Honduras 2017 Validation

Introduction

Honduras' Validation commenced on 1 January 2017.

On 25 October 2017, the EITI Board found that Honduras has made meaningful progress in implementing the 2016 EITI Standard. 

Validation is the EITI's quality assurance mechanism and measures the progress countries have made in meeting the requirements of the EITI Standard.

The Board's decision

On 25 October 2017, the EITI Board came to the following decision on Honduras’ status: 

Following the conclusion of Honduras’ Validation, the EITI Board concludes that Honduras has made meaningful progress overall in implementing the 2016 EITI Standard.

The Board recognises Honduras’ efforts to institutionalise extractive industry transparency through the 2013 Mining Law and contracts in the hydrocarbon sector that require companies to comply with the EITI Standard. The licensing and cadastre system and other internal procedures have been overhauled, using the EITI as guide.

Validation demonstrated that the EITI has brought together government, industry and civil society in trust-building collaboration. Stakeholders have worked together to provide an unprecedented and comprehensive review of the extractive industries. Validation has also highlighted important gaps, such as monitoring of production, modernization of the mining annual company declarations, the collection of municipal taxes and disclosures of mandated social payments.

The Board notes that there are further opportunities for the EITI to contribute to the government’s reform agenda and to continued trust building, taking into account lower commodity prices and an uncertain outlook for further investment. The engagement of all three constituencies needs to be reinvigorated. The government should provide adequate support and funding for EITI-Honduras, and ensure that the hosting of the national secretariat is resolved.

The MSG is encouraged to consider further opportunities to add value, e.g., by further improving the cadastre system to include beneficial ownership information, harmonizing the classification of extractive companies by the mining regulator, and integrating revenue collection data in the systems of the tax agency (SAR). The government should also continue to explore opportunities to integrate the EITI’s disclosure requirements in existing systems in the mining regulator, the tax agency, the finance ministry and Institute for Access to Public Information (IAIP).

While the EITI has made a good start in building trust, the information produced through the EITI needs to be put to better use. The data could be used to examine whether revenue collection is satisfactory, and disclosing municipal-level information on revenue transfers and the utilisation of these funds. Other issues such as the cost structure in the mining industry and social contributions from mining companies could be more widely addressed and discussed.

The Board has determined that Honduras will have 18 months to carry out corrective actions regarding the requirements relating to government engagement (requirements 1.1), industry engagement (1.2), civil society engagement (1.3), EITI work plan (1.5), comprehensiveness of revenue disclosures (4.1), direct subnational payments (4.6), data quality and assurance (4.9), mandatory social expenditures (6.1), economic contribution of the extractive sector (6.3), public debate (7.1), follow-up on recommendations (7.3) and outcomes and impact of implementation (7.4).

The Board believes that this will help build trust in the sector, demonstrate the commitment of all stakeholder groups to transparency and accountable management of the country’s natural resources, and ensure that there is reliable information available to help inform public debate and policy discussions related to the extractive industries.

Honduras 2017

Corrective Actions

The EITI Board agreed the following corrective actions to be undertaken by Honduras. Progress in addressing these corrective actions will be assessed in a second Validation commencing on 25 April 2019:

  1. In accordance with requirement 1.1, the government should demonstrate that it is fully, actively and effectively engaged in the EITI process. The government should demonstrate its commitment to by providing adequate support and funding for EITI-Honduras. The government should consider hosting the National Secretariat in a government agency already involved in EITI work. The MSG should ensure that the Secretariat provides adequate support and coordination to deliver the agreed work plan. In accordance with requirement 8.3.c.i, the government is requested to develop and disclose an action plan for addressing the deficiencies in government engagement documented in the initial assessment and validator’s report within three months of the Board’s decision, i.e. by 25 January 2018.
     
  2. In accordance with requirement 1.2, industry should demonstrate that it is fully, actively and effectively engaged in the EITI process. The industry constituency should review its engagement in the EITI, consider opportunities to work more closely with the MSG to ensure that EITI-Honduras discusses, addresses and communicates more effectively not only the Standard-mandated disclosures but other issues of interest to the industry constituency.  This assessment should inform and be reflected in the MSG’s revised work plan. In accordance with requirement 8.3.c.i, industry is requested to develop and disclose an action plan for addressing the deficiencies in industry engagement documented in the initial assessment and validator’s report within three months of the Board’s decision, i.e. by 25 January 2018.
     
  3. In accordance with requirement 1.3, civil society should demonstrate that it is fully, actively and effectively engaged in the EITI process. The civil society constituency should review its engagement in the EITI, clarify the objectives for EITI engagement, and explore options to ensure that it has adequate technical and financial capacity to participate fully in the process. Such an assessment could inform and be reflected in the MSG’s revised work plan. CSOs could also consider reinvigorating its participation in the MSG by, for example, refreshing its representation. In accordance with requirement 8.3.c.i, civil society is requested to develop and disclose an action plan for addressing the deficiencies in civil society engagement documented in the initial assessment and validator’s report within three months of the Board’s decision, i.e. by 25 January 2018.
     
  4. In accordance with requirement 1.4, the MSG is encouraged to reconfirm the MSG membership and agree clear rules for rotating representatives of the MSG member organizations and ensure that these procedures are followed and documented.
     
  5. In accordance with requirement 1.5, the MSG should agree a revised and fully costed work plan. The MSG should review the outcomes and impact of EITI implementation to date and revise the work plan objectives to ensure that they are clearly aligned with the national priorities for the extractive industry. The revised work plan would be an opportunity to reinvigorate government, industry, civil society and donor engagement. The Government could consider convening an EITI national conference to agree high-level objectives to inform future EITI work.
     
  6. In accordance with requirement 2.3, the government is encouraged to provide INHGEOMIN with resources to update the technological platform supporting the cadastre system to allow improved public accessibility.
     
  7. In accordance with requirement 3.2, the MSG might wish to include in future reporting information on how the production volumes and values are calculated and any other information that could enhance the understanding on how mining production is monitored. The MSG may wish to explore working with the mining regulator INHGEOMIN, the customs agency and the finance ministry in ensuring mining production is properly recorded and monitored. The EITI Report can be used to comment on progress addressing these issues.
     
  8. In accordance with requirements 3.2 and 3.3, the government is encouraged to continue strengthening INHGEOMIN’s internal systems including the modernization of the consolidated annual declaration (DAC) and monitoring capacities and the collaboration with the customs agency, including harmonization of procedures.
     
  9. In accordance with requirement 4.1, the MSG should ensure that future reporting adheres to the standard terms of reference approved by the EITI Board. In particular, the MSG should adopt a definition of materiality that ensures that the scope of the reporting process is comprehensive and that all material companies participate. The MSG is encouraged to work with government authorities including INGHEOMIN and SAR to developing a classification protocol that ensure that the universe of mining companies is clearly identified.
     
  10. In accordance with requirement 4.6, the MSG should clearly establish whether direct payments, within the scope of the agreed benefit streams, from companies to municipalities are material. If material, the MSG should ensure that company payments to municipalities and the receipt of these payments are disclosed and reconciled in the EITI Report. The MSG is encouraged to consider collaborating with municipalities in mining areas to improve their capacity to collect, record and manage revenues from the extractive industries.
     
  11. In accordance with requirement 4.9 and with the standard terms of reference, the MSG should ensure that the Independent Administrator provides an assessment of whether all companies and government entities within the agreed scope of the EITI reporting process provided the requested information. Any gaps or weaknesses in reporting to the Independent Administrator must be disclosed in the EITI Report, including naming any entities that failed to comply with the agreed procedures, and an assessment of whether this is likely to have had material impact on the comprehensiveness of the report. The Independent Administrator should also provide an assessment on the comprehensiveness and reliability of the (financial) data presented, clearly indicating the coverage of the reconciliation exercise based on the government's disclosure of total revenues.
     
  12. In accordance with requirement 5.1, the MSG might wish to consider bringing more information about how the revenues collected through the Population security fee are budgeted and spent.
     
  13. In accordance with requirement 6.1, the MSG should ensure that the reporting of social expenditures required by the Honduras Mining Law is comprehensive. Where the beneficiary of the mandated social expenditure is a third party, i.e. not a government agency, it is required that the name and function of the beneficiary be disclosed.
     
  14. In accordance with requirement 6.3, the MSG should ensure future EITI reporting includes the total of government revenues.
     
  15. In accordance with requirement 7.1, the MSG is encouraged to consider developing a communication strategy to ensure that EITI disclosures and findings are communicated more effectively and contribute to public debate. This could include more analytical work, better linkages with the work advanced by other organizations, and addressing other issues such as industry cost structures.
     
  16. In accordance with requirement 7.3, the MSG is encouraged to take a more active role in developing recommendations from EITI Reports, and monitoring progress with implementing these recommendations.
     
  17. In accordance with requirement 7.4 and as suggested in recommendation 5 (requirement 1.5), the MSG might wish to review the outcomes and impact of the EITI implementation with a view on informing the discussion and elaboration of the next work plan, including setting specific implementation objectives that reflect the current national priorities for the extractive industry.

The MSG is encouraged to document the MSG’s responses to these recommendations in the next annual progress report.

Next Validation date

A second Validation will commence on 25 April 2019.

Impact of the EITI in Honduras

In 2013 Honduras sought through the EITI to ensure revenues from the extractive sector were used transparently and for the benefit of society. They sought to avoid corruption in the sector by promoting accountable management and social monitoring throughout the value chain. They looked beyond the core requirements of the EITI Standard, by aiming to verify that tax payments have been properly collected, to consider environmental and social aspects, and the use of revenues. The extractive sector in Honduras represented in 2013 less than 1% of GDP. The country was hopeful that the exploration of a significant offshore oil block recently signed with the BG Group at that time would make a much larger contribution. With lower commodity prices the contribution of the sector has declined. The prospects of more oil and gas revenues are more distant. With continued widespread anti-mining sentiments, no new mining development is expected. The objectives EITI-Honduras sought to achieve in 2013 were more likely to be attainable in the mid or long term with favourable market circumstances. In the absence of those favourable conditions, the question of impact of EITI implementation in Honduras has to be approached from the perspective of how the EITI has contributed to set the foundations for achieving those goals.

The impact of the EITI can be seen in a number of areas:

Strengthening government systems. In 2013, the mining regulatory framework was updated with the passing of a new mining law. In the hydrocarbon sector, the contract signed with BG Group set the basis for, in the absence of a specific legislation, monitoring companies operating in the sector. In both cases, the EITI Standard was adopted as the reference to disclose and publish information and to mandate companies to report financial information beyond what was already established. This early institutionalization of the transparency requirements meant that Honduras has an important tool for monitoring the extractive sector. In practice, this has been realised through developments in three parts of the regulatory sector.

First, the mining regulator INHGEOMIN, created in 2013, had to update the entire cadastre system to be able to comply with the EITI Standard. The mining cadastre was updated from manual to automated records in 2014-2015, ahead of the publication of the first EITI Report. More recently, INHGEOMIN has worked with the customs agency to harmonize how production data is collected from extractive companies and shared between government agencies. Currently, INHGEOMIN is modernizing the collection, processing and documentation of the annual consolidated report. This annual dossier covers the technical, economic, social and environmental information that mining titles holders have to report to the mining authorities. INHGEOMIN uses the EITI Standard as the reference for what type of information should be included.

Second, the tax office was overhauled in 2016. The old agency (Direccion Ejecutiva de Ingresos (DEI)) was closed in early 2016 and replaced with a new agency, the Rents Administration Service – Servicio de Administracion de Rentas (SAR). A revised tax code is being developed and SAR has started to update modernise its systems. SAR has looked at the EITI for guidance on the type of information they can include in the revamped agency’s systems and regulatory framework. They are willing to work with EITI-Honduras and other government agencies such as INHGEOMIN to improve coordination and sharing of information between the agencies, including compatible classifications and coding of data. Similarly, the Ministry of Finance has considered the EITI Standard as a reference for the development of the system to monitor municipal investments and expenditures (Sistema de Administracion Municipal (SAMI)). They are also willing to ensure that their main system for monitoring public financial investment and open budget data can provide information in accordance to the EITI Standard.

Finally, the Law of Transparency and Access to Public Information, passed in 2006, mandates that all public entities have to publish information related to its mandate, its exercise of the public function and its relation with stakeholders. The law is enforced by the Institute for Access to Public Information (IAIP). The IAIP has worked with EITI-Honduras to host a transparency portal dedicated to EITI-mandated information. The IAIP has offered to use the EITI as one of the vehicles for complying with the transparency law for the agencies related to the extractive sector. They are ready to explore incorporating the requirements in the Standard in their own compliance mechanisms.

Put together, the EITI has informed the development of transparency practices in four key government agencies. These agencies have embarked on ambitious modernisation efforts, and the EITI is being used by all of these government agencies as a reference for what should be made public. They are also using the EITI to improve inter-agency coordination. EITI-Honduras could expand its scope and work closely with these agencies in embedding the EITI requirements into their systems and functioning.

Building trust. Stakeholders in the extractive sector recognise there is a high level of distrust. Companies are questioned for not paying adequate taxes and other contributions. Local stakeholders resent that mining activities do not bring benefits for communities. Companies feel that regulators and affected stakeholders do not understand their economic and social contribution. Opposition to mining is widespread among communities. The EITI has opened an institutionalised space for bringing together stakeholders. While the initial impact of this development was recognised by Tegucigalpa-based stakeholders, there is an appreciation that there are further opportunities. For example, both companies and local stakeholders are willing to bring more transparency to the industry’s contribution and to how revenues are utilised at local level. One municipality, Los Cedros, have been willing to pilot EITI implementation at the municipal level. The national association that groups all municipalities (Asociación de Municipios de Honduras (AMHON) is ready to work with EITI-Honduras on municipal-level disclosure of information that could help improving revenue management. These could include: audits of tax payments, social and environmental information, disclosing beneficial ownership of mining and hydrocarbon licenses, and more information and analysis on the use of revenues at local level and in dedicated spending mechanisms such as the fund that administers the population security fee.

Sustainability. As discussed throughout this assessment, access to adequate funding has been a major obstacle to effective EITI implementation. While the oil, gas and mining sector continues to be a small part of the economy and finding resources for EITI implementation could continue to be a challenge, this issues needs to be addressed. First, to materialise the potential to mainstream EITI disclosures through government systems. This assessment has highlighted that, in Honduras, key government agencies are well prepared to implement this approach. By embedding transparency in government systems as expected in the EITI Standard, Honduras will foster improved governance in the sector using the resources devoted to government systems normal functioning.  Second, given resources limitations Honduras could also pool resources to implement the EITI Standard in an improved cost effective manner. For example, as suggested by some stakeholders, the EITI could be expanded to cover hydroelectric power generation and forestry.