Towards an Evidence-Based Framework for Addressing Corruption in Natural Resources

Daniel Kaufmann, President, RWI/NRC

Keynote Presentation to the Coalition against Corruption (CoCo) Summit, sponsored by the

Janaagraha CCDCD, Stanford CDDRL & the Sunlight Foundation, held in Bangalore, India,

January 13-15th, 2014

This presentation benefitted from inputs of RWI/NRC staff as well as the author’s collaboration with Brookings and the World Bank.

Addressing Corruption in Natural Resources (NR) within rigorous analytical & empirical framework

1. Sobering Evidence on Control of Corruption worldwide

2. Corruption: costly symptom of institutional failure, so ‘don’t fight corruption by fighting corruption’

3. Anti-Corruption is about governance, politics, accountability, incl. civil society space, IT and data

4. Distinct corruption vulnerabilities in Natural Resources (NRs), requiring detailed and rigorous framework

5. Governance in Natural Resources is far more than a ‘sectoral’ challenge. It is about Shared Prosperity, Stability: The Development Challenge of a generation

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

WG

I C

on

tro

l o

f C

orr

up

tio

n, 2

011

Non-ExtractiveIntensive Countries

Extractive-Intensive Countries(All)

Control of

Corruption in:

Trends in Control of Corruption past decade, Extractive vs.

Non-Extractive Intensive Countries, 2002-2011

Source: Worldwide Governance Indicators, 2012. The extractive countries with satisfactory control of corruption

trend line (atop) includes a dozen countries.

Control of Corruption over time: Sobering Trend

Control of Corruption 2012 (Worldwide Governance Indicators --WGI)

Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130

It Can Be Done: Better Governance and Corruption Control results in

higher incomes per capita in Extractive-Intensive (& Other) Countries

Sources: GDP per capita (atop each column) from World Bank World Development Indicators, 2012.

Corruption Control data from Worldwide Governance Indicators (WGI), 2012. Countries grouped into terciles

based on WGI Control of Corruption scores. Extractive Intensive country classification according to IMF (2010).

Poor Corruption Control Average Corruption Control Good Corruption Control

GD

P p

er

ca

pit

a (

PP

P)

EXTRACTIVE INTENSIVE OTHER COUNTRIES

5,000

0

10,000

6,851

3,941

12,712

10,272

45,000

30,820

What’s at stake?

• Oil, gas and mining sector governance as a development challenge

– In resource rich countries, over 1 billion people live on less than $5 a day, and 640 million live on $2 a day or less.

– In 2011, Nigeria’s oil revenues alone were 60 percent higher than international aid to all of sub-Saharan Africa. Rents from oil in the continent are about 8 times higher than aid.

– Natural resource revenues expected to rise significantly further over next decade.

• Governance is the challenge, but also the potential solution.

6

What is the Resource Governance Index?

• A measure of transparency

and accountability of the oil, gas and mining sector in 58 countries.

• For each country, researchers, gathered primary information in 2012

to answer a standard questionnaire with 173 questions, vetted by a peer

reviewer.

12

How is the Index built?

Resource Governance Index composite

13

Index structure

14

Institutional & Legal Setting

(20%)

Reporting Practices (40%)

Safeguards & Quality Controls

(20%)

Enabling Environment (20%)

10 Indicators 20 Indicators 15 indicators 5 Indicators

Indicator Indicator Indicator Indicator

1 Freedom of information law 1 Licensing process 1 Checks on licensing process 1 Accountability & democracy (EIU

Democracy Index & WGI voice and accountability)

2 Comprehensive sector legislation 2 Contracts 2 Checks on budgetary process 2 Open Budget (IBP Index)

3 EITI participation 3 Environmental and social impact

assessments 3 Quality of government reports 3 Government effectiveness (WGI)

4 Independent licensing process 4 Exploration data 4 Government disclosure of conflicts

of interest 4 Rule of law (WGI)

5 Environmental and social impact

assessments required 5 Production volumes 5 Quality of SOC reports 5

Corruption (TI Corruption Perceptions Index & WGI control of

corruption)

6 Clarity in revenue collection 6 Production value 6 SOC reports audited

7 Comprehensive public sector

balance 7 Primary sources of revenue 7

SOC use of international accounting standards

8 SOC financial reports required 8 Secondary sources of revenue 8 SOC disclosure of conflicts of

interest

9 Fund rules defined in law 9 Subsidies 9 Quality of Fund reports

10 Subnational transfer rules defined

in law 10 Operating company names 10 Fund reports audited

11 Comprehensive SOC reports 11 Checks on Fund spending

12 SOC production data 12 Government follows Fund rules

13 SOC revenue data 13 Fund disclosure of conflicts of

interest

14 SOC quasi fiscal activities 14 Quality of subnational transfer

reports

15 SOC board of directors 15 Government follows subnational

transfer rules

16 Comprehensive Fund reports

17 Fund rules

18 Comprehensive subnational transfer

reports

19 Subnational transfer rules

20 Subnational reporting of transfers

80% of countries do not meet satisfactory governance standards

98

92

88

85

80

77 76 75 74 74 73

70 68

66

63 62 61 58 57

56 56 56 54 53 53

51 50 48

47 47 47 46 46 46 46 43 43 43 43 42 42 41 41

39 38 37

34 34 33 31 31

29 28 26

19

13

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20

40

60

80

100

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. In

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. Gh

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16

. Lib

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. Zam

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. Ecu

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. Kaz

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20

. Ven

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. So

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Afr

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22

. Ru

ssia

23

. Ph

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24

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32

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33

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ina

37

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Satisfactory (71-100)

Partial (51-70)

Weak (41-50)

Failing (0-40)

15

RGI Results for the 58 countries

BRIC Countries’ Performance by Component

18

0

20

40

60

80

100

120

Brazil Russia China India

Composite Institutional & Legal Setting

Reporting Practices Safeguards & Quality Controls

Enabling Environment

Source: 2013 Resource Governance Index

20

Source: 2013 Resource Governance Index

Importance of In-Depth Diagnostic and Mapping of Corruption Risks

• In-Depth, In-Country Diagnostic

• Rigorous, Empirically-based

• Focus ought to be on Institutions and on corruption risks at various stages of the chain.

• Nigeria case study specifically focused on the following manifestations of corruption:

i) licensing awards; ii) contract negotiations; iii) subcontracting; iv) State-Owned Enterprises in extractives; v) public procurement; vi) revenue leakages and public expenditures; vii) bunkering, & viii) export/trading.

• Input to Reform formulation

23

What to do about corruption in Natural Resources?

32

Economic decisions determine the strength of each link…

Managing the

revenues

Getting a good deal

Discovering the wealth

Investing for development

…governance quality (both in country & internationally) determines the effectiveness, integrity & sustainability of these decisions

Overarching issues of

governance

Enabling international governance

The Natural Resource Charter (NRC): Transformation of sub-surface wealth to prosperity requires good governance – accountable & effective institutions + economic decision-making

Sub-surface wealth

Prosperity

35

Need to map Corruption risks at each stage: Charter guidance

Managing revenues

Getting a good deal

Discovering the wealth

Investing for development

Licences to inappropriate

individuals

Environmental & human rights

abuses

Government officials

personal gains

Investment in crony projects

Illicit flight of revenues

Savings fund malpractice

Preferential contract terms

Tax evasion

Crude mis-selling by NOC

37

TRANSPARENCY IS PART OF THE SOLUTION – YET IT HAS TO BE COMPREHENSIVE AND DETAILED

Transparency across the value chain

The basis for any decision to permit exploitation of a mineral deposit

should be set out clearly in

published laws and regulations

Contract terms,

including fiscal terms should be

made public

Financial information on revenues into

the public domain will

facilitate enforcement

and reduce tax avoidance

Disclosure of operations and financial data

of savings, stabilization

and investment funds

The disposition of extractive

revenues should be fully

transparent

‘Extra-budgetary expenditures’ and disappearing oil revenues (2007-2010): The Case of the Angola National Oil Company

The Missing $32 Billion (source: IMF)

Civil Society Participation Matters: Voice & Accountability WGI vs. Resource Governance Index (RGI)

Norway

United States

Brazil United Kingdom Mexico colombia Australia Trinidad and Tobago Timor-Leste Peru

Indonesia Liberia India Chile Canada Zambia Ghana Ecuador Kazakhstan Venezuela Bolivia

Russia South Africa Guinea Iraq Mongolia The Philippines Morocco Azerbaijan Tanzania

Sierra Leone Nigeria Yemen Angola Gabon Papual New Guinea Congo, Dem. Rep. Botswana Bahrain China

Vietnam South Sudan Egypt Afghanistan Zimbabwe

Algeria Malaysia Mozambique

Cameroon Cambodia Kuwait

Saudi Arabia Iran

Libya Qatar Equatorial Guinea

Turkmenistan Myanmar 0

20

40

60

80

100

120

-2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Ave

rage

Sco

re o

f R

eso

urc

e G

ove

rnan

ce In

dex

(R

GI)

Co

mp

on

en

ts (

Excl

ud

ing

EE)

Voice & Accountability WGI Score

r = 0.76

Source: 2012 Worldwide Governance Indicators and 2013 Resource Governance Index 1. Resource Governance Index Components excludes “Enabling Environment”

44

Technology in Natural Resource Governance

Technology as a major tool to enhance transparency and accountability in natural resource governance by:

– Leveraging the collection, analysis and dissemination of Data (Open Data, Budget, etc)

– Access and Sharing of Information, including on Contracts and operations – key for monitoring

– Mapping of Resources: Satellite imaging technology transforming the monitoring of resource use. Geographic Information Systems (GIS) is a combination of mapping, statistical analysis, and database technology. (In Ghana:

http://maps.worldbank.org/extractives/afr/ghana; in Tanzania: http://www.flexicadastre.com/tanzania/ )

– Mobilizing participatory civil society, collective action

In sum: to address Corruption in Natural Resources…

1. A comprehensive governance framework: The Charter, +

2. In-depth country diagnostic: Charter benchmarking, RGI, understanding of the political economy (incl. capture)

3. Transparency is key, but not alone: Rule of Law, Sanction

4. Accountability & Collective Action: Civil Society Space

5. Leverage the enormous Power of Technology & Data

6. Effective Policy-Making (e.g. Budget, Institutional innovations)

7. Focus on identified vulnerable institutions: SOEs, MNCs

8. Adoption of International Standards & Global Initiatives, such as the Extractive Industry Transparency Initiative (EITI) and Open Government Partnership (OGP)

45