EITI 2.0

Issue: EITI
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Michael Ross is a member of RWI's advisory board and author of The Oil Curse. He gave the keynote address May 20, 2013, in Sydney, Australia, at the International Mining Development Conference supported by the Australian government (more).

I must begin with an apology to the conference organizers.  They have been very very kind to me and asked that I deliver a talk tonight on “Inspiring Change.”  But I am about to repay their kindness with betrayal, by speaking about something altogether different.

Now that they know I’m going to break my agreement, you might wonder if the conference organizers have any recourse.  They could cancel my honorarium, but they aren’t giving me one so that won’t help.  I’ve been paid with a round-trip ticket from LA to Sydney, which happens to be non-refundable, and I’m already here in Sydney.  They could try and cancel my return to LA, which would force me to stay in beautiful Sydney, which seems more like a reward than a penalty.

In fact, the conference organizers have the same dilemma with me, that government officials often have with mining companies.  They’ve signed a contract, assuming that I would fulfill my part of the deal; they know something about me, but not that much (I have never met our host before tonight).  And now they find – like governments sometimes find – that I’m not upholding my end of the contract, perhaps by failing to disclose all of my earnings and hence paying all of the taxes and royalties, or not making the investments in local communities that I promised. 

So perhaps that is a good place to switch from talking about my own negligence and to begin talking about the mining industry.

I’m going to try and convince you in the next 20 minutes that EITI should take a new direction, a direction that could help governments and citizens avoid the predicament that I’ve just described, of signing unfavorable contracts with socially-irresponsible companies.

This is not because EITI is going in the wrong direction.  I say it because EITI has made so much progress that it is time to focus on a new and critical element.

We all know that to turn mineral wealth into sustainable development, you need both responsible governments and responsible companies. 

And when the PWYP movement began a little over a decade ago, it sought to bring transparency to both governments and companies.  And yet for the last decade, EITI has been overwhelmingly devoted to promoting transparency in governments, with rather little attention paid to companies.

For governments to become EITI compliant they must go through an extensive and meaningful disclosure process, based on a carefully-devised template; and only after their disclosures have been independently assessed by a third party, and approved by the EITI Board, can they receive the EITI stamp of approval.  They work hard to gain the EITI stamp, and they must work hard to maintain it.  This careful validation process has turned the EITI Standard into a valued international brand

Companies are associated with the EITI brand, too, but all that means is they have made a small financial contribution to the Secretariat and agreed to some general principles. 

Here is what it does not mean:

  • It does not mean they disclose all of their payments to all of the governments they work with – only when those governments themselves have signed onto EITI.  In fact, some companies HAVE made disclosures about their payments to non-EITI governments – like Talisman, Statoil, and Newmont – but they are the exception.
  • It does not mean that they don’t have wholly-owned subsidiaries in tax havens, like the British Virgin Islands or Bermuda, which it uses to minimize its tax obligations to the countries where it is engaged in mining;
  • It does not mean that the company refuses to make deals with companies whose beneficial owners have not been disclosed;
  • It does not mean that they are not engaged in transfer pricing or tax evasion in the countries they operate in.
  • It does not mean that they meet ICMM’s 10 principles, including the most recent revisions concerning the Free Prior & Informed Consent for indigenous peoples.
  • It does not mean that they are supporting transparency in other forums.  In fact, several companies that are identified as ‘EITI stakeholders’ have been suing the US government to block implementation of the Dodd-Frank disclosure regulations, and lobbying Congress to create new loopholes.  While they have been investing in EITI to support transparency, they are also investing in lawyers and lobbyists in the US to block transparency.
  • It does not mean they adhere to other important initiatives, like the Global Reporting Initiative (although many of them do, and even helped shape them), or the UN Global Compact Principles (although many of them do, and some (Petrobras) even sit on the Board), or the Voluntary Principles on Security and Human Rights, or the Carbon Disclosure Project.

 

I am suggesting tonight an idea for an EITI 2.0, one that establishes transparency standards for companies – both private sector companies and state-owned companies – that:

  • are validated by an independent third party and certified by the EITI board,
  • follow a standardized template, so that observers can make meaningful comparisons among companies, and
  • cast light on a wide range of company activities, including:
    • on how much they pay in taxes, royalties, fees and other payments in all of the jurisdictions they work in,
    • on the volume of the minerals they extract, how much they sell it for and to whom;
    • on who are the beneficial owners of the companies they work with,
    • on how much they spend on local development in each project,
    • on how many nationals they hire in each of the countries and each of the projects where they work, and how many of them are women, and how much they are paid;
    • on how much of their materials they procure locally
    • on how much they spend on lobbying activities

In other words, EITI 2.0 should recognize that governments AND companies are equally important (in inspiring change, and transforming mineral wealth into sustainable development), and hence should be subject to similar transparency standards that are extensive, audited, validated, and trustworthy

By failing to take on this issue, EITI and many other groups working on extractive sector governance, including the World Bank, the bilateral and multileral aid agencies – are missing a massive opportunity.  The companies have the capacity to do both enormous good and enormous harm.

To put it into perspective, the annual revenues of Glencore are over ten times the size of the total GDP of Zambia and of the DRC.  Shell’s annual revenues are more than twice the size of Nigeria’s total GDP (in 2012), four times the size of Angola’s GDP, and 27 times the size of Gabon’s total GDP.

So when we compare companies to governments, we are comparing an elephant to a mouse.  Why should we focus all of our energy on improving good behavior in the mouse, but little or no energy on the elephant?

What do governments have to gain from EITI certification for companies?  A lot. Right now it’s hard for governments to strike fair deals with companies, in part because many companies are opaque. 

This creates two problems.  First is a problem of selection.  How do you know you are working with the right company – one that meets the highest global standards of integrity, social responsibility, that does not engage in transfer mispricing, and that has a proven record of hiring and training locally? 

You can look on their websites and see if they describe themselves.  Maybe somewhere it says on their homepage, ‘we are a bad company, please stay away from us.’  Of course not.  All companies describe themselves as responsible, but not all companies really are.  So how can governments and citizens distinguish between them?  How do they know that they are signing contracts with companies that will really comply with tax laws – both letter and spirit?

The other involves striking the best bargain, even with a reputable company.  Let us say you would like to maximize not merely government revenues but local sourcing and job creation.  You might be dealing with a world-class company, but you don’t know if your draft contract is as good as the deal they have struck with other countries, because there is no full disclosure across jurisdictions, no standardization of reporting, and no third-party verification.

What do companies have to gain? Good companies have a lot to gain.  Many of the companies affiliated with EITI have already been doing good things but they don’t get full recognition for it.  Whenever a new scandal breaks out in the extractive sector, they are tainted by it and all of their good work is overlooked.

EITI company certification would allow them to gain the recognition they deserve, and show the world they are meeting a global standard for corporate citizenship, not simply because they say they are, but because they have been certified as doing so by a respected multistakeholder organization.

Moreover, investors may realize that projects carried out by EITI-compliant companies are better bets, and less likely to be subject to abrogation by the host government, and hence can more easily raise funding;

How hard would this be to carry out?  The honest answer is that I don’t know.  But at least in some important ways, it should be easier than standards for governments: companies by definition have a lot of resources, and the technical skills, for implementation; they probably collect a lot of the information that would be disclosed; and many would like to be recognized for the investments in social development they have made.

EITI was born from a recognition, in the early 2000s, that mining was NOT making the kind of contribution to development that it should. For the last decade, EITI has focused on governments – even though it is called the Extractive Industries Transparency Initiative, not the Extractive Governments Transparency Initiative – and perhaps rightly so, since it has led to important gains in many countries.

But now is the time to take the next step; to make companies full partners in EITI, and use the same powerful tools of transparency, and independent validation, to reward companies that are already doing the right thing, and create a more powerful incentive for other companies to meet the highest global standards.  If we hope to fulfill the goals expressed by our slogans – to “inspire change” and using “mining for development” – we must be ready to take the next steps – to move ahead from EITI 1.0 and figure out what EITI 2.0 should look like.


Michael L. Ross is professor of political science and director of the Center for Southeast Asian Studies at the University of California, Los Angeles. He has published widely on the politics of resource-rich countries and served on advisory boards for the World Bank, the Revenue Watch Institute, and the Natural Resource Charter. His work has appeared in Foreign Affairs, Foreign Policy, and the New York Times, and has been featured in the Washington Post, Newsweek, and many other publications. In 2009, he received the Heinz Eulau Award from the American Political Science Association.

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