With low commodity prices, the social license is more valuable than ever

Prospects of good governance in the lower commodity price context – the future of MSIs in the extractives.

This blog was written as a contribution to the World Bank's series on Prospects of good governance in the lower commodity price context available here: http://goxi.org/page/goxi-blogs-mini-series

Every day carries a new story about the financial pressures on the oil, gas and mining industries. With oil prices down by over 60% over the past 18 months, the pressure is mounting on industry, and on resource rich countries. Government revenues are falling precipitously. Currencies are under pressure. Some countries have turned to the IMF for assistance.  Public expectations of a commodity bonanza are unfulfilled leading to reduced trust.  Sierra Leone, for example, has suffered the quadruple whammy of businesses withdrawing because of falling iron ore prices; a currency losing its value; less money to invest in infrastructure and creating an attractive investment climate; alongside Ebola closing down most public services and private investment for over a year.  

In such an environment, the need to fight corruption and waste becomes even more important.  Companies have an important role to play.  They need to engage more with government and with affected communities to ensure that their operations are clear and transparent.  As countries consider policy changes and companies re-establish their strategic and investment priorities, the need for comprehensive and reliable information is essential.

The link between good governance and multi-stakeholder initiatives 

As my colleague, Jonas Moberg, and I have written in our book: Beyond Governments, whilst multi-stakeholder governance should be somewhat of a last resort, it can be appropriate when the challenges are beyond the reach of government alone and when each key stakeholder group has something to gain through engagement and, even more importantly, something to lose from not doing so.  We argue that the extractives sector is one such area. 

The Extractive Industries Transparency Initiative (EITI) has made a significant contribution to improved governance. The EITI is a global Standard to promote open and accountable management of natural resources. It seeks to strengthen government and company systems, inform public debate, and enhance trust. In each implementing country it is supported by a coalition of governments, companies and civil society working together.

The 51 countries implementing the EITI disclose information on tax payments, licences, contracts, ownership, production and other key elements around resource extraction. All companies are required to participate, creating a level playing field. This information allows citizens to see for themselves how their country’s natural resources are being managed and how much their government is receiving for them. So far, over USD 1.8trn of revenue have been disclosed in EITI reports – often for the first time.

Already 46 countries have produced reports detailing the governance of their oil, gas and mining sectors.  This reporting has led to more informed debate and some clear, tangible reforms in implementing countries. Attitudes and practices on issues like disaggregated payments, contract transparency, beneficial ownership and commodity trading have evolved more rapidly than we could have imagined; and trust and cooperation have been built between stakeholders.

The benefits of getting extractive industry governance right are enormous. In Nigeria, oil accounts for 90% of the exports, and is by far the country’s most vital source of income. The Nigerian EITI process has already recovered USD 2.4bn taxes and Nigeria’s EITI is confident of recovering almost USD 10bn more.  Furthermore, its recommendations on scrapping the controversial crude oil swaps, on restructuring the national oil company, and on reviewing contracts and subsidies are all being implemented by the new government, potentially saving Nigerians tens of billions of dollars, against an implementation bill of around USD 6m a year.  

As the ‘Panama papers’ show, the EITI requirements on the license process and on disclosure of the real beneficial owners of all extractives companies operating in a country – including those bidding for a licence, is an essential part of plugging the potential leaks from the sector.

It is good value but it needs funding

The World Bank’s study of company’s attitudes and behaviours to governance after the boom is timely.  Whilst supporting efforts like the EITI is but one small part of the jigsaw puzzle of good governance, its sustainability presents an interesting challenge for companies.  For companies, the value of the EITI lies in its contribution to clarity and stability around licence allocation, contractual, legal and fiscal terms; increased trust; increased access to local communities and governments; improved regulatory regimes and bodies; and a level playing field in terms of reporting requirements. 

The International EITI Secretariat has estimated that the cost of EITI implementation globally costs just over USD 50 million per year. Of this, the international management costs less than USD 5 million. In these straightened times it is always important to look for opportunities to reduce spending, but a certain level of revenue is essential to keep any sort of process functioning. 

In recent years, with commodity prices falling, the international management has found it harder to get funding from its supporting companies.  Naturally most extractive companies will generally have fewer resources available to support good governance than they did in previous years and will face pressure to demonstrate the value of good governance.  The number of company contributors fell from 47 in 2014 to 33 in 2015, and many of these reduced their contribution.  This is understandable but creates a challenge to the whole voluntary funding model for the EITI and other multi-stakeholder initiatives.  The funding is unequal, uncertain and insufficient. The Board is currently reviewing its funding mechanisms with a view to perhaps introducing some sort of mandatory fee for supporting companies, and also perhaps for implementing countries.  This will no doubt significantly reduce the number of supporting companies.  It might, however, mean that those still left in will engage at a different level and quality.  If you wish to contribute to the consultation on EITI’s funding, please go to https://eiti.org/consultation-funding-review

During the good times, companies were generous with their social payments.  Some were more savvy than others about supporting those efforts that truly contributed to improved governance rather than just PR.  Companies and governments everywhere are resetting their priorities and strategies.  It should be an opportunity to put improvement of governance, fighting corruption and building trust more centrally into business plans to make sure that all benefit more fully from the next boom.  Leaner times makes these decisions harder, yet time and again we have witnessed the enormous human costs for local communities and corporate financial costs for extracting companies when relationships break down.