December 2011 / January 2012

Question&Answer

Erin Smith, RWI Columbia Human Rights Fellow

Ms. Smith is co-author of the new RWI report Enforcing the Rules, which examines the gaps in effective monitoring of mining contracts, laws and regulations; identifies good practices and proposes practical avenues for improvement.

Why did you begin looking at this topic?
There's been a big push to make contracts public and to analyze whether they are good or bad deals. There hasn't been as much attention paid to what happens after a contract goes into effect, over the next 20 to 30 years as the projects continue. Mining activity has nearly doubled in the past 10 years, but now that those deals are in place, we need to examine the conditions under which mining is carried out and whether it adheres to the original deals.

What are companies' obligations?
There are five categories: financial, environmental, social, operational and production requirements, and health and safety.

Some are basic: financial obligations are paying correct taxes and royalties. Others include creating a work plan and exploration commitments, to make sure companies aren't just hoarding permits to sell later; crafting environmental impact assessments and management plans to determine project-specific risks; and social obligations like hiring local workers, building local infrastructure and fulfilling community consultation and consent requirements.

What losses can occur if company obligations aren't enforced?
The big loss people are already aware of is on the financial side, through tax evasion and transfer pricing. For example, the Democratic Republic of Congo wasn't getting the benefits from mining the government had expected, so the senate conducted a study and found that in 2008 alone, the country had lost $450 million in mining revenues—four percent of the Congo's GDP that year.

Mining and oil production can also generate costs—particularly environmental costs—that they shouldn't. A study of the Deepwater Horizon oil spill in the U.S. found that a lack of effective government oversight was a contributing factor to that explosion. So it's not just developing countries facing enormous challenges in monitoring these very sophisticated industries.

On the social side, the costs include communities not getting the benefits they expected, and also unreasonable risks to workers. The Chilean miners who were trapped underground for about two months last year are now suing their government, alleging negligence for its failure to adequately inspect the mine. There's a sentiment that if the government had done a better job monitoring health and safety risks, the mine collapse might not have happened.

What are obstacles to effective monitoring and enforcement?
One of the biggest, of course, is government capacity. Governments often don't have the staff or resources to devote to monitoring in the way they need to. A related challenge is incentives. Sometimes there's a lot of political will for investment promotion and making sure you're bringing in the deals, but not as much for rigorous monitoring. Monitoring a project over 20-30 years doesn't have the same immediate gratification as getting new permits approved.

The third challenge is transparency and ensuring that government or civil society have and share the information they need to monitor effectively.

Are some aspects of these sophisticated industries, like transfer pricing, too complex to monitor effectively?
It's true that some of the issues are complex, but there are ways to simplify monitoring. For transfer pricing, one solution is to write very clear rules that will make monitoring easier. Instead of calculating royalties by the price that companies bought or sold the minerals for, you use a price from an international commodities exchange. That's clearer and easier to calculate, and the benefits you get from simplifying monitoring outweigh any imperfections at the margins.

Having a uniform set of rules also makes monitoring and enforcement easier. Instead of each company having its own contracted tax regime and social requirements, there's a general mining code that applies to all companies. You don't have to review a whole slew of documents to understand each company's unique requirements; you know that typically every company is required to pay x percent in taxes, y percent in royalties. We recommend that countries define more through laws and, to the extent that contracts remain, try to follow a model contract with limited variables for each company.

What's civil society's role?
Government has the primary responsibility to monitor those deals, but civil society can play a very effective role as an external watchdog in its own areas of expertise and interest. There is already a good amount of civil society monitoring of mining companies, but it can be more effective to refer to specific documents. Instead of saying, "Look at this pond near us that's polluted," you can say, "Look at this environmental impact assessment. This company was aware of this pond and its importance to the community." Now it's clear that the company violated its legal obligations.

Partnerships are also important. In Canada a diamond company established a community committee for social and environmental monitoring. The company took community concerns into account from the beginning and created a monitoring structure that will have the company and community working together over the life of the entire mining project.

• Enforcing the Rules

Regions

Africa

Ugandan Parliament Blocks New Contracts and Demands Transparency
In October, Uganda's parliament voted to suspend all new oil deals until the new petroleum law is enacted, and refused to approve Tullow Oil's move to sell some of its Ugandan assets. The legislators demanded greater transparency in the oil sector and pressed for oil contract disclosure and for the government to join EITI.

• Ugandan MPs Attend Training on Oil Bill
• Parliament Slaps Ban on New Oil Agreements (Parliament of Uganda)

Ghana Budget Takes Cues from EITI Report
Ghana's proposed 2012 budget includes significant reforms for the natural resource sector, including provisions that limit how much companies can offset revenues made at one project or mine by losses incurred at another. They also include increased corporate tax rates and changes to capital depreciation allowances. These proposals echo recommendations in Ghana's 2009 EITI report, which criticized low corporate tax payments and a high capital depreciation allowance of 80 percent for companies' first year.

• Ghana's Budget Statement for 2012 (Ghana Ministry of Finance and Economic Planning)

Nigeria Governors Fight Sovereign Wealth Fund Plans
Nigeria's attempts to create a Sovereign Wealth Fund (SWF) this October, with a transfer of $1 billion from the country's Excess Crude Account, ran into opposition from the country's powerful state governors, who have traditionally sought control of revenues from oil produced in their regions. Nigeria's SWF would save some oil profits for both the federal and subnational governments.

• Nigerian Governors Appeal to Block Sovereign Fund (Reuters)

DRC Mining Transparency Site Launches
Congo Mines, a new website created by the Carter Center, was launched in October to collect and publish information on mining in the Democratic Republic of Congo, including contracts, concession information and important updates for the sector.

• Congo Mines

Asia Pacific

Australia to Pilot EITI
During the biennial Commonwealth Heads of Government Meeting in October, two Australian ministers announced that the country will begin a pilot implementation of EITI. The ministers also announced that Australia will contribute funds and technical assistance to promote global EITI implementation. Australian would become the third developed nation to implement EITI.

• Australia Embraces EITI Globally and at Home
• Australia Encourages Transparency in Oil, Gas and Mining (Australia Foreign Minister)

ASEAN Strategic Meeting Promotes Transparency in Regional Economy
As the Association of Southeast Asian Nations (ASEAN) works towards regional economic integration, transparency and accountability advocates are eager to include their principles. In October, RWI partner the Institute for Essential Services Reform (IESR) hosted a meeting in Jakarta for civil society to discuss embedding a transparency framework in the ASEAN Economic Community plans.

• Capturing the Signals (SEA Extractive Industry Watch)

Philippines: Bantay Kita Calls for Mining Reform
RWI partner Bantay Kita appealed to Philippines President Benigno Aquino III to overhaul the nation's mining policies. Among its demands were an in-depth review of current practices, including industry incentives, local and indigenous peoples' rights, and environmental fallout; EITI implementation; and a moratorium on new mining projects until a new mining act is in place.

• An Appeal to Rationalize Mining Policy (Bantay Kita)

Indonesia: Training on Subnational Revenue Sharing and EITI
On 8 November, RWI partners PATTIRO and LPAW Blora held a training session in Indonesia's oil-rich Blora district on subnational revenue sharing and EITI. The training was attended by Blora District Transparency Team members, local government and civil society. The Transparency Team will calculate what Blora can expect from oil and gas revenue sharing policies.

Training for Community around Mining
The Indonesian Parliamentary Center, an RWI partner, held a three-day training session for mining-affected communities in West Nusa Tenggara in November. The training, designed for two mining districts, gave an introduction to mining rights, the sector's fiscal regime and EITI.

Eurasia

Economists Research Eurasian SWFs
In November, economists from Azerbaijan, Kazakhstan and Russia met in Almaty, Kazakhstan, to present the findings of RWI-funded research on Sovereign Wealth Funds. Combined SWF assets in the three countries amount to more than $250 billion, but governments in these countries lack experience managing major revenue streams. Research papers and policy briefs from the project will be published by the Public Finance Monitoring Center in Azerbaijan by the end of 2011.

• Project: Developing a Post-Crisis Approach to Sovereign Wealth Funds in the Caspian Basin

SOFAZ Conference Focuses on State-Owned Companies
On 2 November, the State Oil Fund of the Republic of Azerbaijan (SOFAZ) hosted a conference on its role in the national oil strategy. The event, which included panels on SOFAZ's investment policies, projects and work on EITI implementation, was attended by senior government officials, foreign ambassadors, EITI representatives and industry and civil society members.

• Conference "State Oil Fund in the National Oil Strategy" Hosted by SOFAZ in Baku (SOFAZ)

Azerbaijan Budget Group Critiques 2012 Plan
On 18 November, Azerbaijan's National Budget Group released its assessment of the government's 2012 budget. In its review, the group suggested a limitation on long-term transfers from the state oil fund; publication of companies' financial statements, mandated reporting of all oil sector activities; and tax reforms.

• National Budget Group Comments on Draft "On State Budget 2012" (Contact Online News)

Eurasia EITI Advocates Meet in Albania
The Eurasia Regional EITI Conference held its seventh annual meeting in Tirana, Albania, on 10-11 October. Participants at the conference, organized by RWI partner the Center for Development and Democratization of Institutions, came from eight countries to share experiences, discuss the network's future activities and present results from joint research projects on the region's post-EITI validation period and on oil contracts and transparency.

• Seventh Annual Eurasia Regional EITI Conference

Latin America

RWI Research Finds "Cholo Disease" in Peru
Original RWI field research suggests the existence of a local Peruvian version of the "resource curse," dubbed "Cholo Disease." Surveys and interviews in Peru's five richest mining and hydrocarbons districts revealed major losses in the competiveness of local agricultural sectors as well as heightened local inflation due to the large cash inflows. RWI's final report on these findings will be published by the end of 2011.

• Paradox in Peru: The Challenges of Mining Revenue in Ite

Author Discusses Natural Resource Charter with Latin America Civil Society
On 12 October, the Latin America Civil Network on the Extractive Industries hosted a panel discussion on the Natural Resource Charter with Michael Ross, author of The Oil Curse. A technical team from the network will draft recommendations to add to the charter based on issues and experiences in Latin America.

RWI Shares Experiences in ICT Conference
From 24-25 November, Colombian NGO DeJusticia and the Ford Foundation hosted a conference on the social impacts of information and communications technology (ICT) in Bogota, Colombia. Felipe Bedoya of RWI's Latin America office discussed RWI's use of daily news reports, industry analysis and the annual extractive industry trends report.

Middle East / North Africa

Iraqi Parliamentarians Gather for Oil and Gas Oversight Workshop
With RWI support, the Arab Region Parliamentarians against Corruption (ARPAC) organized a three-day workshop in November for a group of 20 Iraqi MPs in Beirut, Lebanon. The workshop focused on transparency and improving parliamentarians' oversight role through a structured review of the petroleum and gas law.

• Unity Key to Iraqi Oil Governance

Libya Transparency Roundtable: "Libya's Oil and Finance Future Begins Now"
On 13 December, RWI and Global Witness are co-sponsoring, together with Transparency Libya, a roundtable focused on transparent and accountable governance of the oil sector for Libyan government and civil society representatives. The meeting aims to foster discussion between local stakeholders and regional and international experts about the establishment of robust transparency measures based on the Extractive Industries Value Chain.

Iraqi EITI Report Analysis Workshop
On 19 December, RWI will host a three-day workshop in Beirut for 25 Iraqi civil society activists and journalists on EITI report analysis. Civil society members will learn about their role in the EITI process and good governance, while journalists will learn more about covering oil and gas issues and the Iraq EITI report.