Op-ed

Opening a window on oil, gas and gold income: Two small states lead in transparency initiative

Wall Street Journal Europe, 18 March 2005

By Jean Lemierre

Resource-rich and yet among the poorest countries to emerge from the former Soviet Union, Azerbaijan and the Kyrgyz Republic are breaking new ground as part of the global campaign to promote greater transparency in managing resource wealth.

Azerbaijan on the Caspian Sea has offshore oil and gas fields and related pipelines it is currently developing with international partners, led by BP. Central Asia’s Kyrgyz Republic depends on gold mines, the largest of which is owned by Canadian-based Centerra Gold, for about 10 per cent of GDP. The European Bank for Reconstruction and Development has financed these projects and is among the international and local entities encouraging greater transparency and improved governance in state and private enterprise across the region.

These two young states are at the vanguard of a fledgling movement among poor nations with valuable hydrocarbon and mineral wealth to publish the revenues received from their multinational partners. It is much hoped that greater transparency and accountability in the resource sector will enhance reform in other aspects of these countries’ transition to market economies based in well-functioning democracies.

A blessing or a curse?

Revenue reporting is vital in combating corruption and what is known as the ‘resource curse’. Many countries seemingly blessed with oil, gas, precious metals and minerals and other high-value non-renewable resources have suffered macro-economic destabilisation from huge and rapid inflows of resource revenues, particularly for oil and gas. Some governments have squandered such revenues. This is easily done when taxes and royalties paid to government by mining and logging companies are not reported publicly via the legislature as would be normal in developed democracies.

Experience shows that citizens of such countries can end up worse off than previous generations when corrupt elites use the revenues to stifle necessary reforms, to suppress dissent and to promote their own ethnic groups and cronies. The result, as seen in parts of Africa in particular, can be civil unrest, even outright war.

Azerbaijan and the Kyrgyz Republic are still in the early stages of post-Soviet resource development. Along with their multinational partners the two countries have adopted the ‘publish what you pay, publish what you receive’ principle that underlies a number of complementary approaches promoting transparency. Greater transparency and accountability regarding the receipt of revenues increases the likelihood they will be used for sustainable economic development.

Publicising revenues

The voluntary Extractive Industries Transparency Initiative (EITI), conceived by the UK government, is helping to establish standards for greater openness in resource exploitation. The EITI 2005 conference in London on 17 March will discuss progress in implementing the initiative and next steps in strengthening and broadening it.

The EITI approach starts with the resource companies that pay revenues to government in return for access to a country’s natural resources. In the EBRD’s countries of operation, BP and Centerra are world leaders in their commitment to publicly reporting the amounts they pay to governments. Step two is for governments to report what they’ve received. The resulting data, ideally assessed by independent auditors, is then published widely. The public is then better equipped to hold government accountable for its use of those revenues.

The Kyrgyz Republic was the first country to report revenues under the EITI, an important step forward in the national anti-corruption effort. Azerbaijan’s painstaking and inclusive approach to establishing its reporting process won it a great deal of credit even before it issued its first revenue report this week. A coalition of 32 local NGOs, and all resource-extracting companies in Azerbaijan, have signed a Memorandum of Understanding with the government as to how natural resource revenue reporting should be carried out.

Many paths to transparency

There are many routes to achieving transparency. BP’s and Centerra’s openness regarding revenue reporting has promoted reciprocal transparency by some governments with which they work. The international community – the World Bank, the EBRD, the IMF, donor governments, non-governmental organisations – has also promoted transparency both within and alongside the EITI. In the resource-rich former Soviet Union, complementary results include:

• stabilisation funds in Russia, Kazakhstan and Azerbaijan which are designed to enhance economic management in the face of huge inflows of oil and gas money; these have also enhanced transparency
• Azerbaijan’s State Oil Fund, modelled on the Norwegian Oil Fund, for transparent and accountable long-term management of oil revenues
• the Kyrgyz government’s decision to dedicate revenues from the sale of its majority interest in the Kumtor gold mine to its new Centralised Poverty Reduction Fund
• new corporate governance codes such as that introduced in Russia with assistance from the EBRD and donors
• the commercialisation and restructuring of state-owned resource companies as part of loan conditions (eg EBRD’s transactions with Petrom in Romania and the State Oil Company of Azerbaijan).

Transparency pays

Many corporations and governments realise that good governance and transparency bring concrete benefits such as better access to international capital on improved terms. Poorer countries more dependent on international financial institutions and donors for financing will find that a record for transparency will only help when they seek new loans, debt restructuring/forgiveness, and increased donor aid.

Corruption often seems an intractable issue. But in terms of natural resources, we are making headway via a number of complementary approaches. By setting standards that still allow individual countries to tailor-make their own approaches to revenue reporting, these transparency initiatives can help to turn natural resources into long-term benefits for the good of current and future generations who are their true owners.

Jean Lemierre is President of the European Bank for Reconstruction and Development.