This session brought together leading experts in extractives financial modelling and taxation to discuss how governments can make use of data to design sustainable fiscal frameworks for extractives and monitor them.
Extractive companies model projects carefully before investing. Governments are slowly starting to catch up, but more capacity-building is needed. EITI can have a role in this, as it has in Nigeria and Zambia. Understanding the economic realities is essential for designing a fiscal framework that leads to a fair share for both the government and companies.
Financial models are based on presumptions. If these presumptions are inaccurate, the model does not provide a credible picture of project economics. Profit shifting can lead to significantly lower government revenues than expected, unless the risks are addressed.
Presumptions are based on data, which at its best is relatively complete. A common narrative exists that the data is now there, it just needs to be used. Don Hubert argued the opposite: we still live in an information-poor world. The type of granular data needed for financial modelling is rarely available. EITI is starting to provide relevant data through project-level disclosures and contract transparency.
Moderator: Ms Chiara Bronchi, Deputy Director General, Asian Development Bank (ADB)
Mr Don Hubert, Founder and President, Resources for Development (R4D)
Mr Waziri Adio, Executive Secretary, Nigeria EITI
Mr Talent Ng’andwe, Deputy CEO, Chamber of Mines, Zambia
Ms Alexandra Readhead, Technical Advisor, Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF)
Mr Simon Taylor, Director and Co-founder, Global Witness
Don Hubert, Founder and President, Resources for Development (R4D) introduced the concept of financial modelling in the extractive sector. He focused on identifying and avoiding grossly unfair deals that would lead to significant revenue loss for governments. Don argued that available data was still limited and that few people in governments had skills to analyse it. He presented the basic factors required for financial modelling of an extractive project and highlighted the importance of contract transparency and project-level data.
Waziri Adio, Executive Secretary, Nigeria EITI introduced NEITI’s work to analyse oil contracts and the outcomes. NEITI had moved from simply disclosing payments and revenues to asking, whether the companies where paying what they should be paying. NEITI’s analysis of 1993 PSCs had demonstrated significant revenue losses and led to a bill now being discussed in parliament. NEITI had also shown what public services could have been provided with the missing revenues.
Talent Ng’andwe, Deputy CEO, Chamber of Mines, Zambia spoke about Zambia EITI’s experience with financial modelling in the copper sector from an industry perspective. The exercise had provided industry the opportunity to demonstrate that changes to the fiscal regime had led to mines closing and had hardly increased government revenues. ZEITI had organised training to stakeholders on financial modelling, with companies providing data upon the government’s request.
Alexandra Readhead, Technical Advisor, Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) spoke about considering profit shifting risks in financial models and the tools IGF and OECD have developed to counter base erosion and profit shifting in the extractive sector. She demonstrated how accounting for tax avoidance tricks in a financial model changed the expected government revenues. Alexandra highlighted the importance of considering the cost of tax incentives and presented IGF’s work on the topic.
Simon Taylor, Director and Co-founder, Global Witness noted that contract analysis helped reveal corruption in, for example, Nigeria where the government had lost revenues worth billions of dollars. This restricted the government’s ability to provide public services. Simon highlighted the importance of contract transparency and the need to tackle tax havens.
In the brief panel discussion, Don noted that cost data was almost impossible to find. Panellists were supportive of a suggestion to integrate information on cost audits in EITI disclosures.
Simon noted that citizens had the right to know whose assets would be stranded due to climate change measures. EITI had a role to play in promoting these disclosures.
Don also reminded that strong countries negotiated contracts all the time, so governments should act if deals was proven to be grossly unfair.