Presentation at the International Seminar

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• Presentation at the International Seminar
• Natural Resources, Development and Democracy in
  Latin America
• Lima
• December 5, 2007

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Resource Rich Countries Face Special Challenges

• How to get the best deal out of the extractives
  industry
• Asymmetry of information
• Asymmetry of resources
• State vs. Firms Balance of Power?
• How to avoid the sc resource curse and get the
  biggest positive development impact from the
  resource windfall
• EI often negatively correlated with lagging
  development
• Governance a special problem.
• Sub-soil resources belong to the State. Who is
  the State?

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• The Revenue Watch Institute works with
  governments and citizens to address both
  challenges
• Transparency and accountability are key to
  success in both areas.

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Revenue Watch Institute (RWI)

• Mission The Revenue Watch Institute promotes
  effective
• Management of natural resource wealth for the
  public good.
• Improved public oversight of extractive
  revenues,
• coupled with targeted assistance to governments
  on managing
• them, can help turn resource wealth from a
  hindrance into an
• asset.
• Created to Address the Resource Curse
• Abundance of research showing resource-rich
  countries tend toward lower economic growth,
  greater poverty, corrupt and weak state
  institutions, prone to violence an civil war
• About 50 developing or transition countries are
  resource dependent, and 2/3 of worlds most
  impoverished live inside their borders on less
  than 2 a day
• Resource-abundant countries like Bolivia,
  Colombia, Mexico, Peru and Venezuela have long
  histories of boom-bust cycles, extreme individual
  wealth combined with wide-spread poverty, lack of
  public services and in-equality
• An opportunity to do things differently in this
  boom.

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RWI Background

• Organization
• Launched as program of Open Society Institute
  focusing on Central Asia
• Became global and independent policy institute
  and grant making organization in 2006
• Based in NY, have office in UK and local
  coordinators in all regions
• Donors are OSI, Hewlett, NORAD, Gates
• Activities
• Research and publications
• Advocacy
• Capacity-building and Training
• Monitoring, Networking and Coalition-building
• Technical Assistance
• Countries Azerbaijan, Georgia, Kazakhstan,
  Kyrgyz
• Republic, Mongolia, Russia, Angola, Cameroon,
  DRC,
• Guinea, Ghana, Liberia, Mauritania, Nigeria, Sao
  Tome
• Principe, Sierra Leone, Tanzania, Uganda, Sudan,
  Iraq,
• Yemen, Peru, Mexico, Ecuador, Brazil, Trinidad
  and
• Tobago, Indonesia, Timor Leste, Cambodia

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RWI Multi-Stakeholder Approach

• Local/global civil society-work to build
  well-informed grassroots movements for revenue
  transparency
• Media-work to better inform the public debate on
  extractive sector and broader fiscal management
• Governments/parliaments-work to provide policy
  advice that institutionalizes prudent,
  accountable revenue management
• Companies-work to improve the transparency and
  accountability of their extractive investments
• International financial institutions and donor
  governments-work to mainstream revenue
  transparency in all lending and diplomatic
  support for resource-rich countries.

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Priorities

• The Publish What You Pay Coalition (PWYP)
• Global coalition of more than 300 NGOs
• The Extractive Industries Transparency Initiative
  (EITI)
• Governments, companies and civil society working
  together to promote EI transparency

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New RWI Initiatives

• Mainstreaming listing rules, accounting
• Legislative Capacity Building
• Often excluded
• Vital oversight function
• Sub-national projects
• More EI revenues distributed directly to regional
  and local governments
• Limited experience and capacity to manage large
  flows
• Big opportunity to increase accountability and
  improve public services

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Mexico Sub-National Case Study

• With RWI support, Fundar (a Mexican budget
  monitoring and policy NGO) undertook a
  sub-national monitoring project in 2007
• Focus on assessing mechanisms for transparency
  and accountability regarding the economic and
  material resources that PEMEX allocates to
  Tabasco state government where have facilities
• Analyzed availability of information on payments
  at national and sub-national level, scrutinized
  PEMEX revenues earned from 2000-2006, examined
  how local governments have been spending
• Published a series of reports in summer 2007,
  highlighting opacity of state governments
  management of PEMEXs payments and complete lack
  of accountability to PEMEX, citizens or any other
  actor regarding spending
• Tremendous local and national media response,
  calls from Senators and Deputies for change in
  PEMEX policy

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Supporting Peru Projects

• Monitoring the Generation, Distribution and Use
  of Fiscal Resources generated by the Extractive
  Industries
• Propuesta Ciudadana monitors nationally and in
  eight regions (Cajamarca, Piura, La Libertad,
  Ancash, Ica, Cusco, Arequipa, Moquegua) the
  generation, distribution and use of extractive
  industries revenues.
• Regional and national reports to regional and
  national civil society and media
• Advocacy campaigns for sound policies and
  transparency regarding the extractive sectors.

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• RWI with LGI, Propuesta Ciudadana and the Red de
  Municipalidades Rurales del Perú will provide
  technical assistance to two Regional Governments
  and four Municipal Associations or Mancomunidades
  to strengthen their capacities in the fields of
  transparency, planning and budgeting, so that
  resources generated by the extractive industries
  are used in a more transparent and efficient
  manner. The project will start the first semester
  of 2008 and will last for two years.

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www.revenuewatch.org

END
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• Additional materials not presented at Lima
  conference follows.

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Publish What You Pay Campaign

• Global coalition of more than 300 NGOs engaged in
  campaign to
• promote greater transparency of oil and mining
  revenues,
• so that citizens can hold their governments
  accountable for
• the use of this income.
• 1. Full extractive company disclosure of all
  material payments made to
• governments
• 2. Full government disclosure of resource
  revenues from companies
• (including state-owned enterprises)
• Mandatory Approaches listing requirements for
  disclosure of payments by companies listed on
  stock exchanges IFI/MDB lending policies
• Voluntary Approach Extractive Industries
  Transparency Initiative Equator Principles,
  Principles on Business and Human Rights
• New Frontiers Capacity building for Legislators,
  Sub-national reporting, Contract Transparency,
  Licensing and Concessions Transparency, Publish
  What You Spend/Budget monitoring (everything
  from expenditure tracking and analysis to service
  delivery assessment)

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Mainstreaming Revenue Transparency Efforts

• International Accounting Standards Reform
  Agreement by IASB after two year PWYP campaign to
  develop special financial reporting standard for
  the extractive industries, once approved will
  become law in 50 countries
• Ratings Agencies October meeting brought ratings
  agencies, investors and issuers together to
  discuss incorporating extractive revenue
  transparency/EITI into sovereign credit ratings
• Companies that make legitimate, but
  undisclosed, payments to governments may be
• accused of contributing to the conditions under
  which corruption can thrive. This is a
• significant business risk, making companies
  vulnerable to accusations of complicity in
• corrupt behavior, impairing their local and
  global license to operate, rendering them
• vulnerable to local conflict and insecurity, and
  possibly compromising their long-term
• commercial prospects in these markets.
• -- Investors Statement on Transparency in the
  Extractive Sector
• Mandatory Listing Requirements RWI and PWYP
  working with US Congress on bill requiring US
  registered extractive companies to report
  payments country by country, similar effort in EU
• OPIC/Export Credit Agency/MDBs RWI and PWYP
  working with US Congress to require countries and
  companies to be implementing EITI to receive
  financing/insurance

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Revenue Management Challenges

• Dutch Disease. export booms lead to exchange
  rate appreciation, reducing competitiveness of
  non-booming export sectors, such as agriculture
  or manufacturing.
• Equatorial Guinea--one of Africas newer oil
  producersillustrates how quickly Dutch Disease
  can transform the economy cocoa and coffee have
  declined absolutely, and relatively from
  approximately 60 percent of GDP in 1991 to less
  than 9 percent of GDP in 2001.
• Rentier State. oil, gas, and mining companies
  provide state an autonomous flow of funds or
  rents, no incentive for government to build
  strong institutions linking state and its
  bureaucracy to citizens through taxation.
• Result is weak, non-transparent institutions,
  highly vulnerable to patronage spending or
  corruption, and unaccountable to the public
• Volatility makes it hard to plan, tendency
  towards procyclical policies
• Political Pressure to spend, especially around
  elections and commodity boom time

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Current Revenue Management Challenges

• Rising commodity prices
• Massive exploration and
• development in low
• income countries with little
• to no industry experience
• Growing Dominance of State Companies. 80 of
  Global Petroleum Reserves
• Mixed role/responsibilities of state companies
  can lead to lack of transparency
• BRICs
• National demands for greater domestic economic
  benefit from resource exploitation meeting
  aspirations without killing the goose.
• Growing Fiscal Decentralization and Revenue
  Influx at Sub national Level

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Sub-national Revenue Management

• Oil gas and mining revenues steadily increasing,
  and countries increasingly adopting constitutions
  and laws that distribute larger share of
  extractive income directly to state and local
• In Peru, recent decentralization of revenues
• In Indonesia, producing provinces of Aceh and
  Papua receive 55 and 70 of oil revenues
  respectively, 40 and 70 of gas revenues
  respectively, and all provinces receive 80 of
  revenues from mining, forestry, and fishing
• Delivery of basic public services also left to
  state, provincial and local governments
• The capacity of government at this level to
  manage these resources is worryingly low
• A provincial municipality called San Marcos in
  the Ancash In 2006-2007, San Marcos Municipality
  has received approximately US7 million.
• In South Sudan, more than 95 percent of the
  semi-autonomous regions income comes from oil
  revenues. No infrastructure and children go to
  school under trees meanwhile the south Sudanese
  government has received just over 2 billion USD
  under the 2005 revenue-sharing agreement
• Money disappears without any services being
  provided, or local governments sit on the money
  because they do not know how to spend it
• Absence of transparency creates context where
  corruption and mismanagement are more likely to
  occur because citizens have no way of knowing
  either the amount of revenue or the intended use
  of public funds.
• RWI launching new capacity-building effort with
  several sub national pilots in 3 regions

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Indirect Revenues Corporate Contributions

• Companies setting up special social
  funds--jointly managed with the local political
  and communal authorities.
• Las Bambas copper mine in Southern Peru, where
  the Xtrata Swiss company set up a US45 million
  fund to benefit the two provinces where it will
  operate.
• Funds involved end up being as large or larger
  than local and regional authorities, considered
  private, not subject to planning or
  transparency legal mandates
• Absence of a well organized civil society, low
  local government capacity contribute to situation
  where extractive activities benefit companies and
  some public officials, not broader population
• Ghana has included corporate contributions into
  EITI reporting process, other countries
  considering the same, especially important for
  mining countries
• Mining companies interested in greater
  transparency and improved revenue
  managementoften blamed for lack of public
  service delivery when not their job, and
  voluntary contributions often go unrecognized by
  local communities
• RWI sub-national capacity building projects will
  engage companies interested in building capacity
  of local governments to improve development
  policies and planning and coherence of investments

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• August 2007 Pemex announced change in guidelines
  for allocations to state governments
• Huge turn around from a company that until now
  had always said that states management of its
  revenues was not really their problem
• Pemex has now set limitations on the areas where
  funds are allowed to be spent, and will now
  demand more information regarding how states
  spend their resources which will be made public.
• Hugely important in the context of the current
  commodity boom, where transfers from PEMEX to
  state governments have risen to around 80
  million per year

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Burgeoning Issues

• Helping Countries Get a Better Deal for their
  Resources
• 2. When to Save vs Spend Resource Revenues, and
  How

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Helping Countries Get a Better Deal for their
Resources

• Christian Aid's 2007 report "A Rich Seam Who
  Benefits from Rising Commodity Prices?"
  highlighted grossly inequitable relationship that
  often exists between large oil, gas and mining
  companies and producing countries in the
  developing world
• Poor countries such as Zambia and Bolivia,
  heavily dependent on extractive taxes and
  royalties, receiving paltry sums based on bad
  deals largely signed during commodity busts in
  the 1990s
• Many old PSCs written by industry or by IFIs
  during low commodity price era
• With commodity boom, these countries are not
  recovering a fair share of the now enormous
  wealth flowing into the pockets of foreign
  companies
• Many requests for help renegotiating terms of
  engagement with international investors
• Because IFIs often played a prominent role in
  helping advise and broker investment deals, RWI
  acts as trusted broker in some of these countries
  to help renegotiate fiscal terms in
  well-informed, responsible manner.
• RWI staff currently conducting research project
  on recent changes in fiscal regimes in select
  resource-economies and the impact on investment,
  production, and extractive revenues.

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When Save vs Spendand How

• Debate among economists about the save it vs.
  spend it choices countries with commodity
  windfalls faceno clear practical guidance on how
  to maximize the development impact of their
  spending
• Advice from the World Bank and IMF overly focused
  on the dangers of Dutch disease and inflation
• Result is policies where poor countries using
  most of windfall to finance the US budget
  deficite.g. creating a fund that is invested in
  US government bonds, while roads, schools,
  hospitals in their country go unbuilt
• Azerbaijan finance minister complain to RWIs
  directorIMF said Azerbaijans absorptive
  capacity was so low that it should not spend its
  oil money. Response-- if we dont spend it
  ,Azerbaijans absorptive capacity never will
  increase!
• Standard IMF and WB macro-economic doctrine do
  not provide a means for prioritizing and
  addressing the overwhelming menu of development
  priorities that African countries, many of which
  are post conflict, face.
• Also growing Sovereign Wealth Fund debate--
  investing oil revenue savings in treasury bills
  for low risk and return versus more aggressive
  equity

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Recent RWI TA Efforts to Address These Issues

• Liberia
• Assisting government in re-negotiation of
  contracts with Mittal Steel and Firestone rubber
• Mongolia
• advising various Mongolian officials on fiscal
  regimes applicable to mineral dependent economies
  including stabilization agreements and general
  tax policy
• Helped craft windfall tax that has earned GoM
  approximately 165 million USD in additional
  revenues, proceeds put into a special fund
  dedicated 1/3 to creating a savings account for
  each Mongolian child, 1/3 to health care and 1/3
  as cash support for newly married couples.
• Ecuador
• Assisting government in extractive revenue
  mapping and developing transparency portal for
  public information
• Iraq
• Assisted government in drafting petroleum revenue
  management law, including revenue distribution
  scheme
• MENA (Kuwait, Yemen, Morocco)
• Assisting Arab Parliamentarians Against
  Corruption in mapping extractive revenue flows,
  parliamentary oversight institutions, audit
  capacity and follow-up, and building capacity of
  MPs to improve oversight of revenue collection
  and management

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Thank You!

• www.revenuewatch.org
• Karin Lissakers
• Director
• Revenue Watch Institute
• 1-212-548-0352