Social and economic spending

The impact of the extractive industries on economic growth and social development

Revenues from natural resources are often more challenging to manage than revenues from other sectors. Government revenues may vary as production and prices fluctuate from one year to the next. The resources are finite, so the sustainability of these revenues is also a key consideration.

Policies on public financial management and expenditure, economic diversification and savings for future generations affect the vulnerability of resource-rich countries to the volatility of the extractive sector. In many countries, in particular with large development needs, extractive companies often contribute with social investments in the communities where they operate. Such investments are typically either part of the contract governing the extractive project or made by the company on a voluntary basis. Such investments can often have a significant impact on the social and economic development of extractive regions.

What the EITI requires of its member countries

The EITI promotes disclosure of information on revenue management and expenditures, and helps stakeholders assess whether the extractive sector revenues are well managed and are contributing to social and economic development. 

Specifically, the EITI requires disclosures of information related to social expenditures and the impact of the extractive sector on the economy, helping stakeholders to assess whether the extractive sector is leading to the desirable social and economic impacts and outcomes.

The EITI Requirements related to social and economic spending include: (6.1) social expenditures by companies; (6.2) quasi-fiscal expenditures by state-owned enterprises; and (6.3) an overview of the contribution of the extractive sector to the economy.

In some countries, the EITI has contributed to provoke debate about savings options and public expenditure priorities, as well as strengthened budget oversight.  

“Now the new system ensures greater transparency of revenues and accountability of local governments on social investment payments from oil, gas and mining companies. It is fascinating to see how the EITI reporting affected change in bringing more responsible management of the extractive sector in Kazakhstan.”
Ruslan Baimishev, National Coordinator, EITI Kazakhstan

Social expenditures by extractive companies

In addition to taxes levied by central, regional and local governments, extractive companies often make contributions to regional or local governments, communities, non-governmental organizations or other third parties in the areas where they operate. These transactions are interchangeably called “social expenditures”, “social payments”, or “social investments”. 

Social expenditures can take multiple forms. They may involve cash payments such as donations, grants or other types of cash transfers, the transfer of assets such as the construction of roads or schools, or the provision of services like training and health care. In some cases, these social expenditures are based on legal or contractual obligations. In other cases, companies make voluntary social contributions. 

Social payments - in-kind or cash - are a form of contribution from companies to a region or community and should be reflected as such. Often, communities do not know what companies contribute - or are obliged to pay by nature of their contracts. This can generate mistrust towards the companies and the government. It is thus important to publish the expectations and the actual amounts paid, or in-kind donation given to provide a more complete picture for all stakeholders involved.