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Evolving expectations: Why transparency matters for state-owned companies in the extractive sector

The COVID-19 pandemic has stretched national budgets, increasing the likelihood that governments will turn to state-owned enterprises (SOEs) for much-needed funding. In the longer-term, progress towards the use of clean energy sources may put state-owned oil and gas investments at risk.  

Against this backdrop, the EITI’s recent Transparency Matters webinar was an opportunity to explore the evolving nature of public expectations toward SOEs, understand the drivers of transparency and share country experiences of SOE governance reforms.   

The number of state-owned enterprises (SOEs) listed in the world’s 500 largest companies has more than trebled in the last two decades. In the extractive sector, SOEs can represent a substantial portion of government income and expenditure. In Mozambique, for example, state investments in three gas projects are projected to yield USD 96 billion in revenues over the next 30 years. However, the cost of these investments is also substantial – up to USD 3 billion, or 60% of the state’s budgeted expenses.

Agents of change?

The COVID-19 era has seen a growing government role in the economy and – in many countries – an increased economic contribution from SOEs. “It is perfectly legitimate for SOEs to do things other than maximise profits,” argues Hans Christiansen, Senior Economist at the OECD, “that’s why they need to remain in state ownership.” Yet he stressed an important caveat: “It must be absolutely clear and communicated clearly what that other ‘something’ is, so there can be proper accountability.”

There is also an opportunity for SOEs to be powerful agents of change in the energy transition, according to the OECD speaker, if governments exercise their ownership of big energy companies in the appropriate way. Yet this is not always the case in practice. “If there is a conflict of interest, with the same minister who is responsible for regulating the energy sector being held accountable for the profitability of existing companies, then we have seen state-owned companies become a hindrance.”

Legal reforms a starting point

For Afghanistan, state-owned companies have played a key role in the extractive industries since the 1980s, helping to develop the country’s estimated USD 1 trillion in undeveloped mining, oil and gas resources. Fast forward to 2004, when the extractive industries were opened to private investment aligned more closely with market principles. This shift presented two challenges. First, an overlap in the responsibilities of ministers who were both regulators and responsible for ensuring profitability of SOEs. Second, the lack of adequate oversight of SOEs who were regulated by different ministries and did not prepare financial statements based on international accounting standards such as IFRS.

In 2018, the situation changed with new legislation on State-owned Corporations (SOCs). The law requires an annual external audit of all SOCs, brings SOC oversight directly under the Ministry of Finance and requires each SOC to have a Board of Directors and a Chief Executive Officer who does not have a government background. Annual accounts are prepared using the IFRS standard and external audits have been introduced.

According to Murtaza Rahimi, Director of Legal Services of State-Owned Companies in the Afghan Ministry of Finance, these reforms have also affected the expectations of citizens, who seek more transparency in the governance of SOCs – specifically in relation to the contribution of SOCs to the economy and employment.  

Improving corporate governance

Internal governance systems in SOEs are important too. In Ecuador, the EITI’s newest member country, state-owned oil company EP Petroecuador has initiated reforms to strengthen its management processes. These have included an application for ISO 37001 certification on anti-bribery management systems, the introduction of a code of ethics and the formation of an anti-money laundering unit.    

Financing public enterprises

With so much at stake, public expectations are high. Campaigners see the operations and management of SOEs as a matter of public interest. In Mozambique, civil society representatives have called for  increased transparency on three issues: the capacity of SOEs to meet revenue projections, the information on  financing of state investments (in particular interest rates) and decisions over the level of state participation in extractive SOEs. The latter ranges from 5 to 51%, according to Inocência Mapisse, a researcher for Centre for Public Integrity in Mozambique. The group is calling on government to explain the rationale for these decisions and address gaps between law and practice, such as the failure of some SOEs to publish financial statements.

Assessing risk and reward

Concluding remarks by the NRGI’s David Manley underscored the need for transparent and fact-based risk assessments, based on a range of scenarios. For Uganda’s state-owned oil company, for example, the break even price of around USD 40 to 50 per barrel may prove to be out of reach, putting state funding of up to 20% of the government’s budget in jeopardy. Without such projections, he argues, state ownership of extractive companies can be a risky bet.  

 

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Authors: 

Joanne Jones

Communications Director

Joanne leads the EITI’s communications team, developing and implementing communications plans to build public awareness around the EITI and natural resource governance.