Publication

Chapter 19 Update: Governance, Transparency and Sustainable Development

Three to four years is a relatively short period of time for an assessment of governance trends that by their very nature are long term. This note nevertheless attempts to provide summary impressions on recent progress, the direction of change and the implications of changes in the petroleum industry context.

A major positive development has been the substantially increased policy focus on sector governance. The topic now regularly features in international and national discourse. It has been variously defined to include voice and accountability, institutional and political stability, absence of violence, rule of law, and presence of an enabling environment.[1] In any or all of its several dimensions sector governance appears to be very much on the agendas of investor and producer country governments alike, international fora, international development and financial agencies such as the World Bank and International Monetary Fund, civil society, media and industry. This heightened awareness might reasonably be expected to result eventually in measurable improvements in governance and in the policies and programs essential to the achievement of sustainable development.

An early and highly desirable consequence of the escalation in attention directed at improvements in petroleum sector governance has been significant progress in critical dimensions of sector transparency. The Extractive Industries Transparency Initiative (EITI) has put sector revenue and payments transparency squarely on the map, and under its 2015 revised Standard has begun to aggressively promote and pursue broader transparency objectives, e.g., contract publication, transparent competitive licensing of petroleum rights, exposure of beneficial ownership of petroleum rights, publication and audit of national oil company accounts, and budget and expenditure transparency.[2] The NGOs’ successful campaign to require company publication of extractive industry payments to governments, reflected in the passage of Dodd-Frank legislation in the United States, has been further advanced by the recent issuance of a proposed supporting SEC ruling.[3] Similar success has been achieved in the European Union with respect to companies domiciled there. The IMF is adding a Resource Revenue Management “pillar” to its influential Fiscal Transparency Code that should provide a transparent framework for the ownership, contracting, taxation and utilization of natural resource endowments.[4]

These new or recently revised transparency programs and initiatives not only provide excellent experience-grounded guidance and advice on governance, but also produce governance benchmarks and considerable data that can be used to transform transparency into accountability when picked up by civil society, the media, international development agencies and other concerned stakeholders. Armed with good advice and credible sector data, reform-minded stakeholders are well-placed to challenge the mismanagement, waste, and corruption that undermine good governance and to map out the programs that will enhance governance.[5]

An important part of the governance trends story over the past few years has been the thinking on, popularizing and in-the-field implementation of beneficial resource revenue management policies. This touches on the design and administration of resource tax regimes, resource funds and related savings/investment and expenditure policies.[6] Like transparency, sound revenue management policies are now regarded as fundamental building blocks of good governance.

Finally, attention to sectoral institutional structure and capacity issues is ramping up, as evidenced in academic literature and expanded technical assistance programs.

These are all good signs. Against this undeniably positive background, there remain grounds for serious concern. This concern centers around the paucity of “results on the ground”. It is difficult as yet to point to any significant concrete progress on governance in the resource-rich developing world. Commenting on its 2013 survey, The Natural Resource Governance Institute (NRGI) reported: “the Resource Governance Index shows a striking deficit in natural resource management worldwide. The vast majority of countries exhibit serious shortcomings in resource governance. More than half the sample do not even meet basic standards of resource governance, performing weakly or simply failing. The governance deficit is largest in the most resource-revenue-dependent countries”.[7] While there have been welcome advances under some headings, for example transparent competitive licensing and publication of contracts in a handful of countries, there is no evidence of a meaningful more comprehensive change in outcomes over the past two or three years.

The transparency reporting achievements of agencies like the EITI notwithstanding, resource-rich developing countries for the most part, remain stuck in the bottom fifty percent or even one-third of the governance league tables produced by the NRGI, the World Bank, Transparency International (TI) and others. These findings apply to countries participating in the EITI as well as major resource producers such as Russia and Venezuela who have opted to stay out of the program. Table 1 below, which records transparency, governance and corruption scores for Sub-Saharan current and potential oil producers, suggests the scale of the challenge.

Not surprisingly the same countries continue to find themselves in the same relative ranking in corruption surveys such as that published annually by TI (see Table 1).[8] A growing number of countries are putting aggressive anti-corruption laws on the books, but apparently without the looked-for improvements in governance.[9] The large scale procurement corruption scandal involving Petrobras, Brazil’s national oil company, has led to indictments and sentencing by Brazil’s judiciary, showing that there can be accountability. It was a long time in coming, however, and, so far, such cases have been few and far between. Nigeria’s current investigations of its oil sector and the prosecutions emerging there-from may represent another bright spot, but they come after extended tolerance of overwhelming and massive corruption.

On the economic management front, the IMF has pointed to some gains. During the 2000-2008 period several resource-rich countries did take advantage of the boom years to both put aside precautionary savings and to invest in physical and human capital – policies and practice that are consistent with best practice in managing resource revenues. That said, the most common outcome of increased boom year resource revenues has been a sharp increase in non-resource fiscal deficits leaving countries dangerously exposed to the need for wrenching adjustments when commodity prices fall.[10] Ghana clearly falls within this camp, its relatively favorable scores notwithstanding. It is sometimes argued that straitened economic circumstances provide the best opportunity for the introduction of reforms. In the case, given the massive scale of the collapse in prices and revenues and the painful adjustments it will require, there must be concern that political instability and conflict are as likely as reform. Weaknesses in institutional capacity seem to be one of the root causes of these macroeconomic failures in governance. Unfortunately, resource-rich countries tend to have lower, sometimes significantly lower, institutional quality relative to non-resource countries.[11]

Conclusion

The resource sector governance/sustainable development story is mixed. There have been, over the past few years, dramatic strides in putting in place the essential building blocks for reform. Resource governance has a prominent place on national and international agendas and shows every sign of staying there. Transparency campaigns have yielded major advances in the reporting and publishing of data and documents essential to the pursuit of accountability. There are emerging, albeit limited, signs of a greater resolve to bring corruption to book. And the fiscal frameworks required to manage resource revenues are more widely appreciated and sporadically implemented. There is a lot of very hard work ahead, however, before we are likely to see truly measurable progress. It is surely too much to expect to see major gains in two to three years. As noted in the opening paragraph above this is a long term process. There are bound to be short term setbacks and painful delays. The most hopeful indicator of eventual success is the unwavering commitment of reform advocates to see this through. Continued support – financial, diplomatic, technical and moral – will remain essential.

This volume is directed primarily, albeit by no means solely, at policy-makers in the United States. It hardly needs being said that the issues discussed above are of direct national relevance. While energy supply security may no longer be of concern to the United States, its other stated foreign policy objectives remain constant and are inextricably linked with the promotion of good governance in the resource-rich countries of the developing world – economic growth, human development and human rights, political and social stability, prevention of violent conflict and containment of terrorism, freedom of speech and public-private sector balance and market-oriented economics.

Table 1

Transparency, Governance and Corruption Scores

Sub-Saharan Africa

Selected Current and Prospective Petroleum Producers

Country

EITI

Participant

NRGI

RGI

Rank/Score

Gov. Effectiveness

Percentile

Control of Corruption

Percentile

Corruption Perceptions

Rank/Score

Angola

41/39

13.0

3.3

161/19

Cameroon

Yes

41/34

23.0

10.1

136/27

Chad

Yes

5.8

8.1

Congo (Rep.)

13.5

9.1

152/23

Cote d’Ivoire

Yes

21.1

41.8

115/32

Equatorial Guinea

56/13

6.2

0.0

Gabon

32/46

26.4

30.3

94/37

Ghana

Yes

15/63

44.2

50.9

48/61

Kenya

43.3

16.3

145/25

Liberia

Yes

16/62

7.7

24.7

94/37

Mauritania

Yes

15.8

18.2

124/30

Mozambique

Yes

46/37

24.0

27.9

119/31

Nigeria

Yes

40/42

11.5

7.2

136/27

S. Sudan

50/31

0.5

1.0

171/15

Tanzania

Yes

26.9

22.6

119/31

Uganda

38.4

12.2

Notes:

EITI: Includes both Candidate and Compliant countries (www.eiti.org). Current

NRGI/RGI: Natural Resource Governance Institute/Resource Governance Index (www. resourcegovernance.org). Ranking is out of 58 countries. Score based on composite governance indicators is out of 100. 2013

WB: World Bank Governance Indicators/Government Effectiveness (www.govindicators.org). Percentile out of 215 countries. 2014

WB: World Bank Governance Indicators/Control of Corruption (www.govindicators.org) Percentile out of 215 countries. 2014

TI: Transparency International Global Corruption Perceptions Index 2014. Ranking is out of 175 countries. Score is out of 100. (www.transparency.org)

Charles McPherson is an international consultant on petroleum and minerals policies and taxation. He served as resource tax policy adviser in the Fiscal Affairs Department of the International Monetary Fund, and as senior adviser in the Oil, Gas, Mining, and Chemicals Department of the World Bank. He has also held senior international government negotiation positions at two major oil companies.

[1] Two frequently referenced governance monitors are the Extractive Industries Governance Initiative (www.resourcegovernance.org) and the World Bank’s Worldwide Governance Indicators project (www.govindicators.org). The World Bank defines governance more generally as comprising “the capacity of government to effectively formulate and implement sound policies and the respect of citizens and the state for the institutions that govern economic and social interactions…”

[2] EITI Standard (2015) at www.eiti.org

[3] The proposed ruling can be found at http://www.sec.gov/rules/proposed/2015/34-76620.pdf

[4] See “How Does the IMF Encourage Greater Fiscal Transparency?” FACTSHEET IMF at www.imf.org

[5] See for example NRGI’s “From Reporting to Reform: Eleven Opportunities for Increasing EITI Impacts” NRGI Home Publications www.resourcegovernance.org

[6] See IMF Macroeconomic Policy Frameworks for Resource-Rich Developing Countries Washington, IMF 2012

[7] The 2013 Resource Governance Index. NRGI Home Page www.resourcegovernance.org

[8] Corruption Perceptions Index at www.transparency.org.

[9] Charles McPherson “Necessary but not Sufficient: Anti-Corruption and Transparency Legislation” in Special Issue: Sub-Saharan Africa: Comparative Views on Anti-Corruption Legislation and Its Enforcement . Journal of World Energy Law and Business, Oxford University Press, June 2014 [FCPA/EU]

[10] IMF, The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times. IMF Fiscal Monitor October 2015

[11] IMF, op.cit. page 8.