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Modelling extractives data: the next step in reconciliation?

Modelling extractives data: the next step in reconciliation?

Johnny West is the founder and director of OpenOil, a leading provider of financial analysis and commercial advice on natural resource assets for public policy.

Think of financial modelling as an ultimate “what for” of EITI reporting. Why collect all this data around the oil and mining industries? And why put so much effort into building a consensus around publishing it? How can this data be used to stimulate informed debate and policy choices?

Extractive industries have profound impacts in many ways – environmental, social, even political. But when it comes to money (which, after all, is the force behind why people drill holes into sea-beds or carve out mountains), financial modelling is where it all comes together. Think of a financial model as a recipe. The data that EITI reporting generates – such as production figures, price, fiscal regimes and payments – are raw ingredients. A model is the formula that gives a picture of how this data fits together.

When it comes to extractive projects, financial questions are important: what is a “fair deal”? How much will the government earn this year? How much will go to local communities? How would that change if the price of gold or oil went up by 10%? Down by 20%? How much is the gold mine worth? Do we need to offer this tax holiday?

Static data alone cannot give any of these answers. It needs to be combined – production with prices, profit margins with taxes paid – with the calculations of a model.

Although the EITI delivers data, its purpose is also to offer insight. Financial modelling could be leveraged more systematically to provide insight that is analytic and specific. It can be thought of as a next-level reconciliation. Where reconciliation exercises ask the question “how much did A pay B?”, the model asks “how much should have A paid B?”

It’s no surprise that multi-stakeholder groups (MSGs) are beginning to show a strong interest in modelling. In Nigeria, NEITI used a model to address a critical question of how much the government might have lost in the offshore oil sector by failing to invoke a right to review the first generation of contracts. In Zambia, the government and the mining companies swapped their models that look at the impact of a new fiscal regime on project economics. This took the conversation to a new level in a country which has had a mining industry for a century. Models have recently been published in other EITI countries, such as Guyana and Myanmar, and others in various stages of development include Lebanon and the Republic of Congo.

NEITI analysis showing revenues under status quo and with contract review

The EITI is in a unique position to drive forward modelling in the public space. It is trusted by, and sometimes embedded in, governments, but with a mandate to build consensus – by publishing information. The EITI’s global structure enables it to drive best practise and a knowledge community in the public space in a more coordinated way than other initiatives have done until now. The EITI could build on this success by making sophisticated financial analysis the “new normal” in many countries where the government doesn’t effectively model natural resources in private. This is an exciting prospect!

Ultimately, modelling helps fulfil the other part of the EITI’s broad mandate: to inform the conversation. Models can be great “rumour killers”; they may show that a country’s offshore sector is not going to save the entire economy, public finances, or end poverty. Or, they may demonstrate that a deal was actually OK. Many countries have the potential to replicate Zambia’s modelling success story. The EITI was founded on the idea that trusted, open information informs better policy and fuels social license to operate. Modelling is the natural next level to achieve this mandate.

Johnny West is director of OpenOil, a Berlin-based consultancy specialising in financial analysis of natural resources for public policy. OpenOil hosts the largest collection of published financial models of extractives on the Internet, and consults to governments, think tanks, civil society, bilateral development agencies and international financial institutions. Johnny is on the Advisory Board of the FAST Standard Organisation which manages the widest used open source financial modelling system in the world, as well as the board of Open Knowledge International.

Johnny West