource-rich countries. One
investor noted that ``the lack of revenue transparency has
translated into a lack of real governance and lack of delivery
of services.'' Many businesspeople noted that stable governance
and concrete improvement in the quality of citizens' lives led
to stability which is critical for the business environment.
One person noted ``what investors hate most is uncertainty.
Transparency and certainty go hand in hand.''
Staff heard from several extractive companies becoming
weary of having to serve as de facto host governments,
providing social services and looking after countries'
populations, when the government's elites fail to use newfound
wealth to provide social services.
In some cases, extractives companies are being particularly
pro-active. While still in nascent stages, Newmont Mining in
Ghana has joined a public-private partnership with USAID to
improve governance of extractive resources at the local level.
Equatorial Guinea provides a stark example of how, under
certain circumstances, private industry can markedly improve
transparency promotion efforts, including signing up for EITI.
ExxonMobil in particular played a pivotal role in advocating
Equatorial Guinea's accession to EITI candidate country status,
building knowledge of EITI within the government and civil
society, and assisting in persuading officials to attend
meetings.
Some companies enjoy an enhancement in reputation,
especially among socially responsible investors, when seen to
push EITI; the role of reputation-conscious oil majors was
cited as a major impetus for Azerbaijan signing up for EITI.
International energy companies can face difficult choices
in balancing a pro-transparency stance and potentially damaging
their relations with host governments. Angola is a case in
point. While companies have an interest in transparency as
relates to bidding processes, contract enforcement, and wider
certainty in doing business, Angola with all its flaws is still
a relatively attractive investment destination. The 2001
government rebuff of BP's transparency efforts continues to
cast a shadow. These companies also face strong competition
from a range of international and national oil companies. Yet
it is also evident that extractive companies, particularly with
backing from their home governments, could be more proactive in
transparency promotion. The Foreign Corrupt Practices Act has
proven useful. With U.S. Government guidelines for company
behavior, the Angolan government has been responsive to this
home country regulation.
Some companies are reluctant to engage directly with
countries on EITI specifically and even more concerned about
raising concerns about government budget transparency, which is
currently outside the EITI parameters. They told staff that
they did not want to jeopardize their relationships with
government officials since there were plenty of other companies
without a ``transparency agenda'' waiting in the wings to
secure extractive contracts.
Several groups have called for public disclosure of
contracts, and numerous U.S. Government officials and private
industry representatives suggested they sawno reason why basic
contractual information should not be made public. In some
countries, certain information in contracts is understandably
considered to be proprietary. Yet provisions related to
transfer of funds to the federal government, payments to
localities including in-kind contributions, and agreements for
governments to take a specified amount of product all should be
made public. An international standard for disclosing
contractual information should be adopted.
RESOURCE REVENUE AND SOVEREIGN WEALTH FUNDS
Significant oil revenues are both a burden and a blessing
for oil producing nations. The burden is the necessity to
manage and calibrate the proper use and investment of such
revenues for the citizens of that country. Resource revenue
funds can be a useful tool for countries to manage revenues in
a manner that staves off ``Dutch disease.'' For some countries,
the establishment of a resource revenue fund allows for more
political transparency and third-party surveillance. It may be
appropriate for those countries to segregate resource revenues
for future generations, thereby insulating money from current
political appeals for popular support that are often wasteful.
In others, diversion of extractive revenues into a separate
account can result in a political fund that is vulnerable to
misuse since it is outside the normal budgeting process. What
truly matters is that the resource accounts be designed and
managed prudently. The IMF is expected to issue best practice
guidelines for sovereign wealth funds during the fall of 2008
which should establish how to design a fund to best benefit the
citizens of a resource rich country and to ensure that the
funds' external investments are based on economic, not
political, considerations.
Of the 21 countries examined by staff for this project, at
least 12 had sovereign wealth instruments with various
management strategies from conservative low-interest holdings
to more outgoing investment strategies: Azerbaijan, Chile,
China, Equatorial Guinea, Kazakhstan, Nigeria, Norway, Russia,
Saudi Arabia, Timor-Leste, and United Arab Emirates. Many of
the other countries had resource revenue funds at the state or
community level. The size and management of many of these funds
remain opaque and some predecessor instruments have collapsed
with little indication of reform or improved management.
Staff found that many burgeoning sovereign wealth funds and
local resource revenue funds face absorption capacity
problems--they are not equipped to effectively invest their
sovereign wealth funds in their own country or abroad.
In some countries, staff identified a lack of political
will to successfully manage revenues for future generations.
For example, in Chad, the government failed to implement the
World Bank-supported Revenue Management Program, resulting in a
vacuum of transparency and accountability for oil revenues. In
contrast, Timor-Leste has established an Investment Advisory
Board to advise the Minister of Finance on investment strategy,
performance benchmarks, and performance for its Petroleum Fund,
which is audited annually by an internationally-recognized
audit firm.\21\
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\21\ Abraao Fernandes de Vasconselos, Banking & Payments Authority
General Manager
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Staff observed, in countries such as Norway and Chile, that
successful sovereign wealth funds were operating in countries
with strong governance and prudent fiscal management and that
transparency has shored up support for these funds' existence.
Staff also noted that local resource revenue funds, in
countries such as Chad, Nigeria and Peru, lacked the technical
capacity to effectively spend their revenues in a transparent
manner.
Much attention has focused lately on the impact of
sovereign wealth funds on international financial markets and
geopolitics. The U.S. Treasury Department estimates that the
number of sovereign wealth funds doubled between 2000 and 2005.
As oil prices remain well above $100 per barrel, the incomes of
oil exporting nations are soaring. By some estimates, these
national investment reserves now hold close to $3 trillion.
Russia has about $130 billion in its Stabilization Fund, and
Abu Dhabi Investment Authority's value is estimated to be
between $300 and $900 billion. According to Treasury Under
Secretary David McCormick, sovereign wealth fund assets are
``larger than the total assets under management by either hedge
funds or private equity funds and are set to grow at a much
faster pace.''
While aggressive investment strategies pose certain
concerns, sovereign wealth funds have infused helpful liquidity
into international financial markets and, in some cases,
promoted beneficial local development. Yet they are not
ordinary investors because their ties to foreign governments
create the potential that they will be used to apply political
pressure, manipulate markets, gain access to sensitive
technologies, or undermine economic rivals. Some observers have
argued that the primary goal of sovereign wealth fund managers
will almost always be to produce a good return on invested
assets. Consequently, they are unlikely to engage in political
or economic manipulation. But we have witnessed, in recent
years, numerous instances of nations using or threatening to
use their energy assets for political purposes.
As Professor Daniel Drezner testified before the Senate
Foreign Relations Committee, ``the biggest effect of sovereign
wealth funds on American foreign policy is their effect on
democracy promotion efforts.'' He argued that ``democratization
is a much more difficult policy for the United States to pursue
when the target government is sitting on trillions of dollars
in assets to buy off discontented domestic groups.
Authoritarian governments in the Middle East and East Asia will
be more capable of riding out downturns that would otherwise
have threatened their regimes.'' Drezner added that ``looking
at the long term, sovereign wealth funds are one component of
an alternative development path, suggests a possible rival to
liberal free-market democracy. In state-led development
societies, governments could use sovereign wealth funds, state-
owned enterprises and banks, national oil companies, extensive
regulation, and other measures to accelerate economic
development, buy off dissent and promote technology transfer.
If this model proves sustainable over the long run--and this is
a big if--it could emerge as a viable challenger to the liberal
democratic path taken by the advanced industrialized states.''
\22\
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\22\ ``The Foreign Policy Implications of Sovereign Wealth Funds,''
testimony from Professor Daniel Drezner at June 11, 2008 Senate Foreign
Relations Committee hearing entitled Sovereign Wealth Funds: Foreign
Policy Consequences In An Era of New Money.
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The U.S. Treasury Department has responded to concerns
regarding the potential political and economic power of the
huge sovereign wealth funds by undertaking efforts to balance
the country's need for foreign investment with prudent
safeguards. Domestically, it has been working to improve
accountability within the Committee on Foreign Investment in
the United States for review of foreign government-controlled
transactions, and it is creating a working group on sovereign
wealth funds. Globally, the Treasury Department is supporting
the International Monetary Fund and the World Bank in their
development of voluntary best practices for sovereign wealth
funds. It also has proposed that the Organization for Economic
Co-operation and Development identify best practices for
countries that receive foreign government-controlled
investment. In addition, the Securities and Exchange Commission
requires that sovereign wealth funds disclose holdings of 5% or
more in a public company and the Federal Reserve imposes a
number of regulations on sovereign wealth fund investments in
U.S. banks.
COUNTRY REVIEWS BY REGION
Africa
Angola
Angola has an estimated population of 16.4 million and a
per capita income of $2,360. The average Angolan has a life
expectancy of 42 years, and the infant mortality rate is
estimated at 260 deaths per 1000 births. Angola's 2007
estimated oil export revenues were approximately $44 billion,
comprising approximately 72% of its GDP.
Recovering from a 27-year civil war that left the economy
in shambles and ended only in 2002, the Angolan government has
been focused on consolidating peace among rival forces,
demobilizing combatants, resettling displaced populations, and
rebuilding devastated infrastructure. These tasks are
complicated by stark poverty with only half of Angolans
enjoying access to clean water and extreme economic
inequality--easily palpable when one travels beyond the capital
Luanda's crowded commercial center. Relations with the United
States are made difficult by the fact that the U.S. Government
supported the political forces now in the Angolan opposition.
Angola has been an oil producer since the 1960s. Despite
the devastation wrought by the civil war, the energy sector
continued to flourish throughout the war years and left Angola
well-positioned to capture the benefits of the last five years
of the global run-up in oil prices, although hydrocarbon
revenues are expected to soon plateau. On the back of petroleum
exports, which totaled an estimated $44 billion in 2007, Angola
has been Africa's fastest growing economy since 2005 and one of
the fastest growing in the world at 23.4% in 2007. The primary
symptom of Dutch Disease, currency appreciation, has been
strongly felt in Angola, with inflation reaching heights of
300% in recent years.
Angola's national oil company Sociedade Nacionale de
Combustiveis de Angola, Sonangol, has negotiated contracts with
international oil companies that allow the government to
capture a greater proportion of the revenues as global oil
prices rise, which in today's energy markets leaves Angola
financially well-positioned compared to many of its peers. In
addition to oil, Angola is positioned to become a significant
exporter of Liquefied Natural Gas (LNG). Natural gas exports
are expected to get a boost in the years ahead when the new
Soyo LNG facility comes online. Diamonds are also a big
business in Angola, with the parastatal Endiama having control
over both production and regulation. IMF data cites over one
billion dollars in revenue from diamonds in 2006 from over 9
million carats exported.\23\ These two extractive industries
dominate Angolan exports (petroleum 95.9 % and diamonds 3.6%),
and petroleum exports account for nearly 80% of government
revenues.\24\
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\23\ IMF, ``Angola: Selected Issues and Statistical Appendix,''
IMF Country Report No. 07/355, October 2007.
\24\ IMF, ``Angola: Selected Issues and Statistical Appendix,'' IMF
Country Report No. 07/355, October 2007.
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Transparency is critical for Angola's own ambitions to gain
international respect. Macroeconomic reform, economic
development, and participatory governance all rely upon
improved dissemination of information in order for the
government to be more effective and to enable civil society to
play a productive role in increasing accountability of Angolan
officials. For years, serious concerns have been raised about
billions in revenues going unaccounted. Good governance of the
country's resources and revenues goes far beyond the issue of
transparency. With the reality that extractives revenues will
plateau, and eventually dry up, the Angolan government faces
the challenge of leveraging today's resources for long-term
economic sustainability.
The most striking illustration of the difficulty of
transparency in Angola occurred in 2001, when the Angolan
government lambasted BP for making a public commitment to
disclose its payments to the government. From that low point,
Angola has made impressive progress, most vividly illustrated
in monthly Ministry of Finance internet disclosures of exports
in revenue and physical quantity from petroleum (block by
block) and diamonds. This is a particularly significant step,
as related by Endiama officials, given that such disclosure was
previously prohibited as a matter of law. The government
engages external auditors such as KPMG and publishes at least
some of their reports which do include criticisms of the
government. Angola participates in Article IV consultations
with the IMF, and is undertaking other review mechanisms
despite past disagreements. Likewise, the government of Angola
has joined with the U.S.G. and World Bank in transparency
related technical assistance, and it has joined the NEPAD peer
review mechanism.
Angola is not an EITI candidate country, although it has
been an observer and has participated in international
meetings. One Ministerial-level official commented that he
``saw no reason'' for Angola to not sign up for EITI, but
another explained that its rejection of EITI candidacy was
``purely an issue of political sensitivity'' based upon the
assertion that Angola's domestic politics do not allow for
policy and legislation to be driven from the outside.
Interviews reinforced public statements that there is not
currently political will for EITI candidacy. Nor, according to
a senior Angolan official, have G-8 members in the country
actively advocated the initiative.
A few interviewees outside the government commented that
Angola actually publicizes more information as an EITI observer
than do EITI candidate countries. Yet, published data tends to
be general or difficult to verify. There is not a clear public
consolidated accounting of the variety of revenue streams
associated with contracting for extractive rights or for in-
kind payments and community investments. Nor are the terms of
contracts made public. Signature bonuses up to and exceeding $1
billion are well-known, but they are not included in regular
revenues reporting. There are also widely discussed ``back
room'' agreements related to companies or governments offering
bonuses and non-energy related in-kind payments for
preferential access in bidding for drilling rights.
International oil companies sometimes have community
development funding built into their contracts. Implementation
of such projects have to be directed through Sonangol, creating
opportunities for corruption while also creating a parallel
funding stream not reported in published budget documents.
Angola has made important progress in improving its
budgetary process and publicizing its budget, and it is working
with the World Bank, IMF, U.K. Department for International
Development (DFID) and the U.S. Government in this area. Budget
documents are available on the internet, although they lack
useful detail. The government is now putting in place a new
computerized platform that will facilitate better planning and
cross-ministry accounting and will allow monthly budget
reports. The Angolan government is considering the
establishment of a sovereign wealth instrument, and it is being
courted by major international investment groups. Currently,
excess reserves are held in a treasury reserve fund in Angola's
National Bank.
Despite the challenges faced by U.S. diplomacy, U.S.
interests in Angola are strong, and the Angolan government has
made clear their desire for broader cooperation to be built
upon the foundation of energy trade. However, the government is
keenly aware of U.S. historical involvement in Angola and its
anti-reform elements are emboldened by surging oil revenues.
The current U.S. Embassy team in Luanda has made remarkable
progress in forming a productive relationship with the Popular
Movement for the Liberation of Angola (MPLA)-dominated
government. Increased activity, particularly in support from
Washington, is needed. Staff did not miss the irony that while
they can come to Angola with a specific mandate to examine
transparency issues, Embassy Luanda reported it was left to
terminate its transparency capacity building program due to
lack of funds. U.S.G. assistance for good governance in Angola
is limited by competition for funds with our humanitarian
objectives in the country and constraints on spending set by
Congress and the administration. Close to 90% of fiscal year
2008 funding is dedicated to health, humanitarian, and demining
activities. The remaining 10% of funds support a broad remit of
good governance programs--from supporting elections to
transparency to civil society support to judicial reform. Of
note was the country team's recognition of the key value U.S.
assistance could bring to a nation flush with new wealth but
lacking technical and knowledge capacity. Nonetheless, funding
for good governance in 2008 decreased, eliminating future
funding for transparency programming.
Chad
Chad has a population of nearly 11 million people and
average per capita income is $1,230. Average life expectancy is
50.4 years with an infant mortality rate of 208 deaths per 1000
births. Total hydrocarbon revenues for 2007 were approximately
$1.2 billion, which constituted 17% of GDP, and will be dwarfed
in 2008.
Chronic insecurity is the defining feature of Chad,
affecting state activity and international involvement.
Neighboring Sudan is a haven for rebel forces seeking to bring
an end to Chadian President Deby's eighteen years in power and
has sent a quarter of a million refugees across the border from
the conflict in Darfur. The February 2008 rebel assault on
Chad's capital, N'Djamena, virtually stopped all government
function and international assistance programs. A ``bunker
mentality'' prevailed which has only slowly started to lift.
Chadians are among the poorest people in the world.
Prospects for Chadians improved when oil began to flow to world
markets through the World Bank supported Chad-Cameroon pipeline
in 2003, running from Doba in southern Chad through Cameroon to
an off-shore loading platform at Kribi. With surging global oil
prices, Chad has thus far realized over $2.5 billion in
revenues from oil production--an amount originally expected to
take 25 years to achieve. Although surging global prices create
an unexpected windfall now, those revenues will plateau and
begin diminishing in the foreseeable future. Although the
economy is still one-third dependent on agriculture, global oil
prices are now the principle driver of GDP growth, exposing the
country to economic volatility.
Current oil production is from three fields in Doba, which
are operated and owned by Esso Exploration and Production Chad,
Inc., a consortium led by Esso (ExxonMobil) with Chevron and
Malaysia's state-owned oil company Petroliam Nasional
(Petronas). Relations with the government are productive but
not easy. The government regularly attempts to lodge new fees
on oil companies and had a protracted tax disagreement with
Chevron and Petronas that led to their expulsion from the
country. President Deby has publicly called for Chad to gain a
60% stake in the Esso-led consortium.
Nominally, Chad maintains a surprisingly progressive set of
institutions and international agreements for transparent
management of its extractive revenues. Chad has a number of
institutions built into its government infrastructure that
could play useful roles in financial management and auditing.
Overall, however, these institutions do not have the political
(as opposed to legal) mandate to function effectively and
largely lack expertise necessary to fulfill their duties.
Transparency in oil revenue reporting is to be commended in
Chad. The Esso-led consortium, with the two pipeline owners,
publishes expansive reports from job generation, to land use
compensation, to environmental impacts. These reports contain
quarterly and aggregate payment data broken into general
categories of royalties, pipeline income, corporate income tax,
and miscellaneous. Conducted quarterly during the construction
phase and biannually thereafter, these reports are subject to
World Bank verification. Reports are available on the internet
and printed in English and French. Although the style of
document gives the impression of a public relations brochure,
it contains the most thorough reporting found in the five
countries staff visited in Africa.
The Chadian government is pursuing candidacy in EITI, yet
progress on this too was delayed by the February 2008 conflict.
The Chadian government has formally expressed interest in
candidacy, and held a World Bank supported conference on the
subject in August 2007. This was followed by a December 2007
decree ordering creation of a ``high council'' to make progress
on EITI qualification, but, according to an official, it was
delayed due to the February conflict and has not yet gotten
back on track. The effort is meant to be coordinated out of the
Ministry of Petroleum, but has not received any budget support
although it is reported that the African Development Bank may
provide financial backing.
In exchange for World Bank participation in the petroleum
development and pipeline project, the Chadian government agreed
to a Revenue Management Program, as the World Bank's direct
involvement in oil revenue management is known, consisting of
conditions on management of revenues and guidance on spending
of 85% of royalty and dividend revenues (and eventually 100%).
Those revenues were to be deposited into an escrow account held
at Citibank in London (a prudent debt service mechanism for a
risky country), and expenditure projects had to be approved by
independent multi-stakeholder College. This arrangement was
aimed to minimize opportunities for corruption and spending
outside of development priorities, and provide for a longer
time horizon for revenues.
However, that law was effectively gutted by the President's
amendment in December 2005 to eliminate the Future Generations
Fund (thus shifting approximately $36 million to Chad's general
treasury) to expand priority sectors to include territorial
administration and security, and to shift directed spending in
favor of the general treasury. Declaring a breach of contract,
the World Bank exercised its rights to halt its activities and
freeze the Citibank escrow account in January 2006. With more
than the first quarter of 2008 consumed by the February
conflict--including the government pulling monies from the
country's reserve fund to replenish the military--it is
unlikely that the government will meet targets for 2008 agreed
in a subsequent negotiations with the Bank. In the judgment of
staff, the World Bank should reengage in its revenue management
efforts immediately and restore its presence on the ground.
U.S. Government assistance to the country favors
humanitarian aid and security cooperation. These are necessary
priorities, but U.S. interests in the country will be
strengthened by more consistent demonstration of a broader
agenda which will also require reinstitution of an economic
officer position at the Embassy. Despite the mixed record on
revenue management, Chadian officials expressed gratitude that
staff visited Chad to discuss topics beyond humanitarian action
and security. Skeptical views of Chadian government sincerity
to reform are understandable. However, receipt of oil revenues
in excess of one billion dollars per year, which could support
economic and social development, makes it all the more urgent
that the United States seeks to bolster reform-minded
individuals and activities in Chad.
Equatorial Guinea
Equatorial Guinea has an estimated population of
approximately 515,000 and an average life expectancy of 50.7
years. The infant mortality rate is 205 deaths per 1000 births
and the average per capita income is $10,150. This is a
deceiving statistic given the vast poverty of the majority of
Equatoguineans--income is clearly not distributed evenly in the
country. The total hydrocarbon revenue in 2007 was an estimated
$3 billion, which is approximately 29% of its GDP.
This tiny African country of Spanish-speaking people is
comprised of five islands--the capital Malabo is situated on
the island of Bioko--and a sliver of territory, Rio Muni, on
the African mainland. With oil export revenues over $3 billion
annually, hydrocarbon export has fundamentally altered
Equatorial Guinea's economic environment and dramatically
increased its prospects. The means--human resources, processes,
and organizations--of translating such massive wealth into
economic and social development are extremely limited. The
historical record of the government's political repression,
corruption, and disregard for service delivery leaves many
observers cynical at the prospect for the Equatoguinean
government committing to meaningful development, let alone
political and social opening. Yet recent overtures of the
country's president and government give reason for optimism, no
matter how guarded.
The Equatoguinean government is sharply criticized for near
stagnant social development indicators even as GDP has soared.
Between 2002 and 2006 the country experienced an average real
annual growth of 15.8%. Economic development in Equatorial
Guinea has thus far concentrated on major infrastructure. The
Equatoguinean government is quick to point out that
infrastructure collapsed along with the economy after the
departure of the Spanish in 1968 and subsequent authoritarian
rule by President Francisco Macias.
Equatorial Guinea exhibited few economic prospects prior to
the discovery of the offshore Zafiro oil field in 1995, and
rare international attention on the country focused on the dire
human rights situation and corruption. Today Equatorial Guinea
is the third largest oil producer in Africa, providing a
substantial gain of new production and investment in a region
increasingly critical for the global diversification of oil
sources. With current oil sales well in excess of $3 billion,
Equatorial Guinea now ranks in the global top ten GDP per
capita (PPP) at $44,100. A new state of the art liquefied
natural gas (LNG) terminal outside the capital Malabo positions
Equatorial Guinea to play an independent and useful role in an
increasingly global natural gas market as well.
Transparency is fundamental--albeit a first step--to
improving Equatorial Guinea's domestic governance and
international reputation, including in the financial sector
which the government is relying on for foreign investment and
financing. Power, which is synonymous with information about
and control over finances, remains highly concentrated under
President Obiang. His nod is required for any appreciable
progress, and government ministries outside of energy have had
little reason to build internal capacity, let alone take
initiative to deliver on the needs of its citizens.
Nonetheless, President Obiang has signaled incremental
devolution of power and greater economic and political
openness. The trajectory of improvements is unlikely to be
linear, and the extent of his commitment will be tested over
time. Yet simply more development projects, including those
aimed at meeting social needs, will not be sufficient for
President Obiang to demonstrate genuine change in the
governance of his country. Transparency in Equatoguinean
accounts, budgeting, and expenditures are minimum threshold
markers for change. In fact, opposition leaders largely agreed
with this statement, affirming transparency's importance on the
same level with free and fair elections.
Equatorial Guinea is an EITI candidate country. EITI's
strength in Equatorial Guinea is derived from the fact that
Equatorial Guinea's candidacy was made by personal decree of
President Obiang, though attention to EITI from the members of
his government has been uneven. It is likely helpful that the
government coordinator and assistant coordinator also occupy
significant positions within the key offices of the Finance
Ministry and the prime minister's office, respectively. EITI
will be funded from the state budget. Funding mechanisms will
need to be closely monitored in order to ensure that government
financing does not impinge on the freedom of associated civil
society groups to operate. In the short-term, international
assistance in funding for civil society is likely to be
necessary.
In terms of promoting transparency in the extractive
industries and EITI in particular, the familiarity of U.S.
energy company staff to the Equatoguinean government has
allowed the private entities to be effective advocates.
ExxonMobil, in particular, played a pivotal role in advocating
Equatorial Guinea's accession to EITI candidate country status,
building knowledge of EITI within the government and civil
society, and assisting in persuading officials to attend
meetings. Corporate commitment to continuing progress will be
essential for EITI to have impact.
Energy is the only sector bringing significant economic
activity to the country, and its income per capita is so large
that Equatorial Guinea is not eligible for lending from
international financial institutions. International energy
companies are required to invest heavily in community projects
and have made strong contributions particularly in health and
education. The ministries, particularly the energy ministry,
have a great deal of say in selecting projects, but projects
are carried out directly by the companies. This leaves little
value-added in fostering planning and infrastructure capacity
to implement projects.
As a member of Banque des Etats de l'Afrique Centrale
(BEAC), Equatorial Guinea is legally obliged to deposit excess
revenues with that institution, although it is known that
government accounts are held in other countries with no
official reporting. Currently, there are two separate accounts
at the BEAC. The first account consists of the country's
primary reserves, which are said to be worth over half of total
reserves in BEAC, and another fund sometimes referred to as the
``Generations Fund'' intended for future government
expenditure. Both funds are said to yield less than 3%, and
even this is an increase from reforms over the last couple of
years. Current data on total reserves is not available.
Currently Equatorial Guinea is not in a position to establish
and manage its own sovereign wealth instruments, but these are
services that could be contracted out in relatively short order
and will attract suitors world-wide. This may be an attractive
option in order to keep revenues from flooding the economy (a
hedge against Dutch Disease-like impacts), and help bring
Equatorial Guinea closer in line with international financial
norms. The U.S. is in a relatively weak position to offer
assistance in this area given the continued unease with how the
Riggs Bank episode unfolded, which has hampered further
financial activities by the Equatoguinean government in the
United States.
A future resource in the nascent stage of development and
utilizing Equatoguinean government resources is the Social
Development Fund (FSD), an E.G.-U.S. Government cooperative
endeavor. Created by a Memorandum of Understanding signed April
11, 2006, the FSD is an agreement for U.S. technical experts to
work with the Equatoguinean government in the areas of health,
education, women's affairs and the environment. The pace and
performance of this endeavor has been closely monitored for
Equatoguinean government sincerity. The agreement quickly ran
into difficulties due to misunderstanding between the two
governments in interpreting the agreement. Not unexpectedly in
a country with severely limited institutional capacity, the
Equatoguineans preferred turn-key projects while capacity
building and host government partnership were the watchwords
for USAID. This impasse, however, is reported to have largely
passed. At the time of the staff visit, 45 projects valued at
more than $87 million over three years had been approved but
were awaiting final authorizations to proceed. The U.S.
Government should continue its firm backing for this program
for its development benefits and because it is the first
significant devolution of spending authority from the
President.
The United States' diplomatic footprint in Equatorial
Guinea is miniscule. In 1995, the U.S. embassy was closed and
our diplomatic relationship was managed out of Embassy Yaounde
in Cameroon. The general sentiment behind closure of the
embassy was that the Equatoguinean government showed little
reason to hope for progress, U.S. interests were too small, and
the costs of maintaining our embassy too high compared to the
opportunities available. The regrettable decision to pullout
from Malabo has left diplomatic relations on soft ground. The
first resident Ambassador since 1995 was confirmed in 2006, and
he is supported by just two Foreign Service Officers and one
American USAID contractor. Progress has been made in rebuilding
understanding between our governments in the last year and
half, but many obstacles still exist.
Ghana
Ghana has a population of approximately 22.5 million people
and an average life expectancy of 59.1 years. With about 78.5%
of the population living under $2/day, the infant mortality
rate is 112 deaths per 1000 births. Ghana has a per capita
income of $2,640. Ghana is a country on the threshold of
economic stability and growth. Many Ghanaians fear that the new
discovery of oil and its attendant revenues may overwhelm the
nascent institutions and positive reforms and derail economic
growth. These recent reforms and accompanying economic success
have led to predictions that Ghana may, with accelerated growth
as a driver, achieve the historic milestones of achieving the
Millennium Development Goals and middle-income status by 2015.
The growth rate necessary to deliver on such prognostications
would have to be fueled by a number of positive inputs
including donor assistance, which appears to be waning; non-
concessional loans which have been made possible by improved
risk perceptions; sustained fiscal responsibility; conservative
monetary policy; and continued investment in infrastructure and
institutional capacity. Such a future appears to be within
their means, according to the IMF, if the 2008 election cycle
machinations do not play havoc with their fiscal discipline and
the energy crisis of 2006-2007, caused by low rainfall and
mounting demand, do not coincide to sap what excess growth the
country has generated of late.
Ghana has achieved growth that is the envy of other African
countries and has improved governance and policy to achieve
remarkable milestones reflected in its eligibility for debt
relief, significant private sector loans, a Millennium
Challenge Corporation (MCC) Compact, and growing investor
confidence. Nonetheless, it remains tarred with a legacy of
corruption that has toppled several post-independence
governments and that surveys indicate remains a considerable
problem at the national and particularly at the local and
district level. Ghana also suffers from challenging
institutional capacity hurdles that will require considerable
time and technical assistance to build to levels capable of
administering effective management and oversight of its
extractives, particularly hydrocarbons.
The prospects for Ghana's development were made more
evident in May 2007, when the IMF published an extremely
positive 2007 Article IV Consultation and predicted that the
country could achieve middle-income status by 2015. A month
later, after 111 years of exploration, , Ghana announced the
discovery of an oil field that may contain well over a billion
barrels. At this point, Ghana receives little in oil revenues,
producingonly 700 b/d. By 2010 Ghana expects to be pumping
significantly more from the new oil fields and its budget has
incorporated gradual increases in revenue beginning in 2009.
Formerly known as the Gold Coast, Ghana also has a long
history of mining experience and has relied on significant
exports of gold, as well as manganese, bauxite, diamonds and a
valuable export cocoa crop to drive its effort toward middle-
income status. Many in the country, distressed by perceived
over-generosity in contract terms and exploitation by mining
companies, believe that Ghana has prospered in spite of
extractives, not because of them.
Ghana, an EITI candidate country, and established Ghana-
EITI (GEITI) to address transparency in the existing mining
sector, since it was formed prior to any substantial oil
discovery. GEITI is one of various initiatives working to
enable transparency in Ghana. It draws its strength from
political buy-in rather than law or institution thus far. In
fact many people pointed to the fact that there is already
substantial legislation and other institutions that are
empowered to pursue transparency and accountability. It was
evident to staff that GEITI was accepted across the government
but in a rather narrow focus upon the major mining industry and
companies. Little reform has been accomplished in the informal/
small mine slice of the sector which employs 80% of laborers.
GEITI appears to have begun expansion of its mandate to the
expenditure side rather than limiting itself to revenue as
other countries have. GEITI was quite clear on the necessity of
such scrutiny in order to achieve their goal of effective
resource revenue governance and management for the country.
Nonetheless, despite unanimous GEITI Board concurrence on
expenditure scrutiny, this purpose is contingent upon their
ability to scrutinize at both national and local levels both of
which present their own obstacles. Their efforts to date have
been primarily directed at the local level where they believe
the most immediate problems exist.
GEITI and associated stakeholders are at a point where they
must decide whether or not to institutionalize by statute, as
Nigeria has done, or to make themselves more independent from
government. There is considerable political support under the
current administration behind GEITI, with representation from
key offices, including a representative from the Vice
President's office who said: ``the fact that I am here shows
the political importance of this work; I can take
recommendations to the Presidency.''
Despite Ghana's considerable accomplishments in
establishing macro-economic stability and improving budget
management, Ghana faces daunting challenges to ensure that oil
revenue is managed in a manner that will benefit current and
future generations. As a young democracy with large trade and
fiscal deficits and extensive infrastructure and development
needs, Ghana will be challenged to exercise fiscal discipline
and strike a balance between current and future spending.
The overall control of the petroleum sector is vested in
the Ministry of Energy, but it is the state oil company, the
Ghana National Petroleum Corporation (GNPC), which has
practical authority over the sector according to laws
established in the 1980's. GNPC has been granted exclusive
responsibility for commercial petroleum operations as well as
regulatory and enforcement responsibilities. Petroleum
agreements are subject to cabinet and parliamentary
ratification. Some Ghanaian officials believe that ``the
technical capacity does not exist anywhere else in the
government to effectively manage GNPC's current
responsibilities.'' The officials further noted that Ghana
would require significantly more engineers and hydrocarbon
expertise. The U.S. Government and international community have
many reasons for supporting the stability and sustainability of
Ghana's economic and political improvements. Traditional U.S.
Government assistance in Ghana emphasizes health and education
programs, and the MCC programs helpfully broaden assistance, in
particular to agriculture which is vital to building up ahead
of potential Dutch Disease impacts once oil revenues start to
flow. Beyond concurrence with Ghana's Growth and Poverty
Reduction Strategy, the U.S. Mission Strategic Plan already
identifies Democracy and Governance as the primary focus in our
assistance strategy. However, the resources to adequately meet
that priority are extremely limited. As Ghana's economy
accelerates, foreign assistance will continue to diminish.
Education and health are sectors that Ghana can and should fund
from its own resources. U.S. assistance should fill critical
gaps in those important sectors while concentrating efforts to
build technical capacity for government institutions to manage
and guide government policy-making and decisions and deliver
effective oversight. Oversight will also require substantial
investment in civil society. Ghana has a head start but will be
scrutinized closely both by its own citizens as well as its
neighbors, in the hope that the resources become a blessing for
the country.
Nigeria
Nigeria has a population of 144 million and a per capita
income of $1,050. Life expectancy is 46.5 years and the infant
mortality rate is 194 deaths per 1000 births. About 92.4% of
the population lives under $2/day and the number of people
living in poverty has actually been increasing. Estimated oil
export revenue in 2007 was $57 billion, constituting about 34%
of GDP.
Nigeria is a key ally and economic partner of the United
States. Nigeria plays a major role in advocating peace and
democracy in Africa, from helping resolve political disputes in
Togo and Cote d'Ivoire to providing peacekeeping forces in
Liberia and Sudan. Nigeria is a chief trading partner in Africa
for the United States, is among the top suppliers of oil to the
United States, and has the potential to be an engine of
economic opportunity in Africa. Its laudable economic reform
program has facilitated 7% growth, major debt has been
eliminated, inflation is below 6%, while fiscal reserves and
the banking sector are strong.
Underscoring the importance of oil and gas to Nigeria,
Nigeria's ``Energy Minister'' is the President himself, and
hydrocarbons export is the linchpin of Nigeria's economy. This
also points to the potential for political influence--both good
and bad. According to the World Bank, oil and gas production
account for 85% of government revenues, and 99% of export
earnings. The discovery of hydrocarbons in the Niger Delta in
1956 began a prolonged period of oil and gas production that
has delivered over an estimated half trillion dollars in
income. Yet Nigeria's historical inability to effectively use
oil revenues--including $57 billion in 2007 alone--for broad
development speaks against the Nigerian government's goal of
being a global economic leader. Soaring global energy prices,
persistent instability in the Middle East, and steadily
increasing global demand all work to commend Gulf of Guinea oil
and natural gas as an attractive source of energy import
diversification for world markets. Long at the fore of regional
oil and gas production, Niger Delta instability has recently
caused Nigeria to lose its lock on production leadership in the
region and has roiled global oil markets. Failure to
effectively use hydrocarbon revenues for development has
propagated Niger Delta insecurity, in turn rendering Nigeria
unable to realize the full value of its resources. Shut-in
production, stolen oil, and oil and gas lost due to attacks by
militant groups onshore and at sea--let alone labor disputes--
have removed as much as 1 million barrels of production at
various points in time.
Efforts to promote transparency and improved governance of
fiscal resources in Nigeria is set against a legacy of manifest
corruption, political volatility, and slow institutionalization
of regulatory processes and oversight bodies. Corruption and
mismanagement by a succession of military governments
interspersed by occasional weak civilian governments have been
the norm in the 48 years since independence. Corruption is
rampant, government procedures are opaque, and new state and
federal legislation is needed on public procurement, fiscal
responsibility, and freedom of information. Whilst the
political environment around elections remains contentious and
significant problems of governance persist, Nigeria's
institutional capacity to deal with political volatility,
judicial confidence, and legal remedy on fiscal issues is
notably improving.
The Nigerian economy has been wracked for decades by a
failure to effectively manage and account for revenues,
especially those from the petroleum industry. However, until
1970 when oil income began to markedly increase, the scope of
mismanagement and theft was limited by the national income. At
the close of the Biafran civil war, oil income was just $250
million, but by 1974 due to the OPEC oil embargo it had soared
to $11.2 billion, dominating the economy and lavishing those in
power with untold opportunities for malfeasance with little
scrutiny. Although the massive income would wax and wane, the
mismanagement and theft became entrenched.
In Nigeria's case there are two distinct repositories for
the income derived from oil--the Federation Account and the
Excess Crude Account. The Federation Account holds funds for
use of the federal government, the 36 state governments, and
774 local government councils then draw their respective
proceeds for general budget execution. The formula for each
governing entity's share is developed by the Revenue
Mobilization, Allocation, and Fiscal Commission (RMAFC).
According to the formula, the federal government currently
receives 48.5% of oil and gas revenue, states receive 24%, and
local governments 20%--a minimum of 13% of revenue accruing to
the RMAFC account is stipulated to be returned to the oil-
producing states. The remaining 7.5% is intended to be set
aside but it is unclear for what purpose. The ultimate use of
the finances that are distributed at all levels was beyond the
means of staff to assess. However, all officials with whom
staff spoke echoed the sense that without scrutinizing the
budget expenditure side of the federal and state and local
levels there would be little chance of reducing waste, fraud
and corruption. Budget management is limited, however. In 2003
only 36% of the national budget was met. By 2006 the
effectiveness of implementing the budget had improved to 89%,
although in 2007 there was a dip to 70% according to government
estimates.
Revenues collected above the projected year's budget
outlays, or when oil was in excess of the $54/barrel budgeting
benchmark in 2008, flow into the Excess Crude Account. This
Account was set-up by President Obansanjo's administration in
2003. Great dissension exists between the federal government
and the states as to what should be done with this fund. Some
have indicated that despite the federal management of the
Excess Crude Account, the Constitution stipulates that the
proceeds of natural resources belong to all the states, and
thus should be moved to the Federation Account. Others have
recommended prudent investment of the Excess Crude Account and
use for infrastructure projects throughout Nigeria.
The emphasis on reform of Nigerian governance began during
President Obasanjo's term in office and led to significantly
more U.S.G. interest in engaging Nigeria. The reform effort was
focused on greater transparency and counter-corruption, which
included providing investigative mechanisms that could wield
considerable authority. President Obasanjo established the
Economic and Financial Crimes Commission (EFCC) as well as the
Independent Corrupt Practices and Other Related Offences
Commission (ICPC). Through high-profile prosecution of
corruption allegations, and despite accusations of their use
for political ends by the Obasanjo administration, these
organizations have served to raise awareness of the prevalence
of corruption at the highest levels of the government.
Nonetheless, in late December 2007, after President
Obasanjo left office, Nigeria's Inspector General of Police
announced the transfer of EFCC head Nhuru Ribadu to the state
of Jos to attend a one-year course at a Nigerian policy
institute, raising questions of the new government's commitment
to reform in its present form. The EFCC was also placed under
the authority of the Minister of Justice, possibly limiting its
effectiveness. Staff visited with then acting head of the EFCC,
Ibrahim Lamorde, who maintained that ``there would be no
letdown'' in the effective investigation and pursuit of corrupt
officials. The EFCC's momentum does not appear to have
diminished though their resources are still limited and their
efforts are helping to reveal and remedy a plainly systemic
corruption problem. The EFCC's work has brought information to
the fore; what is done with that information and how capable
the actors are in making best use of it is an opportunity for
international technical and other assistance to help.
President Obasanjo indicated his intent to pursue greater
transparency by naming a reform-minded Finance Minister and
pursuing implementation of the Extractive Industries
Transparency Initiative (EITI). By 2004 Obansanjo had launched
the Nigerian version (NEITI), and had established a committee
to guide the group called the National Stakeholders Working
Group (NSWG), made up of 28 representatives from federal and
state governments, civil society and industry. A subsequent
call for more civil society representation brought the Civil
Society Steering Committee into existence as a consultative
body to the NSWG.
The most influential outcome of these formative efforts is
the Hart Group audit of Nigeria's oil industry between 1999 and
2004. The audit issued in December 2006 was groundbreaking for
Nigeria in revealing information about the petroleum sector.
The most important findings were not specific monetary losses
but failed accounting and capacity to account for resource
transfer up and down the production line that left broad
opportunities for theft. The Hart audit points to the
weaknesses in accountability within the Nigerian National
Petroleum Company, the Department of Petroleum Resources, and
the Federal Inland Revenue Service.\25\ Several observers
commented that the most remarkable finding was that revenues
were largely accounted for and, therefore, that monies were
being stolen after they reached the treasury--hence needed
emphasis on budgeting, expenditure, and procurement. There is
little doubt that billions in income have been lost to
Nigerians over the years. Indeed, the NEITI process has
produced the unintended consequence of enabling the government
to collect on previously missed payments by private industry
and has empowered the federal government to respond to blame by
states that it is not providing them with sufficient resources.
There is validity to the concern that state and local capacity
to properly utilize appropriations is wanting.
---------------------------------------------------------------------------
\25\ Revenue Watch Institute, Policy Brief, Leaving A Legacy of
Transparency in Nigeria, April 2007.
---------------------------------------------------------------------------
Of the countries that have now endorsed EITI, Nigeria joins
only Azerbaijan to have undertaken most of the essential EITI
steps (established multi-stakeholder committees, identified an
individual within the government to lead the process, drafted
national work plans, selected auditors) and have published
audited and reconciled EITI reports. NEITI has been proactive
in public outreach ``road shows'' and has an extended mandate
to audit product movement as well as finances. There are some
reservations as to whether the independence of the institution
will be maintained and whether it will be properly funded.
NEITI was in limbo through the presidential transition, and
only recently was a director named. Observers recognize that
the senior official first chosen to chair NEITI, Obiageli
Ezekwesili (now at the World Bank), possessed a close working
relationship with President Obasanjo, a factor which appears
crucial in generating internal momentum behind EITI
implementation.\26\
---------------------------------------------------------------------------
\26\ Civil Society Perspectives and Recommendations on the
Extractive Industries Transparency Initiative, Publish What You Pay/
Revenue Watch Institute Report, October 2006.
---------------------------------------------------------------------------
Improved governance of extractive industries resources is
fundamental to U.S. Government policy priorities in the
country--from poverty alleviation, to improved security
environment, to democratic consolidation--as well as in meeting
the new President's goals of electrification, gas development,
and Niger Delta conflict resolution. The Nigerian government
has substantial financial and personnel resources, but needs
technical support. Indeed, requests for such assistance were
frequently raised in staff meetings. No economic development
effort in Nigeria is more important than the Niger Delta.
Insecurity in the Delta hampers Nigeria's own ability to
capture the benefits of its hydrocarbons production, and it is
a direct threat to the U.S. economy. The Niger Delta is also of
significant international concern should a full-blown conflict
emerge causing the collapse of the region which would likely
prompt a very difficult and expensive international
peacekeeping response. General sentiment in Abuja now seems to
be that the situation can only be solved through development
instead of military intervention, and the U.S.G. should act
decisively to promote this viewpoint. U.S. embassy personnel
are unable to visit large areas of the delta due to broad
criminality and insecurity that has prompted restrictive
security procedures and the high costs of security personnel
and transport. Lack of a persuasive strategy for U.S.
assistance to the Delta impinges U.S. interests in the country
and economic interests in oil prices.
Some within the donor community and Nigerian officials
indicate that failure to improve governance will undermine
sustained development thus thwarting the government's own
ambition to be in the top twenty economies in the world by
2020.
ASIA
Cambodia
Cambodia is slightly smaller than Oklahoma and has a
population of 14.2 million. Average life expectancy is 61.7
years, and infant mortality is about 57 deaths per 1000 births.
The average per capita income of a Cambodian is $1,690 with
77.7% living under $2/day.
Cambodia still suffers from the legacy of intermittent
civil war between 1970-1990, which included U.S. bombing raids,
the Khmer Rouge genocide, and a 10-year occupation by Vietnam.
The Khmer Rouge having eliminated its educated classes,
Cambodia emerged with very low civil and institutional capacity
but enjoys relative political stability today with impressive
GDP growth of 9.5% in 2007. Cambodian Prime Minister Hun Sen, a
former Khmer Rouge commander, is the longest serving prime
minister in Asia (23 years), and was recently returned to
office in an election that observers say failed to meet
international standards. Cambodia boasts a generally free
press, vibrant civil society, and a multi-party political
system, though impunity for political killings, election
intimidation, and land-grabbing cases are prevalent. Corruption
is rampant in Cambodia (one USAID-funded study concluded that
``only 25% of potential tax was collected from the private
sector in 2005''). Staff heard repeatedly that many government
officials' salaries are so meager that they are forced to take
second jobs or resort to bribes.
Cambodia views itself in competition with its regional
rivals Vietnam and Laos and is aware that it could be left
behind. On the economic front, Cambodia is focused on further
developing its successful garment industry, expanding tourism,
beginning to exploit its hard minerals and recently-discovered
offshore oil resources, fighting endemic corruption, and
petitioning donors for debt forgiveness.
Though Cambodia is believed to have significant deposits of
gold, copper, bauxite, oil, and natural gas, no commercial
exploitation is yet underway and no significant revenues are
being created. Whereas timber was formerly a revenue-creating
industry, it has come under great scrutiny by the NGO community
for corrupt practices, and all timber exports have since been
banned.
In 2002, Chevron was granted a petroleum agreement for
offshore exploration near the Thai border and successfully
located deposits in the Pattani and Khmer basins in 2005. The
deposits are in small pools, as opposed to a single reservoir,
and it is still unclear how viable extraction will be.
Moreover, the Pattani basin lies in the Overlapping Claims Area
with Thailand, and negotiations to resolve the border dispute
are ongoing. The Cambodian government has signed agreements for
five additional offshore blocks with several international oil
companies, whose fiscal terms remain undisclosed; no
exploration has yet taken place in these fields. Several
onshore exploration contracts have also been signed,
particularly in the ecologically- and agriculturally-rich Tonle
Sap (Great Lake) basin in central Cambodia, with seismic tests
now underway.
Due to these uncertainties, international oil companies and
Cambodian officials cautioned against high expectations. Staff
is aware of revenue expectations ranging from $60 million/year
(Cambodian National Petroleum Authority) to $150 million/year
(Cambodian Ministry of Economy and Finance) to $1 billion/year
(Congressional Research Service) to $1.7 billion/year (Global
Witness) from the oil and gas sector if extraction goes
forward, with fields coming online in 2011-2012 at the
earliest.
Several international mining companies, including BHP
Billiton and Oxiana, have signed mining exploration contracts
for copper, iron, gold, and bauxite, but no revenues are yet
being created. No international bidding occurs for mining
concessions, and the concessions themselves are not disclosed.
Cambodian Ministry of Mines officials told staff that private
companies could release whatever they wanted, but the Ministry
of Mines would not divulge any contract details.
Cambodian Prime Minister Hun Sen has often noted that
corruption and lack of transparency have inhibited growth but
few tangible anti-corruption measures have been undertaken.
Many analysts agree that the government has pushed anti-
corruption measures with little zeal, usually only far enough
to keep donor money flowing in. For example, international
donors and civil society have been united in advocating passage
of an anti-corruption law that has been in the works for 13
years. It has ultimately stalled in the Council of Ministers
because of its misgivings about an overzealous anti-corruption
commission, provisions requiring a declaration of assets held
by government officials, and harmonization with the penal code.
Instead, the Council of Ministers has created a weak anti-
corruption body, which international donors have ceased
funding. As is often the norm in foreign assistance debates,
U.S. officials maintain that other international donors have no
leverage over the government on these issues because other
donors have consistently provided increasing amounts of direct
budget support despite Cambodian obstinacy on anti-corruption
measures.
Staff found that all Cambodian officials were well-versed
in the EITI concept and, in general, positively disposed to the
broad principles of EITI. However, officials were hesitant
because of the present lack of revenues, failure of Asian peers
to sign up, and a severe lack of technical capacity to
implement an EITI-like regime. Cambodia has sent delegations to
Norway, East Timor, and Azerbaijan to study their experience
with oil wealth.
Cambodia is the third largest recipient of U.S. aid in
Southeast Asia. Officials from the U.S. Embassy to Cambodia
were very familiar with EITI, and Ambassador Mussomeli appears
to have made advocacy of EITI a U.S. priority in Cambodia.
Transparency, anti-corruption and natural resource management
seemed to touch on most high priorities of the U.S. Embassy. As
one U.S. official noted, ``You have to approach every issue
here from an anti-corruption angle.''
The U.S. Government has been part of the international
coordinating group for passage of the anti-corruption law and
had a lawyer at post to provide counsel on the law; USAID
worked in a similar capacity to provide technical assistance
for the drafting of a freedom of information act. The Embassy
has also trained 22 journalists in investigative reporting to
help expose corruption. USAID launched the Mainstreaming Anti-
Corruption for Equity (MAE) program in 2006, which builds
public capacity to police mismanagement of public land and
resources.
The U.S. Government has no programs that directly deal with
extractive industry capacity building, though the MAE program
has brought together several NGOs interested in transparency in
extractive industries. These NGOs formed a group called
Cambodians for Resource Revenue Transparency in January 2008,
which is still harmonizing its positions on many critical
issues of revenue management.
China
With a land mass slightly smaller than the United States,
China has approximately 1.3 billion people. The infant
mortality rate is approximately 21 deaths per 1000 births, and
average life expectancy is 73 years.\27\ The per capita income
of the average Chinese is $44,050.\28\
---------------------------------------------------------------------------
\27\ Figures for life expectancy and infant mortality throughout
this report are from the United Nations Development Program, Millennium
Development Goal data (http://www.undp.org/mdg/).
\28\ Figures for per capita income are from the World Bank, World
Development Indicators (http://web.worldbank.org)
---------------------------------------------------------------------------
China is still a developing country, despite its GDP
ranking fourth in the world after only thirty years of reform.
China's land is crucial to food production, yet China has only
9% of the world's arable land and 22% of the world's
population. China is also short on fresh water due to its large
population; fresh water per capita is less than one fourth of
the world's average. According to government officials, China's
top policy priority is to focus on the peaceful and equal
development of relations with other countries in terms of
culture, politics, and trade and improving the standard of
living within China.
In 2006, China's GDP from extractives totaled $152.7
billion, and employment in these industries was 7.84 million.
China's extractive industry production amounts to less than 5%
of the country's GDP due to the incredible size of their
economy. China produces significant amounts of the following
commodities: iron ore, mercury, tin, antimony, manganese,
tungsten, aluminum, lead, zinc, molybdenum, gold, uranium,
copper, vanadium, lead, and magnetite. Last year, China
produced around 2.3 billion tons of coal, making it the world's
largest producer and consumer of coal, as well as the world's
largest producer of tin. China's natural gas supply, however,
is less than 1% of the world's total production and aluminum is
only 2% of the world's total. China's extractive industries
have recently boomed in order to satisfy its large population
as well as the rest of the world's demand: China's 2006 growth
rate of output was 49% for coal, 77% for oil and gas, 42% for
metal and ores.
China's total oil production in 2007 was 3.9 millions of b/
d and their consumption was 7.58 million b/d. They ranked 5th
in 2007 in both total oil production and crude oil production,
as well as second in consumption.\29\
---------------------------------------------------------------------------
\29\ ``China Energy Profile'' Energy Information Administration
August 2008.
---------------------------------------------------------------------------
According to an official from Shanghai Institute of
International Studies, a think tank in China, most extractive
revenues go to the central government since most of the
companies are State Owned Enterprises (SOE). The companies can
help the local governments develop water, electricity, housing,
schools, and transportation in order to sustain their economic
development and create a good investment environment for
foreign direct investment. The SOEs have a monopoly over the
extractives industry and pay a tax to the government for their
rights. World Bank officials noted that the mining industries
are usually small and locally operated, and therefore, the
revenue goes into the local economy; however, the central
government is attempting to consolidate this industry. One
government official stated that some of the inland provinces
are rich in natural resources and develop those industries for
their benefit. One stated that most of the fiscal revenue in
the local government of Wuhan goes towards helping the local
people through cultural exchanges and educational development.
The extractive revenues are reportedly not invested in China's
sovereign wealth fund.
China stated that it has just begun SWF investment and is
in an experimental stage. China claims it has suffered the loss
of billions of U.S. dollars, stressing that SWFs are simply for
commercial interest and that it is up to the corporations
themselves on what sectors they make investments in. China
established its SWF, the China Investment Corporation (CIC) on
September 29, 2007, with an initial investment of $200
billion.\30\ China currently has over $1.5 trillion in foreign
exchange reserves, and therefore allegedly created the CIC to
improve the rate of return and to get rid of excess liquidity.
---------------------------------------------------------------------------
\30\ China's Sovereign Wealth Fund information came from Michael
Martin's January 22, 2008 CRS report.
---------------------------------------------------------------------------
CIC has been criticized because the initial investments
were apparently political in nature, even though the top
management denies these claims. Concern has grown from U.S.
officials about the large amount of money in CIC as well as
potential investments in major U.S. investment banks like
Citigroup. The Fund has invested in U.S. Treasury bonds and, on
December 19, 2007, the CIC purchased ``around 9.9%'' of Morgan
Stanley which amounted to $5 billion. Morgan Stanley stressed
that the CIC will have ``no special'' rights of ownership and
no role in corporate management.''
World Bank officials said there has been very limited
dialogue on EITI with the Chinese government. Since extractives
are such a small part of their GDP it would be difficult to
apply any serious pressure on China to become engaged in EITI.
China would benefit from EITI but it would be too complex to
implement because the payments are mostly done at a local level
rather than the national level.
The World Bank has been trying to improve budget
transparency in China, but representatives said this was
difficult and that most successes have been at the local or
municipal level. Transparency became more of a key issue
following the recent earthquake in China. According to both
U.S. officials and Chinese officials, China passed anti-
corruption laws in conjunction with joining the WTO and passed
anti-bribery laws after becoming a signatory on the UN
Convention. The U.S.-China Strategic Economic Dialogue has been
the primary forum for U.S. officials to raise issues relating
to transparency and economic management with Chinese officials.
For example, agreements have been reached to increase energy
security for oil importing countries in the event of a supply
disruption by cooperating with one another and in conjunction
with the International Energy Agency. Other agreements include
civil aviation to approve non-stop flights between the two
countries and tourism agreements. U.S. officials asserted that
they have engaged with China on supporting transparency through
their investment in resource-rich companies, though it is not
clear if these discussions have resulted in any changes. The
United States and China have discussed consumer product safety,
intellectual property rights, and working to expand U.S.
exports to China. As U.S. embassy officials explained,
transparency will continue to expand, but at China's own pace;
the U.S. has little leverage to push these types of issues. In
the end, Embassy officials said that the most important thing
is consistency.
Indonesia
Indonesia has a population of over 230 million. Annual per
capita income is $3,580 while the percent of the population
living under $2/day is 52.4%. Indonesia's total revenue from
hydrocarbons in 2005 was $15.8 billion which was 5.5% of GDP.
The Asian financial crisis severely affected the Indonesian
economy, causing per capita GDP to plummet. The economy has
since bounced back with increasing foreign investment, but
growth is expected to slow to 5.9% in 2008 from 6.3% in 2007,
due predominately to increasing fuel and food prices. Indonesia
still faces issues of corruption that deter further foreign
investment, but the nation has taken substantial steps to
promote democracy.
In 2006, Indonesia was the 21st largest oil producer. As an
oil producer, Indonesia has been on the decline. This reduced
profile as an oil producer led Indonesia to recently announce
its withdrawal from the Organization of Petroleum Exporting
Countries (OPEC) at the end of 2008. Indonesia was responsible
for approximately 1.3% of the world's daily oil production in
2006 with 1,005,810 b/d of petroleum crude and condensate; in
2007 Indonesian production fell to 912,000 b/d. Indonesia's
proven oil reserves are approximately 4.44 billion barrels,
according to official data.
However, there is great untapped potential in gas reserves.
Indonesia ranks eighth in world gas production and is the
world's second largest LNG exporter, with proven reserves of
88.5 trillion cubic feet (Tcf) in 2006. Proven reserves fell 9%
in 2006 compared with 2005. Indonesia produced 2.97 Tcf in
2006, down 1% from 2005. Indonesia lost its status as the
world's largest exporter of LNG to Qatar in 2006. Indonesia
produced 22.4 million tons of LNG in 2006, the same year the
government announced a policy to re-orient natural gas
production to serve domestic needs. As a result, Indonesia's
share of the world LNG market has shrunk from 18.8% in 2004 to
14% in 2006. Rapid rates of new production in Qatar, Australia
and Russia are likely to continue to erode Indonesia's
position.
Indonesia is the largest exporter of thermal coal and also
has large deposits of copper, gold, nickel, and silver. Mining
investment fell almost 66% from 1998 to 2005, largely due to
regulatory uncertainty. Mining policy challenges include
resolving conflicts between mining and forestry laws to prevent
disputes with local communities that cause additional financial
burdens to mining companies.
Oil and gas revenues are channeled to the Non-Tax Revenue
Department, Ministry of Finance and are audited internally with
an external auditor working through the Indonesian audit board
(BPK). Hydrocarbon revenue is included in the national budget
and re-allocated according to separate formulas for oil and gas
to the regional governments. Due to devolution of power and
revenue authority to regional governments, a persistent problem
has been the misunderstanding of the calculations of oil and
gas revenues by sub-national government officials, which has
led many regional administrations and their citizens to
overestimate the value of future transfers. To clarify the
regions' share of oil and gas revenues, the Ministry of Finance
began the practice in 2005 to issue a yearly decree estimating
the allocation of oil and gas revenues to all of the provinces,
regencies, and cities. Indonesia does not have a sovereign
wealth fund (SWF). There is consideration of establishing a SWF
from the ``SOE pooling fund.'' However, it is not yet clear how
the SWF would be structured.\31\
---------------------------------------------------------------------------
\31\ Ibid
---------------------------------------------------------------------------
The prospects for development of a long-term environment
conducive to transparency and combating corruption in Indonesia
are uncertain. Since transition to democracy in 1998, Indonesia
has made progress in anti-corruption reform, notably with
institutional reform during the Yudhoyono administration. Yet,
while a plethora of transparency and anti-corruption
initiatives have been launched by Indonesian governmental
leaders, with the encouragement of civil society, progress is
slow.
Since ascending to the top office in Indonesia, the
President has continually pressed on the corruption front, and
can point to ``over 100 public officials, including governors,
regents and former ministers, (having) been jailed for
corruption since. . . . 2004.'' However, the recently released
United Nations Development Program (UNDP) Asia-Pacific Human
Development Report, ``stresses that while anti-corruption
efforts too often focus on exposing the `big fish,' it is
`small fry' corruption, which causes more day-to-day suffering
and could severely hamper the Region's goal of achieving the
Millennium Development Goals--the eight internationally--agreed
targets aimed at halving poverty by 2015.'' \32\ In March of
this year, the Indonesian Parliament (DPR) passed a ``Freedom
of Information'' act which reflects the Indonesian government's
commitment to transparency. While passage of the law reflects
commitment to transparency, actual implementation of the law
will be the long-term test.
---------------------------------------------------------------------------
\32\ ``Tackling Corruption, Transforming Lives,'' United Nations
Development Program, June 12, 2008.
---------------------------------------------------------------------------
Indonesia is not an EITI candidate country. Timeliness of
action by President Yudhoyono advancing EITI will be an
integral determinant as to whether EITI, and other transparency
initiatives, gain momentum so that the people of Indonesia may
realize direct benefit from extractive industries. There
appears to be a general lack of information in the public
sphere on how EITI works. EITI-related reforms were part of the
massive 2008-2009 structural reform package released by
Coordinating Minister for Economic Affairs Dr. Boediono before
he became Central Bank Governor. Implementation of these
reforms remains uncertain.
USAID is funding over $100 million of transparency and good
governance projects in Indonesia, and as possible, enlists
other donors to contribute and participate in the projects.
U.S. Attorney General Mukasey recently visited Indonesia where
he was able to view U.S. Department of Justice (DOJ) programs
already in place. Along with Indonesian Attorney General
Hendarman Supandji, Mr. Mukasey signed a Memorandum of
Understanding (MOU), providing $750,000 in U.S. Government
assistance to help establish an anti-corruption task force at
the Attorney General's Office (AGO), modeled on the U.S. AGO's
Anti-Terrorism and Transnational Crimes Task Force.\33\
---------------------------------------------------------------------------
\33\ U.S. Embassy, Jakarta, June, 2008.
---------------------------------------------------------------------------
Timor-Leste
Timor-Leste has a population of approximately 1 million
people. The average life expectancy is 59.7 years, and the
infant mortality rate is 61 deaths per 1000 births. The total
hydrocarbon revenue for 2005 was $116 million or 38.8% of GDP.
Timor-Leste was created in May of 2002, following
independence from Indonesia. During the secession movement, an
estimated 75% of the population was displaced and nearly 70% of
all buildings, homes, and schools were ruined by a campaign of
violence carried out by militia groups following their 1999
vote for independence. Between 1999 and 2002, over 5,000 (8,000
at peak) UN peacekeeping troops were sent to help rebuild the
nation. Conflict again broke out in March 2006 resulting in
another UN peacekeeping mission in Timor-Leste and the
resignation of Prime Minister Alkatiri. Violence again erupted
surrounding the April 2007 presidential elections, and in
February 2008, one of the leaders of the March 2006 violent
protests, Major Reinaldo, led an unsuccessful assassination
attempt and coup against the elected President and Prime
Minister. Violence and peacekeeping troops have been persistent
forces in defining the newly independent nation, not only due
to military-related violence but also gangs of unemployed
youths. Unemployment and underemployment are thought to be as
high as 70%. According to a 2007 estimate, inflation is
approximately 7.8%.
In 2000, as Timor progressed toward independence under UN
auspices, complex and politically controversial negotiations
began with Australia regarding overlapping claims on gas and
oil resources of the Timor Sea. The result was the signing of
the Treaty on Certain Maritime Arrangements in the Timor Sea
(CIMATS) on January 12, 2006, which increased Timor-Leste's
share of hydrocarbon revenues from 18% to 50% for the Greater
Sunrise oil field. In the years 2005-2006, Timor-Leste earned a
combined $360 million in hydrocarbon revenues. Timor-Leste is
also currently receiving revenue in a 90%-10% sharing agreement
(in favor of Timor) from an earlier agreement on the Bayu-Udan
field, which contains approximately 400 million barrels of oil
and 3.4 Tcf of gas.
According to World Bank reports, revenues from oil and gas
already comprise 50% of the country's GNI and supply more than
90% of its government revenues. All of this is derived from
offshore, upstream development, with downstream processing done
in other countries. It is the hope of many Timorese, including
the Timor-Leste government, that Timor-Leste will soon receive
revenues from downstream (refining, processing and gas
liquefaction. The most likely near-term possibility for this is
an undersea pipeline from the Greater Sunrise gas field to the
shore of Timor-Leste, with a Liquefied Natural Gas (LNG)
liquefaction plant and tanker port to process the gas and ship
it overseas.'' \34\
---------------------------------------------------------------------------
\34\ ``Sunrise LNG in Timor-Leste, Dreams, Realities and
Challenges,'' A report by La'o Hamutuk, Timor-Leste Institute for
Reconstruction Monitoring and Analysis, p. 3, February, 2008.
---------------------------------------------------------------------------
``Oil and gas revenues are expected to accelerate sharply
in coming years. Petroleum Fund assets have the potential to
exceed $12 billion by 2020.'' \35\ Hydrocarbon revenues are
channeled into the Petroleum Development Fund, which was
established in 2005 and is managed by the Banking and Payments
Authority (BPA). The BPA is a distinct autonomous public
entity, accountable directly to the Prime Minister. The highest
decision body of the BPA is the Governing Board. The BPA does
not receive instructions when making decisions that relate to
areas under its responsibility, e.g. approving licenses for
banks or insurance companies. The Petroleum Fund Law provides
clear lines of responsibility between the BPA, the Ministry of
Finance and the Parliament.\36\
---------------------------------------------------------------------------
\35\ Economics@ANZ, Timor-Leste, June 2007.
\36\ Abraao Fernandes de Vasconselos, Banking & Payments Authority
General Manager.
---------------------------------------------------------------------------
The assets of Timor-Leste's Petroleum Fund are
approximately $3 billion. The return on the Fund for the year
to March 31, 2008 was 9.1%. During the first quarter of this
year, the capital of the Fund grew from $2,086.16 to $2,629.96
million.\37\ The BPA continues to invest all funds received
according to the investment mandate agreed with the Ministry of
Planning and Finance in which a benchmark index of United
States Treasury Securities with maturities up to five years is
specified together with defined performance measures.\38\ The
BPA continues to invest all funds received according to the
investment mandate agreed with the Ministry of Planning and
Finance.\39\
---------------------------------------------------------------------------
\37\ Quarterly Report, Petroleum Fund of Timor Leste.
\38\ Ibid.
\39\ Ibid.
---------------------------------------------------------------------------
Timor-Leste President Jose Ramos-Horta noted that credit
for establishing the Petroleum Development Fund should be given
to the Norwegians, the World Bank and the IMF, which have
provided advice to the government of Timor-Leste on this
project. He also praised former Prime Minister Mari Alkatiri
for his initiative in setting up the fund. It produces
quarterly reports that are released to the public.
The Petroleum Fund law gives the Minister of Finance
authority to make investment decisions after receiving advice
from the Investment Advisory Board (an advisory body set up to
advise the Minister on issues related to investment strategy,
performance benchmarks, and performance of the investment
managers). The Petroleum Fund is audited annually by an
internationally-recognized audit firm (presently Deloitte), and
the BPA and Minister of Finance audit offices also conduct
regular auditing, required every six months.\40\
---------------------------------------------------------------------------
\40\ Abraao Fernandes de Vasconselos, Banking & Payments Authority
General Manager.
---------------------------------------------------------------------------
Leaders of Timor-Leste are committed to transparency in
governance. One example is a special project informing the
public as to the success of individual Cabinet members with
budget execution. Unfortunately, the limited capacity of GOTL
institutions point to weaknesses in fiscal policy, including
budget execution and program implementation and monitoring. The
government does not have the capacity to fully and completely
fund and plan these projects, and large amounts of funds have
been carried over from year-to-year and there is no clear
tracking system for how the money is spent.
Timor-Leste has signed up for EITI and is an outstanding
model of implementation. Former Prime Minister Mari Alkatiri
announced Timor-Leste's commitment to EITI in 2003 and
consulted with Norwegian officials, among others, to determine
the best way forward. The former Prime Minister has conveyed
his hope that Timor-Leste develops an EITI program that is ``a
Norwegian plus model.''\41\ Currently, Timor-Leste EITI does
not include mining as there is presently no mining activity in
the country. However, ``we have left room for mining to join
the Working Group in the event there is an activity in that
area.'' \42\
---------------------------------------------------------------------------
\41\ Interview between Keith Luse and Mr. Alkatari, June 17, 2008.
\42\ Ibid.
---------------------------------------------------------------------------
However, more recently, concern has been expressed
regarding the Timor-Leste government's plans to reportedly
increase government spending in the next budget by over 120% to
assist in subsidizing high food and fuel prices. ``Opponents
say these subsidies risk dampening East Timor's nascent non-oil
economy. ''\43\
---------------------------------------------------------------------------
\43\ ``East Timor Ignores Economic Warning,'' BBC News, July 31,
2008.
---------------------------------------------------------------------------
U.S. objectives in Timor-Leste include strengthening the
country's democracy and free markets. U.S. foreign assistance
primarily supports job creation through accelerated economic
growth and strengthening key foundations of good governance,
with particular emphasis on developing a functioning justice
system and professional media sector.\44\ While U.S. officials
have not been actively promoting EITI in Timor-Leste, part of
USAID's portfolio encourages greater transparency in
government. U.S. advocacy for EITI is unnecessary given the
full endorsement of the project by top levels of the Timor-
Leste government as well as key parts of the business
community. There is opportunity for the United States to
express its support to the civil society players who are on the
front lines, interacting with Timor-Leste officials. Along with
AusAid, USAID is funding a project to strengthen independent
media in Timor-Leste. There is specialized training for
journalists from local media outlets and organizations, to help
the media produce and distribute high quality news to as many
people as possible.\45\
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\44\ U.S. Embassy, Dili, May, 2008.
\45\ USAID News Release, ``USAID, AusAid Sign Agreement to Continue
Supporting Independent Media,'' March 26, 2008.
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Vietnam
Vietnam has a per capita income of $3,300. Vietnam's total
hydrocarbon revenues in 2005 were approximately $3,878 million,
or 7.4% of its GDP for the year. Vietnam's population is 84
million with a life expectancy of 73.7 years and an infant
mortality rate of 19 deaths per 1000 births.
Vietnam is a market-oriented Communist country, not unlike
its neighbor China. It launched a similar opening up (doi moi,
or ``renovation'') process in the mid-1980s, stumbled in the
1990s amid the Asian financial crisis, and has since
experienced high economic growth rates, 7.3% annually for a
decade, coupled with improved relations with the United States.
Its 15-year economic growth and poverty-reduction record has
been called ``a spectacular success story'' by the World Bank.
Competition with China is a driving force. The signing of a
bilateral trade agreement with the U.S. in 2001 and especially
entry into the WTO in January, 2007, marked a major shift in
international perceptions and resulted in an unexpected influx
of foreign direct investment (FDI), remittances and development
assistance. That, combined with soaring world food and energy
prices, has led to raging inflation, expected to top 30% this
year (after averaging 5% annually for much of the decade.)
The extractives transparency agenda in Vietnam is only just
getting underway. Very few government officials have heard of
EITI, and the United States, despite significant interaction on
governance and administrative reform issues, is not a player.
By contrast, an anti-corruption agenda is in full swing.
Corruption is an openly-discussed issue, both in the media and
among government officials and donors, though the government
has reined in reporters who have exposed malfeasance in the
higher reaches of government. The country passed an anti-
corruption law in 2005, and has a high-level National Anti-
Corruption Steering Committee headed by the Prime Minister
himself. There is a long-standing Government Inspectorate which
has been given donor support to improve its effectiveness, and
the State Audit of Vietnam was given its independence in 2006
and reports to the National Assembly. Nonetheless, Vietnam does
poorly on the Transparency International index, ranked 123 in
the world, the same as Nicaragua, East Timor and Zambia. At a
certain level, state budgets are public: until 1998 they were a
state secret, and in 2005, the entire budget was disclosed to
the public for first time.
Vietnam is a significant but low-profile oil producer.
Vietnam has been a net oil exporter since the early 1990s, and
with production starting to slow, the recent boom is largely
due to the run-up in oil prices. Staff was told that oil and
gas revenues in 2008 are likely to be 140% higher than in 2007.
Production in 2007 was about 360,000 b/d, about half that of
Malaysia, and a bit more than Thailand, making it Asia-
Pacific's sixth largest oil producer. All of Vietnam's oil is
produced offshore, and many other offshore areas have been
unexplored or undeveloped owing to territorial disputes in the
Spratley Islands and elsewhere with Thailand, China, Taiwan,
and other neighbors. Fields currently under development could
come online soon and reverse the production decline, and some
believe the unexplored areas are highly likely to contain oil
or gas as well.
Natural gas production has been going up as oil production
has declined, rising by a factor of four since 2000 to more
than 160 billion cubic feet. All the gas, also offshore, is
piped onto land for use in electric power or fertilizer plants,
and it appears the government will not allow gas to be
exported, even though the international oil companies producing
it say they could make much more money if they did. Chevron has
been trying for 10 years to commercialize a large gas find of 4
Tcf, a resource sufficient to supply 20% of the country's
electricity needs.
Since the mid-1990s, Vietnam has greatly increased its coal
production and its exports (mostly to Japan and China). But
coal exports are only 1/10 of crude oil exports by value, and
by 2013, Vietnam expects to be a coal importer as it increases
coal use to meet growing electricity demand. The major new
extractive on the horizon is bauxite (aluminum). Large
commercial deposits (world's fourth biggest, by one estimate)
have been found in the Central Highlands, but they will require
massive infrastructure investments to develop.
The dominant extractives company is PetroVietnam, a wholly
state-owned oil company, which through either production-
sharing contracts or joint ventures has a stake in all oil
production. From its opulent new 19-story headquarters in
Hanoi, it controls directly or indirectly most aspects of the
petroleum and gas business in Vietnam. On the one hand,
PetroVietnam acts like a commercial company: it publishes an
annual report, gets loans from international banks, floats
bonds on international markets, publishes audits, regularly
turns over its profits to the treasury after keeping some for
itself, as set by law. On the other hand, much of
PetroVietnam's operations remain behind a curtain which few
dare to draw back. For instance, when we asked a Foreign
Ministry official what were the perceptions of the company
regarding corruption, he smiled and shrugged his shoulders:
``Not much is known about what goes on there.''
Transparency of oil revenues could curb the power of
PetroVietnam by giving other power centers in the government a
chance to scrutinize, and criticize, its priorities. It could
also help improve macroeconomic management with better data on
cash inflows into the treasury, and more realistic budgeting.
For instance, staff were told that last year the National
Assembly kept asking, in the budget, what the projected oil
price would be. Finally, the government said that for 2008,
they would assume an average $63 a barrel (at a time when oil
was already in the $80-$90 range). The extra money does not
appear to go through the normal budgetary processes. There
appears to be little discussion and no appetite in Vietnam at
the moment for a sovereign wealth fund for oil or other
extractive revenues.
EITI is unlikely to be adopted anytime soon, for several
reasons. First, the concept is still largely terra incognita,
and much more education is needed. Second, the government is
pre-occupied with the inflation crisis. Third, oil company
officials are either not EITI-savvy, or are preoccupied with
other pressing issues. Companies are dealing with the fallout
of recent demands by China that one major international oil
company stop doing exploration work in a Vietnamese block that
is also claimed by China. Because so much of Vietnam's
promising areas lie in contested waters, this has roiled
Vietnam's petroleum community, driving EITI far down the
priority list. Fourth, the U.S. is pushing a variety of other
transparency and governmental reform issues. Fifth, no other
donors, except Norway, appear to be promoting EITI. It is
absent from the World Bank and ADB agendas. Finally, EITI's
image in Vietnam is hurt by the fact that no other country in
the region has signed up.
The overarching U.S. policy toward Vietnam is to continue
the process of normalizing relations that only formally began
in 1996, after being frozen for many years following the
Vietnam War. The main focus is on trade, as the US has quickly
become Vietnam's top export market. Promoting governance reform
and transparency is a major USAID focus, and the primary
vehicle is a comprehensive technical assistance and capacity
building effort for legal reform called ``Support for Trade
Acceleration II,'' or STAR. However, EITI is nowhere part of
this effort. Launched originally to help Vietnam meet its
obligations under the Bilateral Trade Agreement (BTA) and World
Trade Organization (WTO), the project is helping Vietnam cut
red tape, develop an administrative procedures law, and
implement other reforms to help improve the investment climate,
reduce corruption and boost competitiveness. The government of
Vietnam has embraced regulatory and administrative reform,
under a program it calls Project 30, as an element of its
ambitious economic growth strategy, which aims to achieve
middle-income country status by 2010.
EUROPE AND CENTRAL ASIA
Azerbaijan
Azerbaijan has a population of 8.5 million people with an
average life expectancy of 67.1 years and an infant mortality
rate of 74 deaths per 1000 births. Over one-third of
Azerbaijan's population lives under $2/day. Azerbaijan's total
oil export revenues in 2007 was $5.27 billion or 20% of GDP.
Azerbaijan is located in a difficult neighborhood along the
energy rich Transcaucasian corridor linking the Caspian Sea to
Turkey and Russia to Iran. The United States and Azerbaijan
have cooperated strategically and economically on energy
development and transport, which also has reinforced the
sovereign independence of Azerbaijan. President Ilham Aliyev
has made commendable progress in the transparent management of
oil revenues, establishing Azerbaijan as a global leader in
reserves fund management. Yet the ongoing challenges of
corruption and issues of poverty pose substantial challenges.
Azerbaijan is also locked in a frozen conflict with Armenia
over Nagorno-Karabakh.
Fuelled by the oil sector and construction, Azerbaijan's
GDP growth rate for 2006 was, by many estimates, the highest in
the world at 34.5%. Several indicators point to an onset of
``Dutch disease'' in Azerbaijan. Inflation hovers near 1%.
Export-driven industries are suffering as the local currency
experiences steady appreciation (13% against the dollar in
2005-2006), despite currency interventions of approximately $1
billion by the Azerbaijan government. In 2006, the Azerbaijan
government increased fiscal spending by a reported 80%.
Azerbaijan became one of the first world oil producers
after crude was found in the mid-1800s. Since its independence
in 1991, its oil sector has again surged as offshore Caspian
fields have come online. Azerbaijan's oil revenues were $5.27
billion in 2007, constituting 20% of GDP; revenues are expected
to climb to $19.4 billion by 2010, constituting over 43% of
GDP. While Azerbaijan has undergone a massive infusion of oil
wealth over the last decade, oil revenues are expected to peak
in only a few years (2010-2012). Natural gas revenues have the
potential to increase substantially over the coming two
decades. However, lingering uncertainty over the Nabucco
pipeline project leave prospects for development--and price
expectations--of Azerbaijani gas unclear.
Perhaps the most important development for the energy
wealth outlook for Azerbaijan was the completion of two U.S.-
supported pipelines allowing Azerbaijani oil and gas to reach
global markets. The Baku-Tbilisi-Ceyhan (BTC) pipeline
transports crude oil from the Caspian Sea to the Turkish port
of Ceyhan on the Mediterranean, and the South Caucasus pipeline
(SCP) currently transports gas to Georgia and Turkey with
onward ambition to Vienna. The BTC pipeline should ensure that
Azerbaijan remains a major energy conduit for years to come: in
2007, revenues for use of the BTC totaled $16.5 million for
Azerbaijan. These pipelines facilitated investment in new
production, and onward routes will be necessary to develop more
natural gas production in the coming years. Likewise, trans-
Caspian energy transport from Central Asia for onward delivery
through Azerbaijan to world markets would provide a stable
revenue stream from transport fees.
Azerbaijan is a candidate country for EITI and has been
involved with EITI since its inception. Azerbaijan has until
March 9, 2010 to complete the EITI validation process.
Azerbaijan was the first country to submit EITI reports to be
scrutinized by an independent audit firm and is a leader in
allowing civil society to help implement EITI. Azerbaijan has
submitted a total of 8 reports on its oil and gas revenues to
date. Azerbaijan has done a great deal to improve revenue
transparency, but it ranks relatively poorly in measures of
corruption compared to both its oil deprived neighbors in the
Caucasus and even many oil-rich countries in the developing
world. However, most estimates indicate that Azerbaijan ranks
with Nigeria as making the most progress along the EITI path of
oil revenue transparency. Yet as corruption and development
challenges in both those countries indicate, revenue
transparency will not bring development or political reform.
The key question is how that information will be used--and if
the government will allow it to be used through civil society,
media, and political representation--by the people of
Azerbaijan to hold their government accountable.
Several reasons have been posited to explain why a country
known for tightly controlled politics and corruption would
embark on a relatively progressive transparency agenda. First,
Azerbaijan decided to sign up when oil revenues were meager, so
the requisite accounting was still at a relatively simple
stage. Second, international financial institutions, especially
the IMF and World Bank, were very influential in Azerbaijan at
the time and convince Azerbaijan to establish the State Oil
Fund for the Republic of Azerbaijan (SOFAZ) for macroeconomic
stability. Third, Azerbaijan was led by several Western-
educated officials, one of whom set up SOFAZ. Fourth, the
establishment of the BTC pipeline received much international
political attention, which spilled over into general interest
in the management of Azerbaijan's oil revenues. Fifth, the
primary oil companies were Western majors with serious concerns
with their international reputation and, thus, felt greater
pressure to push EITI.
In 1999, President Heydar Aliyev created the State Oil Fund
for the Republic of Azerbaijan (SOFAZ), a sovereign wealth fund
which holds assets overseas in a mix of currencies. As of April
2008, the Fund reported assets of $3.35 billion. SOFAZ expects
$5-10 billion in revenue for 2008, up to $30 billion
accumulated in three years, and $150-200 billion over the life
of the fund. Apart from oil and gas sales, SOFAZ receives
revenues from royalties payments, investment returns, and
rental fees from firms using state property. SOFAZ employs
Deutsche Bank and Clariden Bank as external asset managers, and
has a domestic staff of approximately 80 persons. SOFAZ'
guiding principle, ``solving the most important national
problems,'' is laudable if not amorphous. Fund managers
indicate a preference for infrastructure projects. In effect,
these expenditures represent a funding stream outside the
normal budget, and as such receive soft criticism in terms of
fiscal management. SOFAZ does not receive revenues from SOCAR,
which constitutes SOFAZ' primary weakness in terms of
transparency. Despite need for improved expenditure and
investment criteria at SOFAZ, it seems most payments made thus
far have been applied to projects to improve the lives of
Azerbaijanis in real need. The Economist Intelligence Unit
notes that SOFAZ has become ``the most transparent government
body in Azerbaijan.'' Indeed, managers of the fund are rightly
proud of having received a United Nations Public Service Award
in 2007.
The United States was a strong proponent of the
construction of the BTC and SCP pipelines to diversify
dependence away from Russian-controlled infrastructure. The
U.S. Government and our allies have a profound interest in
extending this project to include nations of Central Asia and
Europe. U.S. Government assistance has also been heavily
focused on the development of the non-oil sector with over $7
million targeted for macroeconomic stability, trade and
investment, private sector competitiveness, and financial
sector reform. The United States has also provided assistance
to bolster Azerbaijan's maritime security forces, assisting in
oil production security. The emerging orientation of Azerbaijan
towards close cooperation with Western countries is a
significant strategic achievement richly rewarding to the
United States, and provides a strong framework through which
the U.S. Government is able to advocate critical governance
reforms.
Kazakhstan
Kazakhstan has a per capita income of $7,780 and a
population of 15.3 million people. Infant mortality is 73
deaths per 1000 births, life expectancy is 65.9 years, and over
16% of the population lives under $2 a day. In 2005, Kazakhstan
brought in approximately $3.6 billion of hydrocarbon revenue,
comprising 6.3% of GDP.
Kazakhstan is the largest energy producer in the Caspian
region, having staked claim to vast oil and gas fields
offshore. Power in the country is centered around President
Nursultan Nazarbayev. Kazakhstan has been a productive partner
of the United States in key areas of cooperation, even as it
balances the concerns of its large neighbors Russia and China.
Kazakhstan's economic growth has been robust, approaching 10%
in 2007, and its oil sector accounts for approximately 38% of
total government revenues and half of Kazakhstan's exports.\46\
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\46\ ``Kazakhstan: Country Analysis Brief'' Energy Information
Administration, February 2008.
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Kazakhstan is rated by Freedom House as not free, due to
increased pressure on civil society. In 2007, President
Nazarbayev announced sweeping constitutional amendments to
allow him to remain president. Many interlocutors believe that
he could easily win any free election, although no elections
have yet been so judged. Kazakhstan ranks 73rd out of 177
countries on the United Nations Human Development Index, higher
than regional rivals Uzbekistan and Turkmenistan.
Kazakhstan's oil production has boomed since 1999. In 2007,
it produced 1.45 million barrels per day of oil, of which 1.2
million were exported. Total reserves are estimated at 40
billion barrels. As the Tengiz field is expanded and when the
new Kashagan field comes online, Kazakhstan's oil production is
expected to increase dramatically. Kazakhstan also has large
natural gas reserves with estimated reserves of 106 trillion
cubic feet. Production, most prominently in the Tengiz and
Karachaganak fields, was estimated at 1,037 billion cubic feet
in 2007, an increase of over 8% on 2006 levels. Kazakhstan
consumes most gas it produces but may become a net exporter of
natural gas in 2008. The primary conduit for gas is the Central
Asian Center pipeline, which is under expansion and travels
from Turkmenistan and Uzbekistan through Kazakhstan to connect
with the Russian network. Pipeline routes to China are also
under discussion.
Kazakhstan is also the largest Central Asian producer of
coal, producing 102 million short tons in 2006 and exporting
just under 30 million short tons. Kazakhstan also has
significant deposits of other minerals, including uranium,
chromium, lead, zinc, and others. Next to Canada and Australia,
Kazakhstan is the third largest producer of uranium.
Kazakhstan is in the process of considering a range of
energy transport infrastructure options to meet and diversify
its own export needs and to balance the concerns of the United
States, Russia, and China. Most importantly for U.S. Government
interests, a recent law authorized shipment of crude oil by
tanker across the Caspian to the Baku terminal of the Baku-
Tbilisi-Ceyhan (BTC) pipeline, which flows to the Mediterranean
coast in Turkey. The United States advocates construction of a
trans-Caspian pipeline to diversify Kazakhstan's oil export
routes and reduce dependence on infrastructure on Russian soil.
Kazakhstan also exports crude across Russia to the Black Sea
port of Novorossiysk through the Caspian Pipeline Consortium, a
pipeline in need of expansion but seeing little progress in
that regard due to Russian concerns; crude is also transported
northward to Russia via the Atyrau-Samara pipeline. The Astasu-
Alashankou network takes Kazakh crude to China, while
Kazakhstan conducts energy swaps with Iran.
Kazakhstan has made many positive strides in the area of
fiscal and oil revenue transparency. Kazakhstan endorsed EITI
in June 2005 and has until March 2010 to become compliant. It
has created a National Stakeholders' Council to coordinate EITI
and hosted its first EITI implementation conference with
stakeholders in February 2008. To date, Kazakhstan has
submitted one Reconciliation Report for EITI in January 2008,
but this report came under some criticism for not including all
oil companies operating in Kazakhstan.
With oil prices on the rise since 2000, the Kazakhstan
government has become more assertive with oil contracts,
passing a law in 2007 that allowed it to break contracts with
any international oil company with only two months notice and
to reserve the right to renegotiate contracts and levy fines
against companies found to be in breach. These moves were
contemporaneous with contracting difficulties for the
exploitation of the Kashagan field. As the Kazakh government
asserts a greater stake in the direct operation and profit-
taking from the oil and gas sector, the inclusion of
Kazmunaigaz in transparency standards should be a particular
point of emphasis for the U.S. Government.
In 2000, Kazakhstan set up the National Oil Fund for the
Republic of Kazakhstan to manage its oil wealth. As of May
2008, the fund contained approximately $18 billion and was
managed by the Ministry of Finance.\47\ From the outset, the
Fund has come under criticism from transparency watchdogs for
having been set up by presidential decree and not an act of
parliament. Oversight of the Fund is carried out by the
Management Council comprised of the President, Prime Minister,
and members of Parliament. Thus, the President ultimately
controls the disbursements, and the public has little
involvement.
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\47\ Goldman Sachs, ``In Defense of Sovereign Wealth Funds,''
Global Economics Paper No 167.
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U.S. assistance to Kazakhstan is highly focused on
expanding the non-oil sector of the economy with $7.7 million
targeted towards private sector competitiveness, financial
sector reform, and macroeconomic foundation and growth. USAID
programs have also helped to develop regional energy markets to
link Central and South Asian markets and enable greater energy
trade with South Caucasian states, Turkey, Europe, and global
markets. Many economic assistance programs are cost-shared
between the U.S. and Kazakhstan governments. In the political-
military sphere, the United States has agreed to a five-year
military plan with the government of Kazakhstan that
incorporates funding to boost Caspian security.
Norway
Norway has a population of 4.6 million people. The average
life expectancy for a Norwegian is 79.8 years old and the
infant mortality rate is 4 deaths per 1000 births. The total
spend on hydrocarbon in 2005 was approximately $38.4 billion
(13% of GDP). The per capita income of Norway is $43,820.
Norway is seen as the leading country on EITI. Since Norway
is a social democratic republic and many of the extractive
countries share a similar view of the role of the state, their
state-owned oil company seems to have particular influence when
suggesting policy actions. Some felt that the Europeans,
particularly the Norwegians, could be more effective because
they were seen as friendly nations whereas the U.S. was seen as
a threatening country with an ulterior motive.
Many refer to the ``Norwegian model'' as one worth
replicating. In Norway, the government was democratic and
fiscally disciplined before the discovery of oil. The state,
which controls the oil industry, has set up a resource
management system which includes an open budget process, a
public long term fiscal policy strategy, and a sovereign wealth
fund.
Some in Norway saw sovereign wealth funds as a framework
rather than a tool. One noted that ``accumulation of cash in a
weak institution is not a recipe for success,'' while another
noted that a fund can help decouple revenues from spending and
help a country avoid inflation. Norway's sovereign wealth fund
was first set up in 1990 but the first allocations to the fund
were only in 1996. 15-20% of Norway's GDP goes to the sovereign
wealth fund to be used for future generations. Now, roughly 4%
of the Fund goes to the government's budget.
In Norway, transparency is important to retain domestic
trust and helps the government stick to an investment strategy
even when markets are turbulent. Norwegians stressed that an
informed public with a clear sense of ownership was critical.
The Norwegians suggest that other countries: 1) devise
comprehensive budget policy frameworks so they can see total
resources and prioritize; 2) may or may not need to develop a
sovereign wealth fund; and 3) build good credible institutions
to manage money--regardless if they have a fund or not. They
repeatedly stressed that a sovereign wealth fund was no
substitute for sound fiscal management.
Most interlocutors stressed the importance of securing
support for EITI from the Chinese and Indian governments. It
was reported that Chinese companies are already reporting
through EITI in Nigeria and Mauritania. A few people suggested
that China be brought into the International Energy Agency
framework.
Russia
The Russian Federation has a population of 142.4 million.
Average life expectancy is 65 years, and over 12.1% live on
less than $2 a day. The average per capita income is $11,630,
and infant mortality is 18 deaths per 1000 births. Russia
collected over $55.8 billion in hydrocarbon revenues in 2005,
approximately 7.3% of its GDP.
Russia has been focused on promoting political and economic
stability following many years of turbulence. These priorities
have resulted in a crackdown on civil society and increased
pressure on opposition parties to operate freely. Many
interlocutors and observers are cautiously optimistic about the
recent election of President Dmitri Medvedev. He has publicly
spoken about the need for increased transparency, although he
has not provided any details about how he will proceed. He
announced the appointment of former President Vladimir Putin as
his Prime Minister as soon as he was elected, which has led to
some debate about who will lead Russia.
Despite the recent economic recovery, which brought
prosperity to some of the Russian people, 15% still live below
the official poverty line set by the Russian government
(compared to 38% in 1998). Quality of life indicators paint a
mixed picture. The population is relatively well-educated and
has a literacy rate of nearly 100%, but since the 1990s, the
health of the Russian people has been in decline. Russian
workers continue to have high levels of under- and unemployment
in pockets of the country, although there is a growing middle
class and labor shortages exist in some high-skilled job
markets.
The energy sector has been identified by the Kremlin as
important to bringing improved living conditions to the
millions of Russians who still live in poverty. Perhaps more
importantly, many Russians see energy as a means to regain the
power and prestige they enjoyed prior to the collapse of the
Soviet Union. There are numerous concerns about the way the
energy sector is managed in Russia. The government has taken
control of much of the country's energy supplies. In addition,
the government has moved to nationalize and take control of
several private corporations.
Over the last several years, Moscow has used energy as a
geopolitical weapon and foreign policy tool on numerous
occasions. It has cut off or threatened to cut off oil and gas
supplies to several neighbors to intimidate or pressure
governments to bend to Russia's will. Targets of this political
intimidation have included Ukraine, Georgia, Estonia,
Lithuania, Belarus, and Czech Republic.
Some observers are concerned that Russia's energy
extraction is inefficient, and could be more productive with
newer technology. Others suggest that without significant
improvements in recovery and transportation Russia will be
hard-pressed to meet its current contract commitments. Many
multinational and international energy corporations have
expressed skepticism about prospects for success in Russia.
Nevertheless, these same entities are quick to add they do not
have a choice and must take their chances given Russia's
reserves. The investment climate in Russia is reportedly
improving, but there have been complaints about limitations on
foreign investor participation. Many are hopeful that the
recent change in Russia's government may improve the situation.
Russia is a large player in the international oil and gas
markets, with the largest proven natural gas reserves in the
world. The Russian economy is heavily dependent on oil and gas,
which account for 63% of its exports and 50% of total state
revenues.\48\ From 1999 to 2007, Russia's real GDP grew at an
annual rate of 6.7%, and Russia virtually eliminated its public
foreign debt, which equaled 100% of GDP in 1999.
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\48\ See CRS Report RL33407 Russian Political, Economic, and
Security Issues and U.S. Interests, by Stuart Goldman; and CRS Report
RL33212 Russian Oil and Gas Challenges, by Robert Pirog.
---------------------------------------------------------------------------
Oil and gas revenues first go into a Reserve fund (which
was formerly called the Stabilization Fund). When the reserve
fund reaches 10% of Russia's gross domestic product in a given
year, the additional revenue goes into the National Welfare
Fund. In some circumstances, money is transferred from the
Reserve Fund to the general budget to cover spending gaps that
non-oil and non-gas revenues cannot fill. It is important to
note that this system was established this year, it is unclear
how well the process will work.
Some interlocutors gave the impression that the Russian
government has relatively responsible and transparent fiscal
policies, including collecting and spending oil and gas
revenues. One interlocutor said that revenues are taxed because
they are by nature more transparent, and it is easier for
companies to miscalculate profits for the purpose of avoiding
paying taxes. The government does not tax profits because it
does not trust the companies to be honest about them. The main
problems voiced about the government concern the lack of
judicial independence and respect for rule of law in general.
These problems increase the risks and therefore the costs of
doing business in Russia, and dampen foreign investment. A few
interlocutors claimed that detailed budget information is not
available from the government, especially for extractive
revenues.
Most interlocutors gave the impression that Russia would
not readily become an EITI candidate country.\49\ Russians
consider EITI to be an initiative for developing countries with
greater problems than Russia. Even those people who admitted
that Russia's problems are very large were hesitant to embrace
EITI as a viable initiative for Russia, mainly because they saw
EITI as something that merely scratched the surface of Russia's
complex governance problems. Furthermore, many interlocutors
expressed a sense that transparency in Russia is improving
because of international financial market conditions, and
pushing EITI would not help move to greater transparency.
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\49\ EITI sets a global standard for companies to publich what they
pay and governments to disclose what they receive in the extractive
industriesw. More information can be found at http://
www.eitransparency.org/.
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An exception to this reluctance about EITI came from
Transparency International which has been encouraging EITI in
Russia. Reportedly, TNK-BP and Lukoil expressed interest in
EITI two years ago and then backed down after receiving no
support from the government or other companies. Transparency
International representatives said that a briefing from a high-
level G-8 delegation could help convince them to consider
implementing EITI. The organization is publishing a report on
EITI in Russia to raise awareness of how EITI could benefit
Russia.
Most of the private sector interlocutors agreed that
Russian oil and gas companies, including Rosneft and Gazprom,
are becoming more transparent for their own reasons. These
companies need to access international capital markets, and in
order to do so they need to adhere to a higher standard of
transparency. They therefore can get a lower cost of capital,
participate in joint ventures with international firms, and be
listed on international exchanges. They also want to be
considered among the best and biggest companies in the world.
There are some concerns that Russian firms could slide back to
old practices if economic conditions change and capital markets
become looser. Some interlocutors suggested that the more
Russian firms become entrenched in international markets, the
more difficult it will be for them to backslide in
transparency. Others thought that the Russian firms are
beginning to see the benefits of transparency in and of itself,
and will not go back to being less transparent. Some observers
believe that they are as transparent as necessary for
international markets, but not necessarily for the Russian
public. There are others who believe that Russian firms in the
extractive industries are still not transparent by western
standards.
Some interlocutors said that as more Russian people become
stockholders, and as major Russian pension funds invest in
Russian companies, they will demand more information from the
companies and this will lead to greater transparency. The
Russian people do not hold the companies or government
accountable because current economic conditions are so much
better than just a few years ago. Russian firms want to be held
to the same standards as firms around the world, but they do
not want to be held to higher standards. They understand that
Russia has a reputation for corruption, but they do not want to
be punished for it by being required to jump through hoops that
western firms can bypass.
Energy, including transparency issues, is a standard agenda
topic in meetings between the U.S. and Russians. Presidents
Bush and Putin was discussed it in April in their meetings at
Sochi. Under the Framework Agreement the two presidents signed
the US and Russia will initiate a number of economic dialogues.
Moscow and Washington have made good progress in the
government-to-government dialogue and energy transparency was
discussed at the inaugural meeting in late April in Washington.
The next meeting is scheduled for September in Moscow and
energy will again be on the agenda.
United Kingdom
The United Kingdom has a population of roughly 60.9 million
people. Life expectancy is about 78.9 years old and their
infant mortality rate is 5 births per 1000 deaths.
Generally in Europe, there is a growing interest in
transparency and governments as a development measure. While
the United Kingdom was the first Western country to push
transparency in extractive industries as an international
initiative, Norway is viewed as the model of prudent management
of extractive revenues and is home to the EITI Secretariat.
Some sense that the focus on anti-corruption and transparency
by the British has diminished in the wake of the BAE scandal
and due to less focus on Africa generally. Some say that DFID
is not getting political backup on transparency.
The next two years are critical in determining whether or
not EITI will really work. A number of people pointed out that
the more stable and predictable framework for oil producing
countries, the more stable the energy supply. One argument for
EITI is that it uses small money to ensure the big money is
used well.
Investors became interested in EITI because they saw the
``potential for the resource cures to bite the companies''
themselves. They see EITI as a tool to promote stability which
would in turn reduce work stoppages or supply disruptions. The
investors are concerned that there are no definitive studies
showing that good governance results in a better cost of
capital. They asserted the need for compelling examples of
developing countries where extractive resources were put to
good use. The EITI process is seen as leveling the playing
field for non-corrupt companies. The major oil companies appear
more engaged on EITI than the ``second-tier'' companies and
many of the companies that are pushing EITI are companies that
had a bad experience with corruption or poor governance.
There is a UN General Assembly resolution supporting EITI,
similar to the one passed on the Kimberley Process, that
Azerbaijan is spearheading. Many argued that countries like
India, China and Brazil will be more likely to embrace EITI. A
range of interlocutors suggested that it would be helpful for
the US to sign onto and promote the UN resolution. A number of
people praised World Bank involvement with EITI but expressed
concern that the regional development banks were not as
engaged. They suggested that all the regional development
banks, particularly the African Development Bank, incorporate
EITI into their projects.
Some suggested that China would be more open to
transparency, influence and reputational impacts than many
expect. They encouraged the U.S. to develop an engaged
approach. Some suggested that the Chinese sovereign wealth fund
may become more interested in transparency issues given their
exposure to extractive investments. Almost everyone asserted
that the wrong way to promote extractive industry transparency
with China was to be critical of the country. One person said
``finger-wagging doesn't work.''
Among EITI experts in these countries, the United States is
seen as being somewhat supportive of EITI, however, more
supportive in policy than in funding. The U.S. has not
contributed funding to the EITI because of the legal structure
of the EITI Secretariat is not finalized. The U.S. currently
has a seat on the EITI board but will give it up shortly in the
every two year board rotation. There are three seats on the
Board from supporting countries, 5 seats from EITI countries
and 5 from companies. The U.S., once its contribution is made
to the Multi-donor Trust Fund, will maintain its seat on the
MDTF Board which gives funding for EITI capacity building.
The U.S. is viewed by many insiders as a focusing force
with EITI. The current U.S. representative to EITI is seen as
capable, bright, and active; however, given his rank at the
State Department, many think that the U.S. needs a
representative with more clout. While U.S. staff at embassies
in extractive countries are engaged on EITI, there is
apparently little action on EITI with the staff at our
embassies in donor countries. Many suggested that it would be
very motivating and influential of the United States signed
onto EITI as a candidate country. Several interlocutors
suggested that the U.S. help encourage companies to make more
emphatic attempts to support EITI, increase political will and
support capacity building.
In addition, many felt that the U.S. Government,
particularly through foreign assistance programs, could do more
directly to encourage extractive countries to sign onto EITI by
the U.S. increasing or shifting funds for extractive countries
for transparency efforts. EITI is consistent with Foreign
Corrupt Practices Act so the more compliance of foreign
companies to EITI, the more level the playing field for U.S.
companies.
LATIN AMERICA
Brazil
Brazil has a population of 192 million, approximately.
Average life expectancy is 72.5 years with an infant mortality
rate of 27 deaths per 1000 births. The average per capita
income is $5,910, while 21.2% of the population lives under $2/
day. Total hydrocarbon revenues for 2007 were $87.5 billion or
5 per cent of GDP.
With the recent discovery of two new offshore oil fields
(Tupi and Carioca), Brazil is in a position to become a
significant political and economic power not just in the
Western Hemisphere, but on the world stage. Brazilians are
anxious to be considered a global power independent of South
America, an emerging economic market on par with India.
However, besides their leadership of the common market area in
Latin America (MERCOSUR), membership in other regional
agreements, and their work to advance peace in Haiti, Brazil
has been reticent to take a larger role in global affairs.
In Brazil, sectors within the country exist that could be
defined as first, second and third world, highlighting the
tremendous disparity between rich and poor that still exists.
Over 50 million Brazilians live in poverty and there are over
600 Brazilian municipalities that have poverty levels similar
to some of the poorest African countries. One percent of the
population controls 45% of the farmland. In addition, disparity
of opportunity and representation in the formal and ``white
collar'' sectors of Brazil's economy continues for Afro-
descendents, as well.
Despite these challenges, Brazil has experienced steady
economic growth that reached 4.5% in 2007 as well as a
significant rise in exports. Brazil still suffers from high
real interest rates but in early 2008 it received an
investment-grade sovereign debt rating.
Brazil is rich in natural resources including oil, iron
ore, manganese, and others. It has 14% of the world's renewable
fresh water. The Government of Brazil (GOB) has undertaken an
ambitious program to reduce dependence on imported oil. In the
mid-1980s, imports accounted for more than 70% of Brazil's oil
and derivatives needs; the net figure is nearing zero. The
recent discovery of the Tupi and Carioca oil fields could yield
reserves upwards of 40 billion barrels. Output from the
existing fields combined with the new discoveries could make
Brazil a significant global oil exporter by 2015.
Brazil produces approximately 1.59 million b/d of oil and
produces 9.37 billion cubic meters of natural gas. In 2007,
Petrobras generated revenues of $41.6 billion from oil and gas
(sold internally and externally) and $87.5 billion from all
sales of hydrocarbons. These figures are expected to increase
to $65 billion and $111 billion in 2008, respectively. 58% of
revenues are reinvested directly into exploration and
production. Although much of the revenues go to domestic and
international development of its oil fields and refineries, as
well as R&D, Petrobras paid an estimated $36 billion to the
Brazilian state in taxes in 2007. Although it is listed on
Bovespa and is partially publically-owned, the government and
the state development bank own 37.5% of Petrobras's preferred
and common shares, and about 56% of the voting shares. In the
recently-approved 2008 federal budget of Brazil, state
enterprises accounted for $62 billion of fiscal receipts,
Petrobras making up over half that figure.
Brazil is also one of the world's leading producers of
hydroelectric power and a global leader in biofuels--especially
ethanol from sugarcane--its production and promotion. Demand
for Brazil's abundant minerals, notably iron ore and bauxite,
has been booming largely due to demand from China. All
extractive industries are impacted by environmental controls
from relevant GOB Ministries.
As a result of potential earnings, at the time staff
visited Brazil Finance Ministry officials were expecting
President Lula to forward a legislative proposal to congress
establishing an ``investment fund'' or ``fiscal savings fund''
of about $10 to 20 billion, exact timing remains unclear at the
writing of this report.
Brazilian Finance officials asserted that Brazil was unique
in that the rationale for this fund was not based on commodity
revenues, but on its robust reserves and good fiscal position,
and therefore was not comparable to other countries' sovereign
wealth funds.
GOB statements that the fund could draw on oil revenues
from PetroBras' recent finds in three to five years to create a
$200-300 billion does not take into account that these fields
are not expected to generate revenue in the immediate future.
Officials indicated that Singapore had come to Brazil and
explained its sovereign wealth fund, and that Brazil's Finance
Ministry had discussed sovereign wealth fund structures with
relevant Gulf States, as well. They underlined that reserves
were off the table as a funding source for the fund, and that
Brazil hoped to increase the primary surplus target by 0.5% of
GDP (or about $13 billion per year) to fund this mechanism.
Brazil is not yet a candidate country for the EITI. The
Ministry of Mines and Energy indicated that they would have to
have direct feedback from extractive industries to persuade
them of EITI's utility and relevance for Brazil. GOB diplomatic
interlocutors felt that the idea had merit but indicated it was
important for the U.S. to demonstrate commitment as well if it
wished to persuade others. Petrobras, the largest oil company,
supports EITI, but EITI reportedly reflects what they are
already doing and complements company goals and operations.
Both Vale, the largest mining company, and Petrobras are
publicly traded, with financial data publicly available on
their websites and results submitted to Brazil's equivalent of
the Securities and Exchange Commission (the Commissao de
Valores Mobili rios).
Brazil's use of the phrase ``Transparancia Publica''
(public transparency) is omnipresent in the Lula
administration, and a website exists with a transparency portal
to track all government spending. Staff is satisfied with
Brazil's transparency efforts regarding earnings revenues since
tax revenues are public and accessible on the internet.
Brazil's relationship with the U.S. has been generally
positive although there is relatively little of substance in
the bilateral agenda; the Bush administration signed an
Executive branch agreement on biofuels, but there is no
guarantee that this agreement will continue during the next
administration.
Efforts to deepen this relationship could begin with
passing into law an improved agreement on biofuels and
eliminating the tax on Brazilian ethanol currently in place.
Other policies could include, negotiating a Tax Treaty and
beginning negotiations for a limited market access agreement
with MERCOSURs full member countries (Brazil, Argentina,
Paraguay, and Venezuela).
Chile
Chile has a population of 16.3 million people approximately
and an average life expectancy of 78.3 years. Chile's infant
mortality rate is 10 deaths per 1000 births and per capita
income is $11,270, with 5.6% of the population living under $2/
day. Total hydrocarbon revenues for 2005 were $25.4 billion or
22% of GDP.
Today, Chile has fewer pressing domestic problems than in
its recent past, and the bureaucracy and markets generally
function well. Private property and the rule of law are
respected and the public actively demands accountability of its
officials. When cases of corruption do arise, they are
denounced and investigated.
Chile is a leader among upper middle income countries on
measures of competitiveness and quality of life. Chile has
embraced globalization and is highly dependent on international
trade, having become an active participant in the Doha round of
trade negotiations. Between 1990 and 2006 the poverty rate fell
from 38.6% to 13.7%; the indigence rate from 12.9% to 3.2%.
Chile is the world's leading copper producer and exporter,
constituting about 35% of world output. Chile also produces
molybdenum, gold, and silver. Copper production and investment
in Chile increased sharply during the 1990s and the consequent
increased production seems to have been responsible for a large
drop in the international market price.
Since 2002, (at the time this report was written) the
copper price has resumed an upward trend, mainly because of
growing demand from the large Asian economies. The Chilean
copper mining sector is both state-owned and privately owned,
so Chile benefits from receiving fiscal resources directly and
through taxes and royalties on private enterprise. High copper
prices have led to increased investment in funds to finance
pension reform and for economic contingency funds to stabilize
the economy during economic downturns. In 2007 copper
production by state owned entities was 28.5% and 71.5% by
privately owned mines.
Though Chile is a net oil importer, it produced
approximately 11,600 billion b/d in 2007. Oil revenues have
been relatively steady over the last several years and oil
exploration activities in Chile are ongoing in the Magallanes
region in the south, the only part of Chile where hydrocarbons
have been discovered.
Chile is examining steps to reduce its dependence on
foreign oil, including the expansion of research on alternative
energy sources, such as wind, solar and nuclear energy. In this
regard, staff noted the need for the United States and Chile to
pursue exchanges where U.S. scientists and energy professionals
can work with the Chilean government, academic and private
sector actors to help establish the necessary technical
capacity so Chile can develop a sustainable domestically-based
energy infrastructure.
Chile is not an EITI candidate country and few government
officials were familiar with the EITI concept. However, Chile
has a very transparent revenue management system, and staff
believes that Chile already has policies in line with EITI. Due
to widespread fears of corruption in the copper industry,
Chilean officials have taken numerous steps to maintain
transparency and improve public confidence in the use of
extractive revenues.
To ensure that fiscal surpluses generated by the extractive
industry are properly invested, Chile established mechanisms to
regulate their use in 2006 through the Fiscal Responsibility
Law. Two sovereign funds were created through this legislation:
the Pension Reserves Fund (FRP) to cover for future pension
payments and the Economic and Social Stabilization Fund (FEES)
to reduce economic instabilities during periods of uncertainty.
Chile's Central Bank has hired JP Morgan Chase as a custodial
bank to manage these funds and produce performance assessments
and reports on the FEES and FRP funds. Reports on these funds
and on revenues are published by the Ministry of Finance and
readily accessible to civil society and international financial
institutions. Reports and recommendations provided by the
Advisory Financial Committee are also accessible to the public.
The United States has no assistance programs relating directly
to transparency or extractive industries with Chile.
The U.S. Government enjoys positive and expanding relations
with Chile that are focused on deepening the U.S.-Chile free
trade agreement. Breaking with traditional diplomacy, in an
example of innovation, Chile has pursued relations with several
U.S. states, including California, in the areas of energy
cooperation and educational exchange programs.
Peru
Peru has a population of 28 million. Average life
expectancy is 70.7 years with over 30.6% of the population
living under $2/day. The infant mortality rate in 2005 was 27
deaths per 1000 births. The total hydrocarbon revenues for 2007
were $855 million or 1 per cent of GDP. Per capita income was
$6,080.
Peru is a country in transition following over 20 years of
political and economic turmoil. While the Government of Peru
(GOP) has earned an enormous amount of revenues from extractive
industries, the technical capacity to transform wealth into
development remains a challenge. President Alan Garcia took
office in July 2006 for a five year term. Although there was
initial skepticism because of the economic chaos and
hyperinflation that occurred under his first term as a result
of his populist policies (1985 to 1990), he has taken steps to
get the Peruvian economy back on track and to encourage private
investment and exports. He has recast himself as a moderate in
his second term and has continued the economic policies of his
predecessor, Alejandro Toledo. GDP is expanding rapidly (7% in
2007) due to mining and export growth as well as an increase in
private investment. The government has had success with recent
international bond issuances, resulting in ratings upgrades.
Peru is rich in natural resources such as iron ore, copper,
gold and silver, which make up 3% of fiscal revenue, 1.5% of
GDP, and over 60% of export revenue according to the IMF. At
the time this report was written, rising mineral prices were
contributing to an increase in revenues from exports. Peru is
the second largest producer of silver in the world, and the
sixth largest of gold and copper. Peru also produces a
significant quantity of zinc and lead. The U.S. purchased 23%
of Peru's exports, mainly gold and copper in 2007.
Extractive industry transparency is important in Peru
because it is still a very poor country despite the massive
influx of revenues it is beginning to receive from extractives.
Peru is now the only country in the Western Hemisphere that has
signed up for EITI. Peru has an extremely complex, yet
transparent, system regarding extractive industry payments to
the government. First, half of all mining revenues are by law
redistributed back to the regions, where extraction takes
place; these revenues are used primarily for social
infrastructure projects. The law dictating this process is
called Canon law and the resulting revenues are referred to as
``canon.''
Given Peru's increasing exports, vast amounts of resources
are being transferred to the regions: in 2007, canon resources
totaled 5.1 billion soles ($1.8 billion). However, the unequal
distribution of canon is one of the hottest topics of political
debate in Peru.
Second, through the aporte voluntario or ``voluntary
contribution,'' 47 out of 49 mining companies give money to a
solidarity fund managed by a committee comprised of
representatives from NGOs, the mining companies, local
governments and civil society. The role of the committee is to
decide how to best invest the resources. Experts estimate that
in 2008 the fund will generate 540 million soles ($193
million).
Third, approximately 50% of the bid or tender is invested
through a fideicomiso (trust fund) into social programs
focusing on health and education to benefit the communities
where extractive activity takes place. The goal of the trust
fund is to ensure that the benefits of extractive company
investments are long-term and continue helping future
generations of Peruvians. Fideicomisos are established during
the projects' exploration phases. The trust fund is
administrated through a council made up of representatives from
the company, the Government, and civil society.
All of the financial data on Canon law, voluntary
contribution, and trust funds are published on the internet.
However, staff heard from several people about the contrast in
transparency between the large international companies and the
smaller domestic companies. Whereas the large international and
multinational companies follow international standards and
practices regarding transparency, smaller indigenous companies
disclose less information.
Peru has also made strides in advancing an anti-corruption
and transparency agenda, though a fragmented government
structure with four independent sub-national levels of
government complicates coordination. A freedom of information
law was approved by the Peruvian Congress approximately five
years ago. The Peruvian Government and civil society have been
increasingly open and forthcoming in sharing information, a few
pitfalls notwithstanding. Transparency has also resulted in a
massive crackdown on corruption because the country's budget is
now available online through the Ministry of Economy and
Finance. Specific information and figures are broken down by
years, as well as by federal, region, province, and district.
This has allowed government officials to be held to account at
all levels in Peru.
Peru became an EITI candidate country in September of 2007.
It has until March 2010 to become a compliant country. Peru
established an EITI working group in the country comprised of
representatives from the Government of Peru, civil society, and
extractive companies. Although Peru was one of the first
countries to sign up for EITI, the progress toward
implementation has been extremely slow. The working group was
slow to organize and the companies do not want to release
disaggregated figures on their taxes paid. This is especially
true of the medium and small sized companies who are mostly
domestic Peruvian companies.
International donors are contributing approximately $2.2
million for implementation of EITI in Peru. USAID granted the
World Bank's International Finance Corporation $450,000 to set
up a well-regarded program to bolster technical capacity to
implement EITI. The program will provide assistance to local
officials on how to design projects that meet legal
requirements and will include a civic oversight component to
inform citizens about the measures taken by their authorities.
USAID remains in an advisory role for this initiative. The
Peruvian Government has also appointed two senior level
ministers to sit on the working group, the Vice Minister of
Energy and the Vice Minister of Mines.
Apart from this USAID-IFC partnership, the United States
has promoted transparency through provisions in the U.S.-Peru
Trade Promotion Agreement, which requires regulatory
transparency. Regulative authorities must use open and
transparent administrative procedures, consult with interested
parties before issuing regulations, provide advance notice and
comment periods for proposed rules, and publish all
regulations. The financial services chapter of the agreement
also includes provisions on transparency of domestic regulatory
regimes. Other U.S. foreign policy priorities in Peru include
promoting democratic governance; countering the transnational
threat of narcotics trafficking; and ensuring that the benefits
of economic growth reach the poor and marginalized.
Technical capacity could actually be a larger problem than
transparency in Peru. Despite the Peruvian Government's
reserves (Peru's Net International Reserves (NIR) amounted to
34.78 billion dollars as of July 25, 2008), the Government has
no plans for much needed large scale national development
projects which would include major transportation
infrastructure, roads, rail and ports, to take full advantage
of the recently enacted U.S.-Peru Trade Promotion Agreement. In
the rural areas, there is a lot of interest and good will, but
capacity for the formulation and implementation of basic
economic development projects by local governments is lacking.
Though the Peruvian Government's system is transparent enough
that people can track budget surpluses and put pressure on
politicians to perform, local Peruvian Governments do not have
the technical capacity to use these surplus funds effectively
and the expectations of regular Peruvians regarding their
Government are low. This is creating a degree of social
conflict and an increasing sense of frustration among the
Peruvian people who have not seen ground-level benefits of this
economic windfall in the form of services, health, education or
infrastructure to improve their everyday lives. This has
resulted in a sense of distrust of both the mining companies as
well as the national Government. Many Peruvian analysts believe
that if the Garcia administration does not show a real
improvement in the everyday lives of regular Peruvians in key
areas of the country, an anti-free market leader might gain the
presidency in 2011 and all the progress that has been made
during presidents Toledo and Garcia will be lost.
MIDDLE EAST
Iraq
A study by UNDP and the Iraqi Government suggest that one-
third live in poverty, while according to Oxfam International,
43% of Iraqis are in ``absolute poverty.'' Unemployment is
calculated from 25-40%, although the Government of Iraq's
(GOI's) estimate is 17.5%. Infant mortality, measured in 2006
and reported by UNICEF is 37. Per capita GNI is $2,170. Iraq
has an infant mortality rate of 125 deaths per 1000 births.
Total hydrocarbon revenue in 2005 was $8.8 billion, which is
approximately 69.5% of GDP. Revenue estimates for 2006 were
$31.3 billion and for 2007 were $41.0 billion and projected
revenue for this year exceeds $70 billion.\50\
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\50\ Oil figures provided by the U.S. Department of State, current
as of 23 July 2008.
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Iraq is emerging from decades of tyranny and corruption
that pervaded all levels of government. As the GOI chips away
at the complex series of challenges it faces, it remains behind
the expectation curve in nearly every measurable aspect. Where
competent governance lags, criminality, powerful militias, and
incompetence compete to replace the institutions of the Saddam
era. Transparency International's ``Corruption Perceptions
Index'' put Iraq among the worst in the world--only Burma and
Somalia rank worse. While Iraq has made some grand gestures,
such as joining EITI and working closely on planning with UN
and IMF, it has not yet changed. Senior Iraqi officials are not
required to declare their income, investments or net worth. Oil
terminals are not metered. Anti-corruption officials are
undermined in their work by the highest officials in the
Government.\51\
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\51\ For more, see Judge Radhi Hamza al-Radhi, former Commissioner,
Iraq Commission on Public Integrity, testimony at House Committee on
Oversight and Government Reform hearing ``The Status of Corruption in
the Iraqi Government.'' October 04, 2007.
---------------------------------------------------------------------------
Despite the widespread poverty and unemployment, Iraq's
macro-economy shows some health. According to the IMF, over the
past year, inflation has fallen from 64.8% at the end of 2006
to 5% at the end of 2007, a rate that has been sustained in
2008. IMF predicts growth in 2008 will be 7%, driven by rising
oil prices, economic reforms and surging foreign exchange
reserves. Sovereign debt, estimated in 2003 to be between $125
and $140 billion, has been cut in half. Fuel subsidies have
been all but eliminated.\52\
---------------------------------------------------------------------------
\52\ Bennett, Adam. Senior Advisor, Middle East and Central Asia
Department, International Monetary Fund. Statement on the International
Compact with Iraq, Stockholm, Sweden, May 29, 2008.
---------------------------------------------------------------------------
Attempts to improve financial management through
computerizing data and reporting have been hit and miss. The
FMIS (Financial Management Information System), an accounting
and reporting system has been put in place by USAID for all
Iraqi ministries to use. The GOI is using the system and has
started to pay for Internet connectivity for all FMIS sites
throughout the country. Training continues for the MOF and
other government staff. Nevertheless, use has not been
standardized and laws and directives are not in place to
stipulate accounting procedures.\53\ Iraq has established
mechanisms to investigate and fight corruption, but they have
proven largely ineffective. The clearest reason for this is
intimidation. Judge Rahdi, Iraq's one time leading anti-
corruption official has fled the country for fear of his life.
---------------------------------------------------------------------------
\53\ Source: email exchange with USAID staff, May 1-5, 2008.
---------------------------------------------------------------------------
In 2008, Iraq's crude oil exports have increased from 2007
levels by 22%. Iraq has exported an average of 1.92 million b/d
this year, with the bulk (approximately 1.5 million b/d) coming
from southern Iraq. Iraq's reserves have long been ranked third
in the world, with estimates ranging from 100-116 billion
barrels, but with only a small portion of its fields producing.
However, great challenges remain to maintain or further boost
this capacity. Within the oil industry in Iraq, which accounts
for 64% of GDP and 84% of the national budget,\54\ smuggling,
corruption, looting, and graft are rife; production (lift and
transfer) is hampered by decrepit infrastructure, the
challenges posed by surface and subsurface water, poor
security, corrosion, poor reservoir management, the flight of
intellectual capital competency, and more. The World Bank
estimates that to simply sustain current levels of production,
Iraq needs to invest $1 billion annually. In 2007, according to
end of year data from the Iraqi Ministry of Finance, the
Ministry of Oil expended only $36.1 million of its $2.5 billion
budget.
---------------------------------------------------------------------------
\54\ International Compact with Iraq, Annual Review Conference
Report, dtd 29 May 2008, p. 49.
---------------------------------------------------------------------------
In May, Iraq's Minister of Oil Hussain al-Shahristani
announced that the first five two-year technical service
contracts (TSCs) with Royal Dutch Shell, ExxonMobil, Chevron,
BP and Total would be signed. These contracts were to have been
completed by now, but domestic Iraq politics and the lack of an
oil law continue to complicate matters. Iraq is hoping that by
using short-term TSCs to reconstruct established fields such as
Rumailah--Iraq's largest and the fourth largest oil field in
the world--it can increase its oil production by 500,000 b/d
and give the political establishment time to finalize a new oil
law, and enable actual investment.\55\ In the Kurdish region,
more than twenty contracts have been reportedly signed, but
this has all been done without pledged transparency. No major
international oil companies have signed contracts in the
Kurdish region.
---------------------------------------------------------------------------
\55\ ``Al-Shahristani Expects First Service Contracts To Be Signed
In June,'' Middle East and Africa Oil and Gas Insights, May 1, 2008.
---------------------------------------------------------------------------
The international companies have a tremendous amount
of leverage--if not than a great deal of influence--
when it comes to promoting transparency now in Iraq but
they have not been pressing the case. One oil industry
executive told staff, ``EITI has not come up in talks
with the Iraqis. . . .'' and stated further that
neither the U.S. Government nor the British Government
have supported EITI.
Iraq's natural gas reserves, according to the Oil and Gas
Journal are 112 trillion cubic feet (Tcf), making it the tenth
largest in the world. Probable reserves may be closer to 275-
300 Tcf. The EIA's annual report notes that natural gas
production has declined steadily over the last 15 years along
with oil production and deteriorating processing facilities.
According to the January 2007 report from the Special Inspector
for Iraqi Reconstruction (SIGIR), the value of the gas that is
flared or injected back into wells is approximately $4 billion
annually. Experts suggest that if Iraq captured and piped that
gas, it could provide for much of Iraq's domestic fuel needs
and enable Iraq to export crude. Plans to build the necessary
infrastructure to capture and pipe the gas have been announced,
but so far have been tabled for future consideration. Estimates
to build the necessary infrastructure are in the $2 billion
range. The Oil Ministry has not made the investments to capture
the gas, whether for domestic use or export.
The Government of Iraq has established a Committee of
Financial Experts (COFE) to serve as an independent monitor of
fiscal activities. COFE has worked closely with the
International Audit and Monitoring Board (IAMB), which is
responsible for monitoring the Development Fund for Iraq (DFI),
the UN-mandated repository for Iraq's oil revenues. COFE will
assume the duties of the IAMB when it and the DFI mechanism are
dissolved, which could come as early as January 2009, when the
current UN mandate expires. The IAMB and COFE's most recent DFI
report, a summary audit of 2007 activities, noted 13.8 million
barrels of oil produced but unaccounted for last year.
Over the past year, the Ministry of Oil has begun to report
monthly export figures on its website and in a national
newspaper, including export quantities and destinations, and
revenues garnered.\56\ Furthermore, the Ministry of Finance is
publishing quite a bit of fiscal data, including what they are
sending to the Kurdish Regional Government (KRG) every month,
but there is not the least bit of transparency on the part of
the KRG, who some locals say are ``selling Iraqi oil down the
river.'' KRG finances are, in the words of one close observer
``a complete black hole.'' This compromises transparency
efforts by the central government as well, and U.S. officials
and oil companies cannot ignore it forever. Nevertheless, the
lack of reliable mercantile infrastructure forces many
transactions to continue to occur in cash. In 2006, the GAO
estimated that about 10% of Iraq's refined fuel and 30% of its
imported fuels were being stolen. Industry analysts quietly
question discrepancies between sales and export figures, with
some placing Iraq's ``slippage'' at as much as 200,000-300,000
b/d, although coalition officials have often said that the
fuel/smuggling theft problem is less than 10% of fuel supply
and much of that stays domestic and is sold on the black
market, and so is not often seen as a major problem. The Iraq
Oil Ministry's Second Transparency Report ``Smuggling Crude Oil
and Oil Products,'' also from 2006 provided clear indicators
the Ministry is aware of its problems, but it has not issued a
subsequent report, suggesting it has made no progress. A U.S.
Government official familiar with the reports, stated to staff
that indeed, ``. . . it's fairly the same story.''
---------------------------------------------------------------------------
\56\ See: http://www.oil.gov.iq/ for Iraq MO reports and http://
www.state.gov/p/nea/rls/rpt/ for USG reports.
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Without laws to govern the oil and gas sector, with good
governance and overall ministerial capacity wanting,
transparency may be the single most powerful weapon the
Government of Iraq has to combat pervasive, systemic
corruption. A transparent, efficient and equitable legal
framework for the management of oil and gas resources is
perhaps the most important benchmark under discussion in Iraq.
If done right, it could be the genesis for true national unity.
In meetings with U.S. and Iraqi officials in Iraq and in
Washington, staff heard no end to the frustration about the
lack of progress towards political milestones, including the
development of a package of laws to regulate the hydrocarbons
industry. Embassy officials and U.S. policy makers recognize
this, and must continue to work steadfastly with the parties to
ensure this becomes a reality. Nevertheless, as with many
things in the new Iraq, it is more important that it is done
right than it is done fast. Across the board, progress on
political reform is slow because the parties in control of the
system benefit from it and a general mistrust among major
factions persists. Progress on the hydrocarbons laws is no
different.
In addition to transparency, metering would seem a simple
and sensible fix. The Iraqi Government has indicated that they
are committed to install, fix, and/or regulate oil flow meters
at all oil production and distribution facilities by the end of
2007, progress has been slow. Some metering has been installed
at oil terminals, such as Basra and the Gulf Oil Platforms, but
no metering is being done in the oil fields.\57\ U.S. funds
supported the installation and renovation of the meters at the
Al Basra Oil Terminal, however according to the U.S. Corps of
Engineers, ``the new meters are still not being used for
custody transfer.'' The meters are being used to check ship's
ullage readings, which determine the custody transfer
amount.\58\
---------------------------------------------------------------------------
\57\ International Advisory and Monitoring Board on Iraq (IAMB),
Third Interim Report Covering the Year 2007.
\58\ Special Inspector General for Iraq Reconstruction, Quarterly
Report to the US Congress, April 30, 2008, p. 117.
---------------------------------------------------------------------------
In a February 21, 2008 letter to the EITI Secretariat, the
Government of Iraq indicated its commitment to formally sign up
to EITI. This action followed several years of Iraqi interest
in EITI, including attendance at EITI annual conferences and
including it as an economic benchmark in the International
Compact with Iraq. U.S. officials that staff met with for this
project have reacted favorably towards the Government of Iraq's
actions towards EITI, toward anti-corruption efforts and
transparency. But, achieving results will require much more
than simple statements.
One U.S. official admitted that extractive industry
transparency ``is not in the top fifty'' of U.S. priorities
with respect to Iraq. The Iraqis have not begun to submit
reports to EITI or to the IMF, and no financial outlays have
been made for EITI.
Saudi Arabia
Saudi Arabia is home to a population of more than 28
million people. With the price of oil skyrocketing, Saudi oil
revenues increased from $85 billion in 2003 to $194 billion in
2007, a 128% increase in just four years.\59\ In 2007, Saudi
oil revenues constituted approximately 52 per cent of GDP.
Saudi Arabians have a per capita income of $16,260, a life
expectancy of 72.2 years, and an infant mortality rate of 26
deaths per 1000 births.
---------------------------------------------------------------------------
\59\ Saudi Arabia also possesses 240 trillion cubic feet of proven
natural gas reserves. This amount represents roughly 4% of the global
total, the fourth largest proven reserve in the world. In 2006, Saudi
Arabia produced 2.6 trillion cubic feet of natural gas.
---------------------------------------------------------------------------
Saudi Arabia has seen some political and economic reform
over the last several years in response to escalating domestic
problems. In 2005, King Abdallah continued his cautious reforms
to increase political participation through nationwide
elections for half of the members of the municipal councils;
the remaining members were appointed by the monarch. Terrorist
attacks in 2003 also provoked a strong political campaign
against domestic terrorism and extremism. Dependence on
petroleum output and prices, aquifer depletion, high
unemployment among a growing population (nearly 40% of which
are youths under the age of fifteen) remain challenges. In
reaction to the largely uneducated youth population, the Saudi
Government has significantly increased spending on job training
and education, infrastructure development, and government
salaries.
According to the Energy Information Administration, Saudi
Arabia's proven oil reserves are 259.8 billion barrels. This
amount represents 22% of the global total, and the largest in
the world. In 2007, Saudi Arabia produced 8.7 million b/d of
oil with an estimated production capacity of 10.5--11.0 b/d.
Oil accounts for 70-90% of Saudi state revenues.
Saudi Arabia releases timely, but not highly-detailed
budget information. Overall, the level of transparency in Saudi
Arabia is improving but still lacking according to most
international standards. The information provided by the Saudi
Government lacks important details, and publicly available
numbers are too generalized to identify specific programs or
even budgets for specific ministries. Furthermore, the lack of
specificity and transparency provide an environment where
corruption can flourish. According to Transparency
International's Corruption Perceptions Index, Saudi Arabia
ranks 79th out of 179 countries with a ranking of 3.4 (0 =
highly corrupt and 10 = highly clean).\60\ From a regional
perspective, this rank gives Saudi Arabia the worst ranking of
the six members of the Gulf Cooperation Council, including
Bahrain, Kuwait, Oman, Qatar, and the UAE. Most observers,
though, believe Saudi Arabia is managing this enormous inflow
of cash in a relatively responsible manner. The Government has
utilized its oil wealth to make qualitative improvements to the
country's social and physical infrastructure and has focused
its expenditures in five areas: education and manpower
development; health and social affairs; water, agriculture and
infrastructure; transportation and telecommunications; and
municipality services.\61\
---------------------------------------------------------------------------
\60\ http://www.transparency.org/policy--research/surveys--indices/
cpi.
\61\ Ibid
---------------------------------------------------------------------------
Saudi Arabia has expressed no desire to join EITI. Average
Saudis express numerous economic concerns, but the relative
lack of transparency in the extractive industries does not
appear to be a leading source of frustration. While the Saudi
Government could clearly improve its level of transparency and
could benefit from joining EITI, the Saudis have already taken
steps towards additional disclosures. In fact, since June 2006,
Saudi Arabia has observed the International Monetary Fund-
endorsed standards and codes related to banking supervision,
monetary and financial policy transparency, and payments
systems.
In December 2007, Saudi Arabia announced its 2008 $106
billion budget, roughly twice the 2002 budget and Saudi
Arabia's largest in history.\62\ In 2007, Saudi Arabia also
accrued a $47.6 billion budget surplus, its fifth consecutive
year of budget surpluses. To put this surplus in perspective,
it is more than twice as big as Lebanon's GDP and equal to the
total value of Qatar's Investment Authority. The Saudis have
used a majority of this budget surplus to accumulate foreign
assets at the Saudi Arabian Monetary Agency (SAMA) and to
reduce debt.\63\ SAMA controls approximately $271 billion in
foreign assets (some estimates are as high as $330 billion).
The value of SAMA's foreign assets has increased fivefold since
2003, and with a projected budget surplus for 2008 of more than
$40 billion, this rapid growth in the value of Saudi foreign
assets is likely to continue.\64\
---------------------------------------------------------------------------
\62\ John Sfakianakis, ``And the boom continues.High revenues,
robust budget, growth,'' The Saudi British Bank (12 December 2007).
\63\ Sfakianakis, ``And the boom continues . . .''
\64\ Ibid.
---------------------------------------------------------------------------
The Saudi Government recently confirmed that it plans to
launch a more traditional sovereign wealth fund. The Secretary-
General of the Saudi Public Investment Fund (PIF), Mansour al-
Maiman, says the new fund is expected to begin with an
authorized capital of $5.3 billion, a relatively small sum
compared to the current worth of Kuwait's fund of about $200
billion and of the UAE's fund of around $500 billion. According
to Maiman, the PIF will retain 100% ownership of the new fund,
but the fund will feature an independent management team. One
of the objectives for the new fund is to improve Saudi Arabia's
financial services sector by building a national asset
management base.\65\ While Saudi embassy officials emphasize
the domestic focus of this fund, the fund's desire to maximize
long-term returns will almost certainly result in equity
investment abroad, including the United States. The fact that
Mr. Maiman has cited Norway's fund as a potential model
suggests the Saudis may plan to run their SWF in a transparent
manner.
---------------------------------------------------------------------------
\65\ ``Join the club; Saudi Arabia launch a formal sovereign-wealth
fund,'' The Economist Intelligence Unit (May 1, 2008).
---------------------------------------------------------------------------
While the U.S. and Saudi Arabia have a long-standing
bilateral relationship, the U.S. has few tools to press the
Saudis for more transparency in its extractive industry. The
U.S. would be wise to promote transparency in Saudi Arabia's
extractive industries and its new SWF through consistent
discrete diplomatic exchanges. Such an approach is most likely
to yield positive results without jeopardizing the dollar peg
or Saudi investment in the U.S., which are important the U.S.
economy.
United Arab Emirates
The United Arab Emirates (UAE) has a population of 4.6
million. The average life expectancy is 78.3 years and the
infant mortality rate is 9 deaths per 1000 births. The per
capita income is $23,990. Between 2003 and 2007, UAE oil
revenues almost tripled, ballooning from $22.9 billion to $63
billion or 33 per cent of GDP in 2007.
The UAE is a federation of seven principalities, including
the oil-rich capital, Abu Dhabi, and the commercial center,
Dubai. The UAE has seen little political reform, but in
December 2006, it held limited elections for half of the 40-
seat Federal National Council (FNC). Despite these elections,
citizens do not have the right to form political parties, and
other civil liberties are limited. The UAE enjoys political
stability and a robust free-market economy, though challenges
in the area of terror financing and human trafficking remain.
Despite diversification, oil exports still account for one-
third of the UAE's federal budget. Favorable terms for foreign
investors and low taxes have helped augment the oil-driven
economy, and GDP growth reached approximately 7.4% in 2007.
Inflation remains a challenge at 11% in 2007.
The UAE possesses some of the world's largest reserves of
oil and natural gas. The UAE enjoys the world's sixth largest
proven oil reserves at 97.8 billion barrels, representing 8% of
the global total. In addition to the UAE's large reserves of
oil, the UAE has 214 trillion cubic feet of proven natural gas
reserves. This amount represents over 3% of the global total,
giving the UAE the sixth largest proven reserve of natural gas
in the world. In 2006, the UAE produced 1.7 trillion cubic feet
of natural gas. Between 2000 and 2005, oil and natural gas
provided 66% of the UAE's fiscal revenue.\66\
---------------------------------------------------------------------------
\66\ ``Implementing the Extractive Industries Transparency
Initiative: Applying Early Lessons from the Field,'' The World Bank.
2008.
---------------------------------------------------------------------------
Roughly 90% of the oil and natural gas reserves are located
in the emirate of Abu Dhabi. In the UAE, an emirate's resources
belong to the emirate as opposed to the entire country so any
discussion of extractive industry revenue and the UAE must
focus on Abu Dhabi. Numerous foreign energy companies, such as
BP, Exxon Mobile, Shell, and Total, operate in Abu Dhabi;
however, the Government of Abu Dhabi owns a majority stake in
all oil concessions. More specifically, with only a few minor
exceptions, the Government of Abu Dhabi owns a 60% stake in oil
concessions in the country.
The UAE's record of extractive industry transparency and
corruption is mixed. Abu Dhabi has taken some measures to
improve transparency and the general trajectory is positive.
The UAE has ratified the United Nations Convention Against
Corruption but lags behind in implementation. It has not joined
EITI, unlike its neighbor Yemen. According to Transparency
International's Corruption Perceptions Index, the UAE ranks
34th out of 179 countries with a rank of 5.7 (0 = highly
corrupt and 10 = highly clean).\67\ In short, while
transparency in the UAE is improving, critics suggest that it
is not at a level to certify that all extractive revenues are
reported or arrive in Abu Dhabi's treasury.
---------------------------------------------------------------------------
\67\ http://www.transparency.org/policy_research/surveys_indices/
cpi.
---------------------------------------------------------------------------
For budgeting purposes, Abu Dhabi's Department of Finance
gets a projection of expected oil revenues. When revenues
exceed the projected amount, the difference has been sent to
the Abu Dhabi Investment Authority (ADIA)--the Government's
sovereign wealth fund (SWF). If actual revenues are less than
expected, then ADIA covers the revenue shortfall. Recently,
since ADIA has done so well with its investments, the Abu Dhabi
Investment Council (ADIC)--which focuses on regional and
domestic investments-reportedly now serves as the destination
for Abu Dhabi's budgetary surpluses.
The large reserves of oil and natural gas controlled by the
UAE--combined with the ballooning price of both commodities
over the last decade--have resulted in significant budgetary
surpluses in the UAE. Abu Dhabi has directed these
extraordinary surpluses to the emirate's sovereign wealth fund.
ADIA represents one of the largest SWFs in the world. While
the lack of transparency makes it difficult to accurately
estimate the amount of investments owned, ADIA's value is
estimated to be between $300 and $900 billion. Recently, ADIA
paid $7.6 billion for a 4.9% stake in Citigroup, becoming the
biggest shareholder in the world's biggest bank. In September
2007, ADIA also invested $1.35 billion in the private equity
company Carlyle Group, obtaining a 7.5% ownership stake. In
order to assuage the fears of some, ADIA agreed to forgo any
management role. ADIA and Abu Dhabi officials insist that Abu
Dhabi's SWFs seek solely to maximize returns. Some skeptics of
this official Emirati line point to the lack of transparency as
evidence of ulterior and potentially political motives.
Admittedly, the U.S. does not know with any level of accuracy
how much the assets of ADIA are worth and cannot identify all
ADIA investments in the United States. While Abu Dhabi has
worked with the U.S. Department of Treasury in developing a
mutually acceptable ``philosophy'' for the operation of SWFs,
Abu Dhabi has resisted Treasury's calls to make specific
disclosures or provide a list of investments.
Some commentators have remarked, ADIA's investment in the
U.S. economy is a ``natural evolution of globalization.'' Much
of the money ADIA is investing in the U.S. is simply a
recycling of the trillions of dollars the U.S. has paid for low
cost imports and Middle Eastern oil. This dynamic rests at the
heart of globalization. If the U.S. seeks to remain faithful to
its long-term interest in promoting trade and reducing
protectionism in order to gain access to foreign markets, the
U.S. must continue to allow foreign investment in the U.S.
Allowing foreign investors to invest in the U.S. often involves
some level of risk, but these risks are often overblown and
exploited for political purposes. The U.S. must balance its
national security interests with its desire to welcome the
much-needed capital infusion that SWFs like ADIA are eager to
provide.
A P P E N D I X E S
----------
Appendix I: Administration Responses to Questions From Senator Lugar
Senators often ask witnesses and nominees follow-up
questions, i.e. questions for the record, on topics addressed
in hearings. Below are administration responses such questions
for the record, selected for their relevance to topics covered
in this report.
FEBRUARY 13, 2008--QUESTIONS FOR SECRETARY OF STATE CONDOLEEZZA RICE
Senator Lugar. Funding for the Multilateral Donor's Fund
for the Extractive Industries Transparency Initiative was
authorized in legislation signed by the President in December
2007. What is the State Department's policy on contributing to
the Fund?
Secretary Rice. We support EITI, participate actively on
the EITI board and assist with EITI implementation directly
through our embassies. Our financial support to date has been:
FY06--$990,000 in total funds ($1 million before
rescissions) to support civil society participation in
EITI implementation, administered by USAID
Peru--$445,000 for catalyzing EITI planning and stronger
civil society participation in EITI
Nigeria--$445,000 to expand civil society oversight of EITI
Democratic Republic of Congo (DRC)--$100,000 to expand
civil society and private sector engagement in EITI
FY07--$1 million to support civil society participation in
EITI implementation. USAID is currently determining the
recipient countries.
FY08--The FY08 funding estimate is $3 million. The Foreign
Operations Conference Report directs that no less than
this amount be provided to the EITI multi-donor trust
fund at the World Bank; however, the final
determinations on the amount and destination of the
money are subject to 653(a) negotiations on FY08
allocations.
MAY 14, 2008--QUESTIONS FOR STATE DEPARTMENT DEPUTY SECRETARY OF STATE
JOHN NEGROPONTE
Senator Lugar. Chinese companies are playing a growing role
in extractive industries (such as oil, gas, minerals and
timber) in developing countries. Do Chinese companies operate
differently than companies from other countries? If so, how?
Are Chinese companies held to similar anti-bribery
standards that U.S. companies are held to through the Foreign
Corrupt Practices Act?
Deputy Secretary of State John Negroponte. Overseas
investments by Chinese firms in extractive industries are a
response to China's rapid economic growth. Like their OECD
counterparts, Chinese companies are profit-maximizing
corporations whose actions are guided primarily by commercial
considerations. However, Chinese companies are bound by fewer
national legal restrictions than companies from OECD countries
and are not yet party to international agreements on overseas
business practices. Many of the Chinese companies engaged in
pursuing contracts for extractive products are state-owned or
state-operated companies, meaning that the companies receive
political support from the Chinese Government for their
overseas activities, including tied development aid, and
business decisions may take into account some political goals
as well as purely commercial factors.
There is no legislation in China that is the equivalent of
our Foreign Corrupt Practices Act (FCPA). In recognition of
China's importance in global commerce and the need to level the
playing field by addressing the issue of foreign bribery, the
U.S. and partners at the OECD are hopeful that China will sign
the OECD's Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions, which
requires legislation making the payment of bribes a criminal
offense and eliminating tax breaks for bribing foreign
officials. The desire to address the problem of bribery and
corruption is one of the reasons why the OECD has called for
Enhanced Engagement with countries like China, with the aim of
having these countries adopt common standards on the way to
eventual OECD membership.
Senator Lugar. How is the administration engaging with the
Chinese Government on issues around extractive industry
transparency? At what level and through what agencies is the
engagement? Is the administration encouraging the Chinese
Government to support the Extractive Industry Transparency
Initiative (EITI)? If so, how?
Deputy Secretary Negroponte. Senior Department of State
officials have, on a number of occasions, encouraged
interlocutors within both China's Foreign Ministry and the
National Commission for Development and Reform (NDRC) to
consider China's participation in EITI as a ``supporting
country.'' This is the same status that the U.S. holds in EITI.
Such support by China would reflect China's growing weight and
influence as an important investor in the extractive sectors of
many developing countries.
Senator Lugar. A number of countries are supporting a UN
General Assembly draft resolution in favor of EITI--A/62/L.41.
Some have suggested that a UN resolution encouraging EITI will
help pave the way for Chinese and Indian support for the
initiative. Given the administration's support for EITI, does
the administration expect to support this resolution? Why or
why not?
Deputy Secretary Negroponte. The pursuit of transparency is
a high-profile foreign policy objective which cuts across
numerous USG departments and organizations. State participates
in international and bilateral efforts such as EITI to
encourage resource-rich developing countries, as well as
countries that invest in them (including China and India), to
implement transparency throughout the extractive industries
value chain. Resource revenue transparency contributes to
effective use of public resources by enabling oversight. It is
encouraging to see that other countries, including those who
have proposed and sponsored the current UNGA draft resolution
in favor of EITI (A/62/L.41), agree and are willing to
encourage increased participation in the initiative. Although
the US does not anticipate formally co-sponsoring the
resolution, we have no objections to the current wording, and
expect that the administration will support it.
JULY 18, 2008--QUESTIONS FOR TREASURY DEPARTMENT DEPUTY ASSISTANT
SECRETARY KENNETH PEEL AND NOMINEE FOR U.S. EXECUTIVE DIRECTOR OF THE
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
Senator Lugar. What is the European Bank for Reconstruction
and Development's (EBRD) current assessment of the Extractive
Industry Transparency Initiative (EITI)? How, if at all, is the
EBRD currently integrating EITI into their operations? What
steps have been taken? What will be your role in promoting
EITI?
Deputy Assistant Secretary Kenneth Peel. The EBRD supports
the EITI and is participating in the work of the EITI. For all
natural resource projects, the EBRD requires its project
sponsors to publicly disclose their material project payments
to the host government, regardless of whether the government is
a member of the EITI. The EBRD is actively involved in the EITI
consultative process, including through providing input into
the development of technical mechanisms for reporting
(templates, aggregation of data, etc.). The EBRD promotes
transparent revenue reporting, as well as increased financial
and organizational transparency, with the draft EITI reporting
guidelines providing a useful starting point for even greater
revenue transparency. The EBRD is working in cooperation with
other international financial institutions and the
participating private financial institutions to promote
governance and transparency initiatives in the financial
community. The EBRD is helping to build capacity in countries
of operation to enable them to implement the objectives of the
EITI. Two countries, Azerbaijan and the Kyrgyz Republic, have
been in the forefront on this, and may be among the first
countries to achieve full EITI compliance. In Mongolia, the
EBRD is helping the country to implement the EITI through its
work with mining companies.
My role would be to monitor EBRD activities in this area
and also to engage upstream with Bank staff and management to
promote the related objectives identified in recent legislative
guidance on IFI extractive industry projects. Accountability
and transparency are key to the mandate of the EBRD to promote
transition to market economies.
Senator Lugar. Given your current position as Deputy
Assistant Secretary for International Development Finance and
Debt, what is the Asian Development Bank's current assessment
of the Extractive Industry Transparency Initiative? How, if at
all, is the Asian Development Bank currently integrating EITI
into their operations?
Deputy Assistant Secretary Kenneth Peel. The Asian
Development Bank (AsDB) endorsed the EITI on February 29, 2008.
The AsDB has five member states that have already agreed to
comply with EITI principles: Azerbaijan, Kazakhstan, the Kyrgyz
Republic, Mongolia, and Timor Leste. All of these countries are
at the EITI's ``candidate'' stage.
The AsDB already promotes transparency and anti-corruption
efforts in its projects and its developing member countries
through projects and initiatives. These efforts will be
strengthened by the endorsement of EITI, which is a natural
complement to these existing activities. Also, the AsDB is
currently revamping its safeguards policies and our expectation
is that extractive industries, and the principles of the
initiative, will be part of that.
Senator Lugar. Also, what is the World Bank's assessment of
the Extractive Industry Transparency Initiative? How is the
World Bank currently integrating EITI into their operations?
Deputy Assistant Secretary Kenneth Peel. The World Bank
formally supported EITI in December 2003 as a global
initiative, which aims to support good governance and
transparency in resource-rich countries through the publication
of payments and revenues from oil, gas, and mining in a multi-
stakeholder process. EITI is achieving strong momentum globally
and has become an established standard for transparency. There
are EITI programs in 23 candidate countries, 21 of which have
active Bank programs. In addition, there are several countries
that have publicly stated their intention to join EITI and
others who are in contact with the World Bank Group about the
EITI process.
The World Bank Group role, led by the Oil, Gas, and Mining
Policy Division (COCPO), is to support EITI implementation at
the country-level and globally. COCPO's Technical Assistance
programs on EITI are supported by a multi-donor trust fund
(MDTF). The MDTF seeks to broaden support for the EITI
principles and process through the establishment of extractive
industries transparency initiatives in countries that have
signed on to EITI through programs of cooperation among the
Government, the private sector, and civil society. The MDTF is
instrumental in funding the EITI work programs and grants in 10
countries and 7 additional programs are in negotiation. The
World Bank Group also has special funds dedicated to supporting
civil society groups working on EITI through the Development
Grant Facility. Following strong U.S. leadership during
negotiation of the fifteenth replenishment of the International
Development Association (IDA) in 2007, the World Bank expressed
a continued commitment to enhance transparency of revenue flows
to governments from extractive-industry projects.
World Bank Group support for EITI includes making EITI
consultants and advisors available to governments to assist
them in implementation and sharing international best practice.
The Bank also works with client governments on EITI issues as
part of broader Bank-supported programs on extractive-
industries reform, natural resource management, and good
governance/anti-corruption. Aside from the MDTF, the Bank has
also provided financial support from its own funds to a number
of civil society groups involved in EITI implementation.
JULY 18, 2008--QUESTION FOR MS. MIMI ALEMAYEHOU, NOMINEE FOR U.S.
EXECUTIVE DIRECTOR OF THE AFRICAN DEVELOPMENT BANK
Senator Lugar. What is the African Development Bank's
assessment of the Extractive Industry Transparency Initiative?
How, if at all, is the bank currently integrating EITI into
their operations? What steps have been taken? What will be your
role in promoting EITI?
Ms. Alemayehou. African Development Bank (AfDB) President
Kaberuka endorsed the EITI in October 2006. Since then, I
understand that the Bank has developed an implementation
framework to guide the Bank's operations to help African
countries improve resource management of extractive industries.
The framework is results-oriented and includes both short and
medium term measures to help countries strengthen transparency
and accountability in the management of extractive industries.
The approach includes technical and financial assistance for
countries which have demonstrated political will by endorsing
the EITI and for those countries participating in EITI++,
advocacy and outreach activities to encourage resource rich
countries to improve governance, and mainstreaming the EITI
principles in the Bank's own natural resources operations. The
AfDB has worked with the Liberian Government to develop its
EITI work plan, and has assisted Madagascar to become an EITI
candidate country. The Bank is also financing efforts by the
Central African Republic, Botswana and other countries to
become EITI candidates.
I believe that it is very important that every appropriate
measure is taken to ensure that all people in resource rich
countries benefit from the extraction of resources, and not
just a well-connected few.
As U.S. Executive Director, I will actively promote the
Bank's involvement in achieving the important transparency and
accountability objectives of the EITI in the Bank's borrowing
member countries. Furthermore, I would work to block any
support by the Bank for the extraction and export of certain
natural resources unless the government of a country has in
place functioning systems which meet three broad standards on
revenue accounting, independent auditing of accounts and
transparency.
JULY 18, 2008--QUESTION FOR MR. MIGUEL SAN JUAN, NOMINEE FOR U.S.
EXECUTIVE DIRECTOR OF THE INTER-AMERICAN DEVELOPMENT BANK
Senator Lugar. What is the IDB's current assessment of the
Extractive Industry Transparency Initiative? How, if at all, is
the IDB currently integrating EITI into their operations? What
steps have been taken? What will be your role in promoting
EITI?
Mr. San Juan. The Extractive Industries Transparency
Initiative (EITI) was launched in 2003 to promote transparency
in resource rich countries through the reporting and
publication of company payments and government revenues from
oil, gas and mining operations. EITI is implemented through
multi-stakeholder partnerships (government-industry-civil
society) that adhere to a series of 20 voluntary steps embodied
in a ``validation grid.'' Countries are deemed to be EITI
compliant if they have met all 20 steps, and EITI candidates if
they have met the first four ``sign up'' steps. To date, no
country is compliant; 23 countries are candidates (Peru is the
only candidate from Latin American and the Caribbean).
Candidate countries have two years to achieve compliance
(implement the 20-steps). The United States, through the State
Department, sits on the EITI Board of Directors, which sets
broad policy for the initiative. The U.S. recently contributed
around $3 million to the EITI trust fund administered by the
World Bank, and has provided nearly $2 million in bilateral
support to help countries to implement EITI.
The U.S. has actively pressed the IFIs to support EITI
through their policy dialogue, lending and technical assistance
programs, and analytical work.
The IDB has not yet formally endorsed EITI, despite
encouragement by the USG to do so. However, bank management has
indicated that they are preparing a proposal regarding EITI
which will be submitted to the Board shortly. Steps for
integrating EITI into operations will depend on the outcomes of
the consultations with the Board.
If confirmed, I will work with IDB management and the Board
to integrate EITI into their operations and also engage
upstream with Bank staff and management to promote the related
objectives identified in recent legislative guidance on IFI
extractive industry projects.
JULY 18, 2008--QUESTION FOR MR. PATRICK J. DURKIN, NOMINEE TO BE A
MEMBER OF THE BOARD OF DIRECTORS OF THE OVERSEAS PRIVATE INVESTMENT
CORPORATION
Senator Lugar. Please describe OPIC's policy regarding the
Extractive Industry Transparency Initiative. How is OPIC
integrating EITI into its policies and operations? How is
implementation proceeding?
Mr. Durkin. As I understand it, in 2006 OPIC included the
Extractive Industries Transparency Initiative (EITI) in its
initiative to combat corruption and improve transparency. Under
the policy announced by OPIC President Robert Mosbacher, OPIC
will encourage its investors to abide voluntarily by EITI
guidelines to ensure that revenues from extractive industries
projects contribute to sustainable development and poverty
reductions and not individual enrichment. Implementation of
EITI has been a high priority and OPIC is working with the EITI
Secretariat to encourage compliance with other multilateral
organizations and OPIC counterparts. I understand the OPIC
Board of Directors has approved the first OPIC-supported
project where the agency's commitment to greater transparency
in reporting on royalty payments to host governments on
extractive projects has been realized. Additionally, OPIC's
pending reauthorization legislation would formalize OPIC
support for EITI principle
Appendix II: U.S. Legislation Pertaining to EITI and Related Extractive
Industry Issues\68\
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\68\ This appendix is based on a background memo entitled ``The
`Resource Curse': Literature Survey Paper Summary'' prepared by
Danielle Langton and Nicolas Cook from the Foreign Affairs, Defense,
and Trade Division of the Congressional Research Service.
---------------------------------------------------------------------------
U.S. legislation pertaining to EITI and related extractive
industry issues includes the following:
P.L. 110-161 (formerly H.R. 2764) [110th]
Title: Consolidated Appropriations Act, 2008
Sponsor: Rep. Nita Lowey (introduced 6/18/2007)
Relevant sub-element of this omnibus legislation: The
Department of State, Foreign Operations and Related
Programs Appropriations Act, 2008 (Reported in Senate)
P.L. 110-161 itself does not mention the Extractive
Industries Transparency Initiative. However, accompanying House
Report 110-197 recommends $1 million in Economic Support Funds
(ESF) for ``Extractive Industries Transparency''
Senate Report 110-128, which accompanied P.L. 110-161,
states that:
Environmental Security and Sustainability- The
committee recognizes the work of the Foundation for
Environmental Security and Sustainability [FESS] to
address critical national security issues, including
regional instability arising from resource scarcity and
management practices, natural hazards, and other
environmental stresses. The committee recognizes the
importance of the Foundation's conflict management and
mitigation programs, particularly initiatives to
develop regional and global approaches to combat
corruption, implement extractive industries' best
practices, and promote effective reconstruction of
post-conflict countries to promote stability and
security. The committee recommends continued support to
FESS for these activities.
As originally reported in the Senate, the measure, The
Department of State, Foreign Operations and Related Programs
Appropriations Act, 2008, [H.R. 2764.RS] stated that of
Economic Support Fund appropriations:
``. . . not less than $3,000,000 shall be made
available for a United States contribution to the
Extractive Industries Transparency Initiative Trust
Fund . . .''
Under the heading ``Surplus Commodities'' (Sec. 614), with
regard to extractive industry commodities but not issues of
transparency, it stated that:
``The Secretary of the Treasury shall instruct the
United States Executive Directors [. . . multiple
multilateral development banks and funds . . .] to use
the voice and vote of the United States to oppose any
assistance by these institutions, using funds
appropriated or made available pursuant to this Act,
for the production or extraction of any commodity or
mineral for export, if it is in surplus on world
markets and if the assistance will cause substantial
injury to United States producers of the same, similar,
or competing commodity.''
Under the heading Environment and Energy Conservation
Programs/ Extraction of Natural Resources (Sec. 676 [c]), it
stated that:
``. . . (1) The Secretary of the Treasury shall
inform the managements of the international financial
institutions and the public that it is the policy of
the United States that any assistance by such
institutions (including but not limited to any loan,
credit, grant, or guarantee) for the extraction and
export of oil, gas, coal, timber, or other natural
resource should not be provided unless the government
of the country has in place functioning systems for:
(A) accurately accounting for revenues and expenditures
in connection with the extraction and export of the
type of natural resource to be extracted or exported;
(B) the independent auditing of such accounts and the
widespread public dissemination of the audits; and (C)
verifying government receipts against company payments
including widespread dissemination of such payment
information, and disclosing such documents as Host
Government Agreements, Concession Agreements, and
bidding documents, allowing in any such dissemination
or disclosure for the redaction of, or exceptions for,
information that is commercially proprietary or that
would create competitive disadvantage.
(2) Not later than 180 days after the enactment of
this Act, the Secretary of the Treasury shall submit a
report to the Committees on Appropriations describing,
for each international financial institution, the
amount and type of assistance provided, by country, for
the extraction and export of oil, gas, coal, timber, or
other national resource since September 30, 2007, and
whether each institution considered, in its proposal
for such assistance, the extent to which the country
has functioning systems described in paragraph (c)(1).
. . .''
The managers statement for P.L. 110-161 (Division J,
Department Of State, Foreign Operations, And Related Programs
Appropriations) appropriated $3 million in ESF funds for
``Extractive Industries Transparency'' and designated that
these funds be used as a U.S. contribution ``to the Extractive
Industries Transparency Initiative Trust Fund'' (presumably a
reference to the World Bank-administered, primarily donor
government-supported Multi-Donor Trust Fund for EITI).
Under a provision entitled Environment and Energy Programs
(Sec. 684), the managers state that ``the amended bill modifies
a provision similar to that proposed by the House and Senate.
There are technical modifications to the language,
modifications to the funding level, and modifications to the
Extractive Industries report.''
Under the heading Anti-Kleptocracy (Sec. 699L) it stated
that:
``(a) In furtherance of the National Strategy to
Internationalize Efforts Against Kleptocracy and
Presidential Proclamation 7750, the Secretary of State
shall compile and maintain a list of officials of
foreign governments and their immediate family members
who the Secretary determines there is credible evidence
to believe have been involved in corruption relating to
the extraction of natural resources in their countries.
(b) Any individual on the list submitted under
subsection (a) shall be ineligible for admission to the
United States.
(c) The Secretary may waive the application of
subsection (a) if the Secretary determines that
admission to the United States is necessary to attend
the United Nations or to further United States law
enforcement objectives, or that the circumstances which
caused the individual to be included on the list have
changed sufficiently to justify the removal of the
individual from the list.
(d) Not later than 90 days after enactment of this
Act and 180 days thereafter, the Secretary of State
shall submit a report, in classified form if necessary,
to the Committees on Appropriations describing the
evidence considered in determining involvement pursuant
to subsection (a).
----------
P.L. 109-102 (formerly H.R. 3057) (109th)
Title: Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 2006
Sponsor: Rep. Jim Kolbe (introduced 6/24/2005)
This legislation included the following provision on the
extraction of natural resources:
Sec. 585. [. . .] (c) Extraction of Natural Resources.--
(1) The Secretary of the Treasury shall inform the
managements of the international financial institutions
and the public that it is the policy of the United
States that any assistance by such institutions
(including but not limited to any loan, credit, grant,
or guarantee) for the extraction and export of oil,
gas, coal, timber, or other natural resource should not
be provided unless the government of the country has in
place or is taking the necessary steps to establish
functioning systems for: (A) accurately accounting for
revenues and expenditures in connection with the
extraction and export of the type of natural resource
to be extracted or exported; (B) the independent
auditing of such accounts and the widespread public
dissemination of the audits; and (C) verifying
government receipts against company payments including
widespread dissemination of such payment information,
and disclosing such documents as Host Government
Agreements, Concession Agreements, and bidding
documents, allowing in any such dissemination or
disclosure for the redaction of, or exceptions for,
information that is commercially proprietary or that
would create competitive disadvantage.
(2) Not later than 180 days after the enactment of
this Act, the Secretary of the Treasury shall submit a
report to the Committees on Appropriations describing,
for each international financial institution, the
amount and type of assistance provided, by country, for
the extraction and export of oil, gas, coal, timber, or
other national resource since September 30, 2005.
----------
H.R. 2798 [110th, Passed/agreed to in House]
Title: Overseas Private Investment Corporation
Reauthorization Act of 2007
Sponsor: Rep. Brad Sherman
This legislation would have governed OPIC reauthorization.
Note that OPIC has agreed to abide by the EITI principles.\69\
---------------------------------------------------------------------------
\69\ See: (1) OPIC, Transparency Initiative: http://www.opic.gov/
about/Transparency; (2) OPIC, Anticorruption & Transparency Initiative
Fact Sheet: http://www.opic.gov/about/Transparency/documents/
transparencyfactsheet0906.pdf; (3) OPIC, Anti-Corruption Policies And
Strategies Handbook: http://www.opic.gov/about/Transparency/documents/
opicanticorruptionhandbook-0906.pdf; (4) See also: U.S. Embassy Deputy
Chief of Mission Praises Opening of EITI Resource Center in Liberia:
http://monrovia.usembassy.gov/eiti.html
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The House-passed version of the bill included these
provisions:
[. . .] (b) Extraction Investments.--
(1) Prior notification to congressional committees.--
The Corporation may not approve any contract of
insurance or reinsurance, or any guaranty, or enter
into any agreement to provide financing for any project
which significantly involves an extractive industry and
in which assistance by the Corporation would be valued
at $10,000,000 or more (including contingent
liability), until at least 30 days after the
Corporation notifies the Committee on Foreign Affairs
of the House of Representatives and the Committee on
Foreign Relations of the Senate of such contract or
agreement.
(2) Commitment to EITI principles.--The Corporation
may approve a contract of insurance or reinsurance, or
any guaranty, or enter into an agreement to provide
financing to an eligible investor for a project that
significantly involves an extractive industry only if--
(A) the eligible investor has agreed to
implement the Extractive Industries
Transparency Initiative principles and
criteria, or substantially similar principles
and criteria; or
(B) the host country where the project is to
be carried out has committed to the Extractive
Industries Transparency Initiative principles
and criteria, or substantially similar
principles and criteria.
(3) Preference for certain projects.--With respect to
all projects that significantly involve an extractive
industry, the Corporation, to the degree possible and
consistent with its development objectives, shall give
preference to a project in which both the eligible
investor has agreed to implement the Extractive
Industries Transparency Initiative principles and
criteria, or substantially similar principles and
criteria, and the host country where the project is to
be carried out has committed to the Extractive
Industries Transparency Initiative principles and
criteria, or substantially similar principles and
criteria. [. . .]
It also contained these definitions:
(A) Extractive industry.--The term
``extractive industry'' refers to an enterprise
engaged in the exploration, development, or
extraction of oil and gas reserves, metal ores,
gemstones, industrial minerals, or coal.
(B) Extractive industries transparency
initiative principles and criteria.--The term
``Extractive Industries Transparency Initiative
principles and criteria'' means the principles
and criteria of the Extractive Industries
Transparency Initiative, as set forth in Annex
A to the Anti-Corruption Policies and
Strategies Handbook of the Corporation, as
published in September 2006.
The version of the bill reported in the Senate replaced the
House language and contained this provision:
(b) Extraction Investments.--
(1) Prior notification to congressional committees.--
(A) In general.--The Corporation shall
provide notice of consideration of approval of
a project described in subparagraph (B) to the
Committees on Foreign Relations and
Appropriations of the Senate and the Committees
on Foreign Affairs and Appropriations of the
House of Representatives not later than 60 days
before approval of such project.
(B) Project described.--A project described
in this subparagraph is a Category A project
(as defined in section 237(q)(3)) relating to
an extractive industry project or any
extractive industry project for which the
assistance to be provided by the Corporation is
valued at $10,000,000 or more (including
contingent liability).
----------
H.R. 3221 [110th; Passed/agreed to in House; Motion to
proceed to consideration of measure withdrawn in Senate.
However, the bill was incorporated into omnibus energy
legislation, H.R. 6 (Energy Independence and Security Act of
2007) and passed as P.L. 110-140]
Title: New Direction for Energy Independence, National
Security, and Consumer Protection Act and the Renewable Energy
and Energy Conservation Tax Act of 2007
Sponsor: Rep. Nancy Pelosi
Note: The legislation supports diverse measures to support
the Extractive Industries Transparency Initiative (EITI) and
authorizes the appropriation of # million for this purpose. The
following summary of EITI provisions in P.L. 110-140 is
excerpted from CRS Report RL34294, Energy Independence and
Security Act of 2007: A Summary of Major Provisions, by Fred
Sissine, Coordinator, et al.):
Section 935 has the stated purpose of improving national
energy security by promoting anti-corruption initiatives in oil
and natural gas rich countries and of improving global energy
security by promoting programs such as the Extractive
Industries Transparency Initiative (EITI) that aim to increase
transparency and accountability into extractive resource
payments. The sense of Congress is expressed that global energy
security should be furthered by encouraging further
participation in EITI by eligible countries and companies and
by promoting the effectiveness of the EITI program by ensuring
that a robust and candid review mechanism is put in place. The
Secretary of State is required to report to Congress on
progress made in promoting transparency in extractive
industries resource payments. An authorization of $3 million is
provided to support U.S. contributions to the Multi-Donor Trust
Fund of EITI.
----------
H. AMDT .762 to H.R. 3221 [110th; offered 8/4/2007, Agreed
to by voice vote]
Sponsor: Rep. Alcee L. Hastings
Title: Amendment requires the Secretary of State to submit
to Congress a report on progress made in promoting transparency
in extractive industries resource payments.
Amendment Purpose: An amendment numbered 20 printed in Part
B of House Report 110-300 to make findings regarding fuel
supplies and expresses the Sense of Congress that the U.S.
should further global energy security and promote democratic
development in resource rich foreign countries by encouraging
further participation in the Extractive Industries Transparency
Initiative and other international initiatives.
Related bill:
H.R. 1886 [110th; introduced in the House]
Title: To prevent public financing of oil or gas field
development projects, surveying or extraction activities,
processing facilities, pipelines, or terminals, or other oil
and gas production or distribution operations or facilities,
and for other purposes.
Sponsor: Rep. Maurice D. Hinchey
H.R. 1886 would prevent U.S. funding of extractive industry
projects and activities. It does not mention transparency
specifically related to EITI or EITI itself, but does reference
the Extractive Industries Review (EIR) of the World Bank Group
(commissioned in 2001), which deals with issues generally
related to issues that EITI also seeks to address.
CRS Summary of the bill, as introduced, from the
Legislative Information System:
Amends the Export-Import Bank Act of 1945 to prohibit
the Export-Import Bank of the United States from
guaranteeing, insuring, or extending credit: (1) in
connection with an oil or gas project; or (2) to any
entity that may use the guarantee, insurance, or credit
to finance such a project.
Amends the Foreign Assistance Act of 1961 to prohibit
the Overseas Private Investment Corporation from
issuing any contract of insurance or reinsurance or any
guarantee, or entering into any financing agreement for
an oil or gas project, or to taking such actions
respecting any person who will insure or finance such
project.
Amends the International Financial Institutions Act
to direct the Secretary of the Treasury to use U.S.
influence to oppose multilateral development
institution assistance to gas or oil development
projects.
----------
H.R. 6066 [110th, Introduced in the House]
Title: Extractive Industries Transparency Disclosure Act
Sponsor: Rep. Barney Frank
This legislation would amend Section 13 of the Securities
Exchange Act of 1934 (15 U.S.C. 78m) to require companies to
file an annual report with the Securities and Exchange
Commission (SEC) disclosing payments made to foreign country
governments for natural resources in a foreign country. The
legislation would also require the SEC to compile the
information from all companies and publish it publicly on its
website.
Appendix III: Summary of G-8 Commitments on Extractive Industry
Transparency\70\
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\70\ This appendix is based on a background memo entitled ``The
`Resource Curse': Literature Survey Paper Summary'' prepared by
Danielle Langton and Nicolas Cook from the Foreign Affairs, Defense,
and Trade Division of the Congressional Research Service.
---------------------------------------------------------------------------
The Group of 8 (G-8) has made numerous statements and
commitments to increasing and promoting transparency and
accountability related to Extractive Industries Transparency
Initiative industry relations with and revenue payments to
governments, among many other related good governance
commitments.\71\ Below are excerpts of the main G-8 Extractive
Industries Transparency Initiative industry relations
commitments, beginning with the G-8 meeting in Kananaskis,
Canada in 2002, the year when EITI was initiated. Key terms are
highlighted.
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\71\ See Ella Kokotsis, ``All G7/8 Commitments, 1975-2006,'' G8
Research Group, [http://www.g8.utoronto.ca/evaluations/
G8_commitments.pdf ].
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G-8 SUMMIT HOKKAIDO TOYAKO, JAPAN, JULY 7-9, 2008
World Economy (Summit Leaders Declaration July 8, 2008)
15. To promote improved transparency, accountability, good
governance and sustainable economic growth in the extractive
sector, and to address the natural resource dimensions of armed
conflict and post-conflict situations, we:
(a) continue to support initiatives such as the
Extractive Industries Transparency Initiative (EITI)
and call for its full implementation and for candidate
countries to complete the validation process in a
timely manner. We encourage emerging economies and
their companies to support the initiative;
(b) promote improved resource management including
fiscal transparency and legislative oversight by
resource-rich countries through supporting
international financial institutions' efforts to
develop international standards and codes to be
voluntarily adopted by those countries, and technical
assistance, as appropriate; and
(c) support international efforts to respond more
effectively to the natural resource dimensions of
conflict and post-conflict situations, and would
welcome additional analysis on the issue by the OECD
Development Assistance Committee (DAC), the United
Nations Secretary General, and the World Bank.
16. We affirm the importance of open raw materials markets
as the most efficient mechanism for resources allocation. We
call on our trading partners to strictly comply with WTO rules
and to enhance the transparency and predictability of their
measures in this area.
[. . .] 51. Reaffirming that principles of ownership and
partnership are essential for African development, we agree
that the following points, inter alia, are critical both to
generating private sector-led economic growth and achieving the
MDGs:
[. . .]
(c) improvement of domestic revenue generation capacity by
African countries and of transparency in the use of resources
[. . .]
----------
G-8 SUMMIT HEILIGENDAMM, GERMANY, JUNE 6-8, 2007
Growth and Responsibility in Africa (Summit Declaration June 8,
2007)\72\
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\72\ Source: http://www.g8.utoronto.ca/summit/2007heiligendamm/g8-
2007-africa.pdf
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[. . .] 11. We will also continue to strengthen efforts
such as the Extractive Industries Transparency Initiative
Industries Transparency Initiative (EITI) as appropriate to
enhance good financial governance on the revenue side. In this
context, we support African states in their efforts to increase
the transparency and predictability of expenditure flows and
encourage more African participation in EITI. Transparency
principles could also be extended to other sectors, where
appropriate. [. . .]
33. [. . .] The G-8 will encourage sustainable investment
through African private sector networks, including support for
the UN Global Compact and the UN Principles for Responsible In-
vestment. The G-8 will also strengthen their dialogue with
emerging donors on international initiatives for responsible
investment and financial transparency (such as EITI). [. . .]
Responsibility for Raw Materials: Transparency and Sustainable Growth
[. . .]
80. Raw materials produced by the Extractive Industries
Transparency Initiative sector are a key factor for sustainable
growth in industrialised, emerging and developing economies.
They are a particularly valuable asset for sustaining growth
and reducing poverty in many of the poorest countries in the
world. It is in our common global interest that resource wealth
be used responsibly so as to help reduce poverty, prevent
conflicts and improve the sustainability of resource production
and supply. We firmly agree that significant and lasting
progress in this area can only be achieved on the basis of
transparency and good governance. Against this background, we
support increased transparency with regard both to the
Extractive Industries Transparency Initiative sector and the
subsequent trade and financial flows. In doing so, we will work
closely together with resource rich economies as well as
important raw-material consuming emerging economies.
82. Mineral resources have a great potential to contribute
to poverty alleviation and sustainable development. In some
cases, nonetheless, extraction and processing of resources are
associated with misuse of revenues, environmental destruction,
armed conflict and state fragility. We firmly agree on the need
to further enhancing the contribution of mineral resources to
sustainable growth and will continue to support resource rich
countries in their efforts to further expand their resource
potential while promoting sustainable development and good
governance. To this end we will build capacity for good
governance of mineral resources consistent with social and
environmental standards and sound commercial practices by
reducing barriers to investment and trade, through the
provision of financial, technical and capacity building support
to developing countries for the mining, processing and trading
of minerals. Based on sound life cycle analyses, we will also
encourage conservation, recycling and substitution of raw
materials, including rare metals, for sustainable growth.
83. Increased transparency in the Extractive Industries
Transparency Initiative sector, is of crucial importance for
achieving accountability, good governance and sustainable
economic growth worldwide. We welcome the proposal of the G-8
Presidency to convene in 2007 a global conference on
transparency in the Extractive Industries Transparency
Initiative sector with the participation of governments,
business, civil society and science from industrialised,
emerging and developing economies.
84. The development of a consolidated set of principles and
guidelines that apply to the international mining sector in
developing countries would help ensure that the sector
contributes to development while at the same time providing a
clear and more predictable set of expectations for investors.
It is important that all stakeholders be involved in a process
to build consensus around a set of recognised principles and
guidelines in the mining sector. In order to encourage such a
consensus among key stakeholders we:
--reaffirm our support of the OECD Guidelines for
Multinational Enterprises as important international
benchmark for corporate social responsibility,
--will promote wider understanding of and support for
the following standards, tools and best practices for
the mining sector: the OECD Risk Awareness Tool for
Multinational Enterprises in Weak Governance Zones, the
Voluntary Principles on Security and Human Rights and
the International Finance Corporation (IFC) Performance
Standards,
[. . .]
85. Certification systems can be a suitable instrument in
appropriate cases for increasing transparency and good
governance in the extraction and processing of mineral raw
materials and to reduce environmental impacts, support the
compliance with minimum social standards and resolutely counter
illegal resource extraction. Therefore, we reaffirm our support
for existing initiatives such as the Kimberley Process, Green
Lead, the Intergovernmental Forum on Mining, Minerals, Metals
and Sustainable Development, the International Council on
Mining and Metals or the International Cyanide Management Code,
and encourage the adaptation of the respective principles of
corporate social responsibility by those involved in the
extraction and processing of mineral resources,
86. The artisanal and small-scale mining sector provides
important livelihoods to many people in developing countries,
and also contributes to global production of minerals. We are
concerned that these activities often are conducted in an
informal manner and do not meet minimum social and
environmental standards which apply to the Extractive
Industries Transparency Initiative sector. In order to better
support the development of sustainable livelihoods and positive
developmental impacts associated with artisanal and small-scale
mineral production, we
--encourage collaborative partnerships between
public, civil society and private actors in the mining
sector in order to develop systems for the transparent
use of funds for local development from mining
companies and donors, consistent with aid effectiveness
principles,
--support a pilot study, in co-operation with the
World Bank and its initiatives, concerning the
feasibility of a designed certification system for
selected raw materials. In taking this initiative we
will focus on the artisanal and small scale mining
sector and work in close partnership with governments
from mineral resource rich developing countries as well
as industry on the basis of their voluntary
commitments. The pilot study shall strive on the basis
of the existing principles and guidelines, in order to
comply with internationally recognised minimum
standards by verifying the process of mineral resource
extraction and trading. We invite major emerging
economies to work with us on this issue,
--encourage support for the Communities and Small-
scale Mining (CASM) initiative, housed at the World
Bank, and for the multistakeholder Diamond Development
Initiative (DDI), which emerged from the Kimberley
Process to strengthen the developmental impacts
associated with artisanal diamond mining in Africa, [.
. .]
87. We emphasise our determination to fight corruption and
mismanagement of public resources in both revenue raising and
expenditures. As part of our ongoing efforts to foster
transparency with regard to resource-induced payment flows, we
will continue to support good governance and anti-corruption
initiatives, such as the Extractive Industries Transparency
Initiative (EITI), and we
--commit to provide continuous assistance to
strengthen EITI, as appropriate through financial,
technical and political means. Equally, we invite all
stakeholders to provide support for the implementation
of the EITI,
--call on implementing countries and companies
participating in EITI to implement the Initiative and
comply with their disclosure commitments. Equally, we
encourage further countries to participate in EITI as
appropriate,
--welcome the fact that an independent validation-
process has been initiated to monitor the national
implementation measures. We encourage prompt
application and further development of the validation
methodology,
--welcome the fact that a number of large banks have
already signed the United Nations Environmental Program
(UNEP) Finance Initiative and the Equator Principles.
We call on further major banks to follow suit to adopt
the Equator Principles for project finance and
implement the International Finance Corporation (IFC)
standards, particularly those standards that relate to
transparent payments and contracts in the Extractive
Industries Transparency Initiative sector, and finally
--initiate, within the framework of the 2007 global
conference on transparency, a dialogue with the major
emerging economies to enlist the governments and
especially the state-owned companies domiciled in these
countries as participants in EITI.
G-8 SUMMIT HEILIGENDAMM, GERMANY, JUNE 6-8, 2007\73\
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chairs-summary
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Chair's Summary
[. . .] Freedom of Investment, Investment Environment, and
Social Responsibility: We concluded our discussion on
investment with a strong commitment to the freedom of open and
transparent investment.
[. . .] Open markets need social inclusion. We therefore
agreed on the active promotion of social standards, of
corporate social responsibility, and on the need to strengthen
social security systems in emerging economies and developing
countries.
Responsibility for Raw Materials--Transparency and
Sustainable Growth: We discussed the situation on world
commodity markets and recent price increases and reaffirmed our
commitment to free, transparent and open markets. We will
support increased transparency and build good governance in
developing countries with social and environmental standards.
We therefore express our continuous support for EITI and we
will launch a certification pilot project. We acknowledge that
promoting a consolidated set of principles and guidelines that
apply to the international mining sectors in the developing
countries would help ensure that the sector contributes to
development.
Good Governance and the Reform-Partnership with Africa: We
paid tribute to the Regional and Pan-African institutions,
especially the African Union (AU), and underlined our strong
intention to further support African institutions at the pan-
African and regional level. [. . .] The G-8, together with
their African partners, also welcomed the Extractive Industries
Transparency Initiative Industries Transparency Initiative
(EITI) and agreed to implement an Action Plan for Good
Financial Governance.
G-8 FINANCE MINISTERS' MEETING IN POTSDAM, GERMANY, MAY 19, 2007\74\
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\74\ Source: http://www.g8.utoronto.ca/finance/g8finance-africa.pdf
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G-8 Action Plan for Good Financial Governance in Africa
[. . .] This plan outlines ten areas for action drawing on
the principles of the Paris Declaration on Aid Effectiveness
and on ongoing initiatives to support the reform of public
finance systems in Africa. [. . .]
5. Increasing accountability for revenues from Extractive Industries
Transparency Initiative industries
We give our full backing to the Extractive Industries
Transparency Initiative Industries Transparency Initiative
(EITI) and support it in its efforts to optimise its
implementation and monitoring mechanisms and to contribute to
enhanced participation by all stakeholders. We encourage other
resource-dependent countries and industries from the Extractive
Industries Transparency Initiative sector, especially from
emerging market economies, to participate in the EITI. We
welcome the fact that an independent validation process has
been initiated to monitor the national implementation measures.
We encourage a prompt application of arrangements to identify
countries which have achieved the target levels of transparency
and those which are making progress towards them. The
applicability of EITI principles to other sectors should be
examined more closely. Moreover, measures could be considered
to use revenues from Extractive Industries Transparency
Initiative industries for the long-term benefit of the
respective countries by establishing stabilisation funds or
funds for future generations.
G-8 SUMMIT, ST. PETERSBURG, RUSSIA, JULY 15-17, 2006
Update on Africa (St Petersburg, July 16, 2006)\75\
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Our commitments: [. . .]
Promoting Good and Responsive Governance: We have,
with our international partners, secured the entry into
force of the UN Convention against Corruption in
December 2005: 22 African and 3 G-8 countries are among
those who have ratified. 25 African countries have
signed up to the African Peer Review Mechanism and 3
have completed the process. Good progress has been made
in improving transparency and accountability including
in the oil and gas industries through the Extractive
Industries Transparency Initiative Industries
Transparency Initiative (EITI), in which 15 African
countries and 23 companies take part. We have
successfully completed work at the OECD to strengthen
significantly anti-bribery requirements for those
applying for export credits and credit guarantees. [. .
.]
Continuing work
We have made substantial progress since Gleneagles. Our key
steps over the next year include: [. . .] encouraging wider
implementation of the EITI and other resource transparency
programmes in resource-rich African countries;
G-8 SUMMIT, ST. PETERSBURG, RUSSIA, JULY 15-17, 2006
Plan of Action on Global Energy Security\76\
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\76\ Source: http://www.g8.utoronto.ca/summit/2006stpetersburg/
energy.html
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I. Increasing Transparency, Predictability and Stability of
Global Energy Markets
4. As a critical tool in the fight against corruption, we
will also take forward efforts to make management of public
revenues from energy exports more transparent, including in the
context of the Extractive Industries Transparency Initiative
Industries Transparency Initiative (EITI) and the IMF Guide on
Resource Revenue Transparency (GRRT).
[Note: Apart from the above excerpt, other provisions of
the Plan of Action on Global Energy Security may be of
interest]
Unofficial View Non-Governmental Groups Statement on Sidelines of G-8
Summit, St. Petersburg, Russia, July 15-17, 2006
TRADE, FINANCE FOR DEVELOPMENT AND AFRICA: RECOMMENDATIONS TO THE G-8
SUMMIT
Civil G-8 International NGO Forum, March 9-10, 2006, Moscow\77\
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\77\ Source: http://www.g8.utoronto.ca/summit/2006stpetersburg/
civil8/cg8060310-trade.html
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[ . . .] The G-8 should take firm steps to implement
mandatory codes of conduct that ensure responsibility by
private enterprise. At the same time, good governance is an
important aspect to addressing building stable and secure
societies. We support all countries ratifying and implementing
the provisions in the UN Convention of Corruption, and support
the Extractive Industries Transparency Initiative Industries
Transparency Initiative.
G-8 SUMMIT, GLENEAGLES, SCOTLAND, UNITED KINGDOM, JULY 6-8, 2005
Gleneagles Communique on Africa, Climate Change, Energy and Sustainable
Development, with leaders' signatures\78\
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\78\ Source for entire document: http://www.g8.utoronto.ca/summit/
2005gleneagles/communique.pdf. Source for sub-portion, Communique on
Africa: http://www.g8.utoronto.ca/summit/2005gleneagles/africa.pdf. See
also: Related unofficial document by G8 Research Group, ``A Comparison
between the Recommendations of the Commission for Africa Report and the
G8 Commitments,'' http://www.g8.utoronto.ca/summit/2005gleneagles/
africa_g8-vs-cfa.pdf.
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Communique on Africa
[. . .] Promoting Good and Responsive Governance
13. We welcome African institutions' engagement in
promoting and enhancing effective governance, including NEPAD's
strong statements in support of democracy and human rights.
Well-governed states are critical to peace and security;
economic growth and prosperity; ensuring respect for human
rights and promotion of gender equality and the delivery of
essential services to the citizens of Africa. We will support
African countries' efforts to make their governments more
transparent, capable and responsive to the will of their
people; improve governance at the regional level and across the
continent; and strengthen the African institutions that are
essential to this.
14. In response to this African commitment, we will:
(d) As part of our work to combat corruption and
promote transparency, increase support to the
Extractive Industries Transparency Initiative
Industries Transparency Initiative and countries
implementing EITI, including through financial and
technical measures. We call on African resource-rich
countries to implement EITI or similar principles of
transparency and on the World Bank, IMF and regional
development banks to support them. We support the
development of appropriate criteria for validating EITI
implementation. Transparency should be extended to
other sectors, as the G-8 is doing in pilot projects.
G-8 SUMMIT, SEA ISLAND, GEORGIA, UNITED STATES, JUNE 8-10, 2004
G-8 Action Plan: Applying the Power of Entrepreneurship to the
Eradication of Poverty Sea Island (June 9, 2004) \79\
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[. . .] The G-8 will work with developing countries to
develop pilot projects and support actions to:
18. Promote adoption of measures to improve
transparency in fiscal policy and public procurement,
to improve the climate for investment and responsible
use of government resources.
Fighting Corruption and Improving Transparency (Sea Island, June 10,
2004) \80\
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\80\ Source: http://www.g8.utoronto.ca/summit/2004seaisland/
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[. . .] Country-led Transparency Compacts Launched
G-8 governments are working with a number of developing
countries with a view toward building voluntary partnerships to
assist their efforts to increase transparency and thereby to
use public resources wisely. These efforts will focus on
transparency in public budgets, including revenues and
expenditures, government procurement, the letting of public
concessions and the granting of licenses. Special emphasis will
be given to cooperation with countries with large Extractive
Industries Transparency Initiative industries sectors. These
partnerships will be put in place through voluntary compacts
that lay out commitments on both sides in support of country-
owned strategies and in full complementarity with ongoing
initiatives and programs.
The Governments of Georgia, Nicaragua, Nigeria and
Peru have come forward with the first such compacts to
achieve these important goals. Other interested
countries are actively pursuing compacts. We task our
relevant ministries to develop in partnership with
these countries implementation plans.
Partner governments have specified, in concrete
terms, what they intend to do to bring greater
transparency and accountability to the management of
public resources.
Participating G-8 countries will support them by
providing bilateral technical assistance and political
support. With each compact partner, participants will
develop action plans that set forth our joint efforts
to achieve measurable improvements in these areas.
Participating G-8 governments will work with partner
countries to enlist the support and engagement of
private companies, organizations and civil society, as
well as international institutions.
For partner countries rich in oil, natural gas, and
mineral resources, the compacts will pay particular
attention to the transparency of revenue flows and
payments in these sectors, while protecting the
necessary confidentiality of business operations. Our
shared goal is to help combat the harmful effects on
development when national resources and revenues are
misused. Complementary efforts to promote transparency
are also taken forward by countries participating in
the Extractive Industries Transparency Initiatives
Industry Transparency Initiative.
Chair's Summary (Sea Island, June 10, 2004) \81\
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[. . .] We supported progress in the multilateral effort
against corruption and welcomed the completion of Comprehensive
Anti-Corruption Compacts with Georgia, Nicaragua, Nigeria, and
Peru. We noted the role information technology can play in
promoting transparency.\82\
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\82\ On these compacts, see: http://www.g8.utoronto.ca/summit/
2004seaisland/road.html
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Related U.S. Document:
Fact Sheet: Fighting Corruption and Improving Transparency, June 10,
2004\83\
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\83\ Source: http://www.whitehouse.gov/news/releases/2004/06/
20040610-31.html
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G-8 Summit, EVIAN-LES-BAINS, FRANCE, JUNE 1-3, 2003
Chair's Summary
1. Strengthening Growth World-Wide
[. . .] we therefore reaffirm our commitment to:
strengthen investor confidence by improving corporate
governance, enhancing market discipline and increasing
transparency;
the principles of our Declaration on Fostering Growth
and Promoting a Responsible Market Economy, accompanied
with specific actions to improve transparency and to
fight corruption more effectively, including a specific
initiative on Extractive Industries Transparency
Initiative industries.
Fighting Corruption and Improving Transparency: A G-8 Declaration\84\
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herein. Source: http://www.g8.utoronto.ca/summit/2003evian/corruption--
en.html
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5. We recognise the importance of promoting Transparency in
Government Procurement and the Awarding of Concessions. To this
end, we will: [. . .]
6. Consistent with these principles and recognizing
the importance of revenues from the Extractive
Industries Transparency Initiative industries (oil, gas
and mining), we have agreed to pilot on a voluntary
basis an intensified approach to transparency. To this
end, we will:
6.1. encourage governments and companies, both
private and state-owned, to disclose to the IMF or
another agreed independent third party such as the
World Bank or Multilateral Development Banks, in a
consistent fashion and common format, revenue flows and
payments from the Extractive Industries Transparency
Initiative sectors. This information should be
published at an aggregated level, in accessible and
understandable ways, while protecting proprietary
information and maintaining contract sanctity.
6.2. work with participating governments to develop
and implement agreed action plans for establishing high
standards of transparency with respect to all budget
flows (revenues and expenditures) and with respect to
the awarding of government contracts and concessions
6.3. assist those governments that wish to implement
this initiative with capacity building assistance;
6.4. encourage the IMF and the World Bank to give
technical support to governments participating in the
initiative and to develop linkages with other elements
of this Action Plan.
G-8 Summit, Kananaskis, Alberta, Canada, June 26-27, 2002
G-8 Africa Action Plan
[. . .] I. Promoting Peace and Security
[. . .] We are determined to make conflict prevention and
resolution a top priority, and therefore we commit to:
1.5 Working with African governments, civil society
and others to address the linkage between armed
conflict and the exploitation of natural resources--
including by:
Supporting United Nations and other
initiatives to monitor and address the illegal
exploitation and international transfer of
natural resources from Africa which fuel armed
conflicts, including mineral resources,
petroleum, timber and water;
Supporting voluntary control efforts such as
the Kimberley Process for diamonds, and
encouraging the adoption of voluntary
principles of corporate social responsibility
by those involved in developing Africa's
national resources;
Working to ensure better accountability and
greater transparency with respect to those
involved in the import or export of Africa's
natural resources.
Appendix IV--Excerpt from Accountability Report: Implementation Review
of G-8 on Anti-Corruption Commitments
Appendix V--Extractive Industry Transparency Initiative U.N. Resolution
Appendix VI--World Oil Consumption and
Production, by Country
Appendix VI--World Oil Consumption and
Production, by Country--(continued)
Appendix VII--Origins of U.S. Imports
of Crude Oil
Appendix VIII--Acronyms and Abbreviations
ADIA -- Abu Dhabi Investment Authority
AfDB -- African Development Bank
AGO -- Attorney General's Office
AsDB -- Asian Development Bank
AU -- African Union
AusAid -- Australian Government Aid Program
BEAC -- Banque des Etats de l'Afrique Centrale
b/d -- barrels per day
BIC -- Bank Information Center
BP -- British Petroleum
BPA -- Banking and Payments Authority
BTA -- Bilateral Trade Agreement
BTC -- Baku-Tbilisi-Ceyhan
CASM -- Communities and Small-scale Mining
CIC -- China Investment Corporation
CIMATS -- Certain Maritime Arrangements in the Timor Sea
COCPO -- Oil, Gas, and Mining Policy Division
COFE -- Committee of Financial Experts
D.C. -- District of Columbia
DFI -- Development Fund for Iraq
DFID -- United Kingdom's Department for International
Development
DOJ -- Department of Justice
DPR -- Indonesian Parliament
DRC -- Democratic Republic of Congo
EBRD -- European Bank for Reconstruction and Development
EFCC -- Economic and Financial Crimes Commission
E.G. -- Equatorial Guinea
EIA -- Energy Information Administration
EIR -- Extractive Industries Review
EITI -- Extractive Industry Transparency Initiative
EITI++ -- Extractive Industry Transparency Initiative Plus Plus
ENAP -- Chilean National Oil Company
ESF -- Economic Support Funds
Exim -- Export Import Bank of the United States
FCPA -- Foreign Corrupt Practices Act
FDI -- Foreign Direct Investment
FEES -- Economic and Social Stabilization Fund
FESS -- Foundation for Environmental Security and
Sustainability
FMIS -- Financial Management Information System
FNC -- Federal National Council
FRP -- Pension Reserves Fund
FSD -- Social Development Fund
FY -- Fiscal Year
GEITI -- Ghana-EITI
GDP -- Gross Domestic Product
GNP -- Gross National Product
GOB -- Government of Brazil
GOI -- Government of Iraq
GOP -- Government of Peru
GOTL -- Government of Timor-Leste
G-8 -- Group of Eight (Canada, European Union, France, Germany,
Italy, Japan, Russia, United Kingdom, United States)
H.R. -- House Resolution
IAG -- International Advisory Group
IAMB -- International Audit and Monitoring Board
ICI -- International Compact with Iraq
ICPC -- Corrupt Practices and Other Related Offences Commission
IDA -- International Development Association
IDB -- Inter-American Development Bank
IFC -- International Finance Corporation
IFI -- International Financial Institution
IMF -- International Monetary Fund
IOSCO -- International Organization of Securities Commissions
KRG -- Kurdistan Regional Government
LNG -- Liquefied Natural Gas
MAE -- Mainstreaming Anti-Corruption for Equity
MCC -- Millennium Challenge Corporation
MDB -- Multilateral Development Bank
MDTF -- Multi-Donor Trust Fund
MERCOSUR -- Common Market of the South
MMS -- Minerals Management Service
MOF -- Ministry of Finance
MPLA -- Popular Movement for the Liberation of Angola
NEPAD -- New Partnership for Africa's Development
NEITI -- Nigeria-EITI
NDRC -- National Commission for Development and Reform
NGO -- Non-Governmental Organization
NRC -- National Resource Companies
NSWG -- National Stakeholders Working Group
OECD -- Organization for Economic Co-operation and Development
OPEC -- Organization of the Petroleum Exporting Countries
OPIC -- Overseas Private Investment Corporation
OTA -- Office of Technical Assistance
PDVSA -- The Venezuelan Oil Company
PIF -- Public Investment Fund
P.L. -- Public Law
PPP -- Purchasing Power Parity
ROSC -- Report on Standards and Codes
SAMA -- Saudi Arabian Monetary Agency
SCP -- South Caucasus pipeline
SEC -- Securities and Exchange Commission
SIGIR -- Special Inspector for Iraqi Reconstruction
SOCAR -- State Oil Company for Azerbaijan
SOE -- State Owned Enterprises
SOFAZ -- State Oil Fund for the Republic of Azerbaijan
SWF -- Sovereign Wealth Fund
Tcf -- trillion cubic feet
TSC -- Technical Service Contracts
UAE -- United Arab Emirates
UK -- United Kingdom
UN -- United Nations
UNDP -- United Nations Development Program
UNEP -- United Nations Environment Program
UNICEF -- United Nations Children Fund
U.S. -- United States
USG -- United States Government
USAID -- United States Agency for International Development
WTO -- World Trade Organization