Extractive Industry Revenues:

1

• Extractive Industry Revenues
• Transparency and their use
• for Local Development
• Indonesia study tour May 30, 2008
• Vanessa Herringshaw
• Director, London office,
• Director, Training and Capacity Building
• Revenue Watch Institute (RWI)

2
Overview of presentation

• Revenue Watch Institute
• Resource curse? - Explanations Economic,
  Managerial, Political
• What makes a difference? - Governance
• - Management and oversight
• - Transparency and accountability
• Resource curse and decentralisation
• - Local issues - Economic, Managerial,
  Political
• Entry points in preventing local resource curse
• - At the local level in producing districts
• Project Cepu block, East and Central Java
• - At the national level
• Training local government staff
• Supporting improved transparency and
  accountability
• EITI
• EITI

3

• Mission statement
• The Revenue Watch Institute (RWI) works to
  improve the responsible management of extractive
  resources
• for the public good
• Focus on oil, gas and minerals
• Overall approach
• gt Build management capacity
• gt Support transparency and accountability

4
Who are we and how are we funded?

• We are an independent, international, non-profit
• first launched in 2002
• Created in response to growing awareness of the
  resource curse
• Work in producing countries in South East Asia
  (including Indonesia, Africa, Latin America,
  Caucasus, South East Asia, Middle East
• Funding from
• - independent foundations (Hewlett, Open
  Society, Gates)
• - bilaterals (Norwegian and Dutch governments)
• No funding from companies

5
What support can RWI offer?

• Flexible responsive to local needs
• We provide expertise and finances to support the
  following activities for the following groups
• Research and analysis
• Capacity-building and Training
• Technical Assistance
• Advocacy
• Monitoring, Networking and Coalition-building
• Civil society and media
• Parliamentarians
• Government agencies
• We also assist with
• Links to information/publications see RWI
  website
• Networking with other actors globally

6
What is the resource curse?

• Trend In recent times, countries with abundant
  natural resources have tended to grow more slowly
  than resource-poor countries (per capita growth
  rates)
• E.g. Singapore, Korea, Hong Kong
• limited resources, strong growth.
• E.g. Mexico, Nigeria, Venezuela
• resource-rich but poor
• More harm than good?
• Slow progress with human development indicators
• Unstable or authoritarian regimes
• High inequality and corruption indices
• Social and political instability and violence

7
Why is the extractive sector such a challenge?

• Economic explanations
• Dutch disease
• Extractive sector comes to dominate, crowding-out
  the economy
• Inflated exchange rate undermines the
  competitiveness of the non-oil sector
• Increased imports lead to worsening deficits and
  debt and making economy more vulnerable to price
  volatility
• Price inflation hurts the poor the most

8
Why is the extractive sector such a challenge?

• Management explanations
• Natural resources resources tend to be highly
  volatile and unpredictable
• gt dependent on prices, geology etc
• Sheer scale of extra resources may prove
  difficult to invest wisely
• Government staff do not always have the technical
  skills to
• gt predict revenue flows
• gt to smooth spending
• gt to avoid over-committing in peak years

9
Why is the extractive sector such a challenge?

• Political explanations
• Mineral-related cash inflows are independent
• of citizens
• This reduces accountability of leaders to the
  people
• Huge revenues are extra incentive for corruption
  and conflict over their control
• Some interest groups organize as rent-seekers
• may close the sector to all scrutiny and
  control tightly
• - can deepen over time since they have the
  resources to fund their activities
• - may also control means of violence

10
What makes the difference? Governance
management and accountability
Good oversight accountability (skills, systems,
performance) - of elected representatives - of
the judiciary - of civil society - of media
Good planning and management (skills, systems,
performance) - of government staff - of
extractive company staff
11
Essential for management and oversight -
Transparency

• Transparency is an essential step for good
  management and good oversight
• Gives government staff the information they need
  to plan and manage
• e.g. revenue projections, information on
  production etc.
• Allows oversight actors to exercise their right
• - to know how much is earned
• - and how it is spent monitoring,
  engaging, lobbying, voting etc.
• Removes the cover for corruption and
  mismanagement
• Allows rapid intervention where there are
  problems
• Builds trust and helps manages expectations

12
Resource curse issues What do they have to do
with decentralisation?

• So far focus on national level - analysis
  interventions
• But in situations of strong decentralisation,
  huge volatile windfall revenues flow to local
  governments
• e.g. Indonesia Revenue Sharing (Dana Bagi
  Hasil)
• General rule, local governments are entitled to
  15 of revenues produced in their areas from
  natural resources such as oil and gas, forestry
  products
• Experience has shown that producing areas have
  not always shown significant improvements in
  well-being Riau, East and Central Java
• Often leads to frustration and political
  discontent
• Especially in current situation of very high
  prices and profits,
• will the extra revenues be well-managed?
• Will they do more good than harm?

13
Economic issues for local areas

• 1. Can be huge revenue increases for a short
  period of time (wall of money)
• Challenge is to translate temporary,
  unsustainable revenues into long-term growth and
  development

14
A wall of money The outlook at 50 dollar oil
per barrel - Azerbaijan
20
MOD billion
Govt revenues
10
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
-2,
-4
IOC OPEX Uplift Aband Fund Recovery
IOC CAPEX Uplift recovery
IOC Profit Petroleum less PT
SOCAR OPEX Uplift Aband Fund recovery
SOCAR CAPEX Uplift recovery
SOCAR Profit Petroleum less PT
SOCAR Profit Petroleum
Profit Taxes
OPEX
CAPEX
Abandonment Fund
Source Willy Olsen, June 2006
15
Economic issues for local areas

• 2. Highly volatile and difficult to predict
• Especially if contract, production and revenue
  models are kept secret
• Especially if transfers from central government
  (or companies) are unpredictable

16
World gas prices
Source M. Speltz, Chevron, sept 2005
17
Copper prices
Courtesy of Extrata - June 2007 St. Gallen
Symposium
18
Price fluctuations in commodity markets
Courtesy of Extrata - June 2007 St. Gallen
Symposium
19
Economic issues for local areas

• 3. Challenge to balance short-term investment
  with long-term commitments
• Invest in ways that reduce poverty and support
  growth
• But prevent commitments to recurrent expenditure
  that cant be sustained

20
Economic issues for local areas

• 1. Can be huge revenue increases for a short
  period of time (wall of money)
• Challenge is to translate temporary,
  unsustainable revenues into long-term growth and
  development
• 2. Highly volatile and difficult to predict
• Especially if contract, production and revenue
  models are kept secret
• Especially if transfers from central government
  (or companies) are unpredictable
• 3. Challenge to balance short-term investment
  with long-term commitments
• Invest in ways that reduce poverty and support
  growth
• But prevent commitments to recurrent expenditure
  that cant be sustained
• Question How can these challenges be best
  addressed
• At local level?
• At national level?

21
Management issues for local governments

• 1. May have limited technical capacity
• i.e. may not have the necessary staff with the
  necessary skills to
• gt project revenues
• gt produce a good long-term plan for their
  investment
• gt scope, cost and and gain any necessary
  approval for large projects
• gt manage such large scale expenditure management
• 2. May have insufficient information
• gt especially if contract, production and revenue
  models are kept secret and transfers are
  unpredictable.
• 3. May have a culture of secrecy or a lack of
  systems to share essential information
• gt Proactive need to publish information on
  receipts and spending
• gt Reactive need systems to respond to requests
  for informaiton
• Question what management capacity is needed by
  local government?
• - how should this be developed and supported?

22
Political issues for local governments

• 1. Unrealistic expectations may generate unrest
• 2. Certain groups may capture most of the
  revenues and investments
• Less optimal impact on service delivery and
  poverty reduction
• Corruption can put extra burdens on local
  population
• Revenues may not be spent of activities in the
  public interest
• Post holders can use funds to consolidate their
  positions, reducing the possibility of democratic
  accountability
• 3. Companies may use their social expenditures
  in ways that undermine political stability and
  accountability
• e.g. supporting events under certain political
  leaders
• e.g. running services in parallel to local
  government
• Questions What is needed to ensure that those
  managing the extraction and revenues are
  accountable to the local population, including
  the poorest and most marginalised?

23
Entry points in preventing local resource curse

• 1. At the local level in producing districts
• Example Cepu block, East and Central Java
• 2. At the national level
• Training local government staff
• Supporting improved transparency and
  accountability

24
Local level RWI/LGI/Pattiro project Cepu
block, East and Central Java

• Cepu is Indonesias largest oil discovery in 30
  years
• Estimated reserves - 1.7 trillion cubic feet of
  gas and 600 million barrels of oil
• First production slated for late 2008
• Initial capacity 25,000 to 40,000 barrels per
  day, increasing to 170,000 barrels per day at
  peak production.
• Production will take place in 2 districts
  Bojonogoro and Blora
• Lack of transparency of contracts and production
  projections
• - difficult to predict timing and scale of
  revenues flow to the local governments
• However, very rough estimates suggest two
  districts may receive as much as an additional
  150 or more of their current local revenues at
  peak production
• If poorly managed, this would mark an enormous
  wasted opportunity
• Estimated half of the population currently live
  below the poverty line

25
Project aim and approach

• Aim To assist Blora and Bojonegoro districts to
  avoid the resource curse and achieve sustainable
  economic and social developments from their oil
  revenues, especially for the poorest and most
  marginalized sections of the local populations.
• Approach A two-wheeled approach of
• gt improving local government capacity for
  planning and management
• gt strengthening public oversight, especially by
  local civil society but also by local media and
  parliamentarians.
• NB This is cutting edge one of first
  pilots in the world to our knowledge
• We will also run pilots in Nigeria and Peru

26
RWI/LGI/Pattiro project Cepu block, East and
Central Java

IMPACTS - Local impacts on well-being

• Central government/ extractive company policies
  and activities
• support for appropriate local performance
• Removal of barriers, bottlenecks etc

IMPACTS - Local services experience of the
users - quality, quantity
OBJECTIVES - Local management performance
transparent, high quality, appropriate to local
needs, poverty-focussed, efficient
Good local implementation expenditure
management
Good local monitoring of service delivery and
impact
Good local revenue projection and tracking
Good M/L term plan
Good local budget

• OUTCOMES
• Local government capacity
• - has capacity in each area of local management
  to be
• skilled in content
• transparent
• support participation and be responsive/accountabl
  e
• - has capacity to do this now institutionalised
  for future

• OUTCOMES
• Local oversight capacity civil society, local
  parliament, media
• - has capacity to track and influence each area
  of local management, to be
• skilled in content
• Transparent
• Participative and ensure accountability
• - has capacity to do this now institutionalised
  for future

OUPUTS - Local government capacity- building
activities - in each area of local management
OUPUTS - Local oversight capacity- building
activities - in each area of local management
27
RWI/LGI/Pattiro project Cepu block, East and
Central Java

OBJECTIVES - Local management performance
transparent, high quality, appropriate to local
needs, poverty-focussed, efficient

• Cross cutting
• Adequate skills
• Transparency
• Participation and accountability

Good local revenue projection tracking
Good medium/long term plan and costed projects
dealing with volatility /increases
Good local budget
Good local implementation expenditure
management
Good local monitoring of service delivery and
impact
28
Local level RWI/LGI/Pattiro project Cepu
block, East and Central Java

• First year Focus on
• - Gaining support for multi-stakeholder group
• gt government, civil society, parliamentarians
• - Building public awareness of the issues
• - Developing revenue projections
• - Developing long-term plan through
  participative approach

29
Entry points at the national level

• Training local government staff across all
  districts
• Interested to hear from this group about training
  options
• Especially the potential for learning lessons
  from the Cepu pilot

30
Entry points at the national level

• B. Supporting improved transparency and
  accountability
• along the whole value chain
• EITI
• EITI

31
The value chain
National development plans
Legal Framework
Contracts
Cost-benefit analyses / decision to extract
Impact monitoring
Resources in the ground
Changes in well-being of population
32
EITI Extractive Industries Transparency
Initiative

• Why does it exist?
• A wedge of transparency into the value chain
• Response to the resource curse
• Extractives one of the most opaque of all sectors
• What is it?
• International initiative
• gt 22 country members
• gt secretariat in Oslo
• Multi-stakeholder approach
• Country-led

33
EITI minimum Revenue Transparency
Government
Companies

• Companies publish payments
• Governments publish revenues
• These are compared any discrepancies explored

34
EITI Multi-stakeholder

• Multi-stakeholder working group in each country
• Multi-stakeholder international Board

Civil Society
Government
Companies
35
EITI What are the steps?

• Sign-Up Announcement, multi-stakeholders,
  leader, and work-plan
• Preparation working group, civil society
  barriers, templates, auditor, reporting process,
  international standard audits
• Disclosure disclosure, reconciled, report
• Dissemination publically available

Candidates
Validation
36
EITI Who else is doing it?
Candidate Countries

• Kyrgyzstan
• Liberia
• Madagascar
• Mali
• Mauritania
• Mongolia
• Niger
• Nigeria
• Peru
• Sao Tome And Principe
• Sierra Leone
• Timor-Leste
• Yemen

• Azerbaijan
• Cameroon
• Congo Brazzaville
• The Democratic Republic Of The Congo
• Equatorial Guinea
• Gabon
• Ghana
• Guinea
• Kazakhstan

37
EITI What have others done?Going beyond EITI
minimum

• Nigeria What revenue are we due?
• Financial, production and process audits
• Mongolia What revenue was paid?
• Disaggregated by company
• Mauritania What revenue was received? By whom?
• Fostering reputation for transparency
• Ghana How are revenues shared within the
  government?
• Includes sub-national distribution

38
The value chain
National development plans
Legal Framework
Contracts
Cost-benefit analyses / decision to extract
Impact monitoring
EITI Minimum
EITI Plus (So far)
Resources in the ground
Changes in well-being of population
EITI Plus Plus
39
EITI

• Extends transparency to
• gt the sale of resource rights
• gt a tax regime free of corruption
• gt real revenue savings domestic investment of
  revenues and
• gt a sound approval process for expenditures
• Launched by World Bank April 2008 in Guinea and
  Mauritania
• Multi-stakeholder process government, companies,
  and civil society

40
EITI Country Led

• Each country decides
• What information to collect, audit, and publish?
• What size, shape and format for working group?
• What government ministries should lead and be
  included?
• How many and what type of civil society
  representation?

41
Thank you

• Vanessa Herringshaw
• 44 (0)79 00 49 26 31
• vherringshaw_at_revenuewatch.org
• www.revenuewatch.org

42
Country Case Study Mongolia

• RWI Efforts
• RWI team helped advise government on revising
  mining-related policies
• (tax, royalties, environment etc)
• Provided independent analysis of economic
  development plan of Ivanhoe Mines
• Organised a study tour for Mongolian MPs to
  Kyrgyz Republic
• Ran a seminar on resource funds and their
  possible use in Mongolia

43
Mongolia Continued

• Local Foundation organized workshop on mining and
  budgets for civil society
• Supported a TV forum about mining issues
• Organized media training with Columbia University
  and Joe Stiglitz on mining sector coverage

44
Mongolia Outcomes

• New national mining law
• - historic transparency accountability
  provisions
• First major mining contract with Ivanhoe Mines
  now complete
• - new windfall tax earning significant income
  for Mongolia
• - local communities must consent for mining
  projects to proceed
• Mongolia joined the EITI published first report
  on revenues
• Ministry of Finance and Foundation created a web
  portal
• - expanded budgetary information for public
• Helping set up stabilization future generations
  fund