The Extractive Industries Transparency Initiative (EITI) is designed to increase transparency in revenue flows between oil, gas and mining companies and their host governments, in essence to monitor and publicise these revenues so that citizens can hold their governments to account for their use of the money. The goal is to use revenue transparency to help tackle poverty, conflict and corruption in what has come to be known as the “resource curse”, or the “paradox of plenty”.

EITI is a multi-stakeholder initiative involving representatives from national governments, the extractive industries, intergovernmental institutions and civil society, the first of its kind to bring together so many different stakeholders. Today, twenty-one countries have committed to implement EITI. Twenty-two companies are involved, as well as civil society, investors, donor governments and international organisations such as the International Monetary Fund and the World Bank.

Four years into the initiative, the first signs of success have emerged. The number of participants and stakeholders in the process is growing. Nigeria and Azerbaijan, countries at the forefront of implementation, have published their first extensive audits. Their citizens can now see for the first time how much money is collected for their resources, empowering them to monitor how the government spends that money. In addition, the Group of Eight (G8) industrialised nations specifically endorsed EITI at annual summits in 2004 and 2005. In some cases, international lenders such as the World Bank and its subsidiary the International Finance Corporation have pledged to make revenue transparency a requirement for all financing of extractive-sector projects.

However, some areas must still be strengthened as the initiative moves forward. Many countries are at different stages of implementation, leaving people to question the meaning of “implementing EITI”. While Nigeria and Azerbaijan are at the final stages of implementation, other countries have indicated their support but have not fully developed a work plan; others have not moved beyond an oral commitment. This raises the issue of how to validate countries’ claims of implementation.

Another challenge will be to increase the number of countries committed to EITI. This requires more clearly demonstrating the benefits of participation, even as oil-producing countries reap substantial profits from extremely high oil prices. Governments and companies of the emerging economies of Brazil, China, India, Russia, and South Africa must also be encouraged to participate in their countries of operations at a time when they are most concerned with the security of supply.

The International Advisory Group (IAG) held its fifth and final meeting in London on 20 June to discuss these and other issues in preparation for the appointment of a multi-stakeholder board. Following the 3rd EITI Plenary Conference in Oslo in November, the new board is expected to take responsibility for the future governance of EITI.

Validation of implementation

The first and most important issue is to ensure the reputation of the EITI brand. Questions have already arisen about how to distinguish countries that are serious about transparency and the reform of structures and institutions, from those who simply wish to “freeload” off the EITI brand. Effective arrangements are required to ensure that governments and companies comply with EITI criteria throughout the four stages of implementation: sign up, preparation, disclosure and dissemination. For example, repression of civil society in an implementing country violates EITI principles. The validation process, currently in its closing stages of development, addresses the challenge of ensuring that implementation is “real”.

On 20 June, the IAG agreed a new basis for validation, with two objectives: to ensure that a country that has produced an EITI report is implementing in accordance with EITI principles and criteria; and where no report has yet been produced, to measure a country’s progress. Any country that claims to be implementing EITI will need periodically to validate that claim. The EITI board may also ask a country to undergo validation if a lack of “meaningful” progress is perceived. If a lack of progress is confirmed, the country will be removed from the list of implementing countries.

“Meaningful” is an important concept: EITI does recognise progress in addition to absolute achievement, and it make take some countries several years to develop the structures for successful implementation. Country-specific context must also be taken into consideration.

Implementing countries are required to ensure that all extractive industry companies, foreign and domestic, submit their data. One way is to encode EITI in law, as is being done in Nigeria. Azerbaijan has followed a different route, persuading companies to sign a memorandum of understanding covering the terms of their involvement in the process. Most important is to ensure that all material payments are covered by the auditors’ report. Companies should also commit to transparency in all their operations, and not claim compliance in one country whilst lobbying against its adoption in another.

Emerging Economies

A number of countries currently implementing EITI have raised the urgent need for full involvement by companies from emerging economies. In growing economies like Brazil, China, India, Russia, and South Africa, the need for oil and gas is increasing. Rising energy needs in China accounted for 40 percent of the growth in oil demand over the last four years. As global demand increases, countries may resort to paying bribes to secure access to oil reserves. A lack of commitment to transparency from these countries and companies has the potential to undermine EITI progress.

Incentives

The question of incentives is an important one. How can countries be convinced to implement EITI with oil prices so high? How can national oil and energy companies in emerging economies be convinced to sign up when their main concern is securing a steady supply of oil?

While some resource rich countries may not currently see a tangible benefit to implementing EITI, many countries and companies see long term benefits. To be seen as implementing EITI offers a huge reputational advantage, as well as potentially increasing energy security and long-term investment security. The IAG recognised both direct and indirect incentives, and has developed suggestions to make them more attractive. In the case of indirect incentives, more research is needed to demonstrate the connection between EITI implementation and benefits like improved energy security and business climate. In terms of direct incentives, EITI implementation can be an indicator in performance assessments, for example, for use by donor governments and international financial institutions for funding, as many resource rich countries are dependent on this aid.

Conclusion

There are many benefits to implementation of the Extractive Industries Transparency Initiative. Transparency in the oil sector can improve overall budget accountability and make the environment more attractive for foreign direct investment. As a sign of good governance, implementation can attract donor nations and institutions, and improve the corporate reputation of businesses.

But much work remains. Supporters of EITI must push for more countries to adopt its principles. Rapidly developing economies should endorse it in their oil production and importation. Developed countries should insist on rigorous implementation from companies headquartered within their borders. In the years ahead, EITI should build on successes in the oil and gas sector, moving forward quickly to include solid mined minerals, and possibly industries such as forestry and fishing.

Most importantly, as accurate information about the collection of revenue becomes available in countries implementing EITI, civil society must seize the opportunity to open discussion of how that revenue is used, a question central to their successful development.