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New IMF Fiscal Transparency Code Spotlights Major Extractive Sector Corruption Risks

Last month, after four years of work, the International Monetary Fund published the natural resource revenue management pillar (Pillar IV) of its Fiscal Transparency Code. NRGI provided written submissions during each round of stakeholder consultation on Pillar IV, most recently in December.

In our submissions, NRGI consistently flagged the importance of transparency across the natural resource management chain, from state-owned company operations, to license allocation, contracts, management of environmental and social impacts, project-level extractive company payments to government and commodity sales. The IMF heard and responded to stakeholders, stepping back into the frontlines of some of the most pressing natural resource transparency issues.

Contract transparency and open contracting

A country’s natural resources belong to its people and should be used for their benefit. Yet the process for allocating licenses to companies can be shrouded in secrecy, leaving citizens in the dark on the terms and conditions for extraction of their resources. These early decisions present corruption and mismanagement risks that can mean long-term losses for countries.

In a big win for contract transparency advocates, the IMF explicitly states in the code that the publication of contracts is now an established international norm. This reflects an important shift in extractive industry governance in recent years. At least 44 countries have disclosed contracts and no fewer than 18 extractive companies have made statements in support of the practice. With discussions due to take place at the end of this month on whether to make contract disclosure a requirement in the Extractive Industries Transparency Initiative Standard, the IMF’s statement is a significant move that might inspire EITI to follow suit.

Importantly, the code sets forth best practice on how these contracts are allocated in the first place. The IMF stresses the importance of open contracting procedures for all license allocation, through mechanisms like published qualification criteria, lists of applicants, justifications for decisions and registers of license holders. Crucially, it calls for publication of beneficial owners of companies holding licenses, including the chain of intermediaries connecting these owners to the license holder. Such publication can help prevent unqualified and politically connected persons from circumventing fair licensing processes while hiding their identity behind layers of companies.

Project-level company payment transparency

Once licenses are allocated and resources extracted and sold, what happens to the money?

The IMF recognizes the progress made on resource revenue transparency, including worldwide reporting by companies of the fiscal payments they make to governments by type and by project. In particular, the IMF calls project-level reporting an established international norm. This form of reporting provides critical information to affected communities, governments and investors alike on the economic contribution of specific extractive projects.

The code also provides needed clarity on what constitutes a “project.” Projects may be based on one legal agreement, or based on multiple agreements if the agreements have substantially similar terms and are both operationally and geographically integrated. This could be the case where multiple mining concessions and licenses cover a single mining project.

Commodity trading transparency

A key revenue stream for several oil- and gas-rich countries comes from domestic and international sale of natural resource commodities. These commodity trades, often conducted by powerful state-owned companies, constitute the government’s single largest source of revenue in countries like Angola, Azerbaijan, Iraq, Libya and Nigeria, but have limited oversight and are susceptible to corruption and governance risks.

The scale of such fiscal flows should not be underestimated. Glencore voluntarily revealed it paid USD 12.6 billion to purchase crude oil from governments in 2017, almost five times more than its fiscal payment disclosures related to exploration and extraction. Commodity trader Trafigura paid over USD 90 billion to national oil companies between 2013-2017.

Since 2013, the EITI Standard has required member countries to disclose the volume and value of sales of a state’s share of resource production or revenues paid in-kind. In growing recognition of the significance and opacity of commodity trading revenues, several countries committed in 2016 to improving commodity trading transparency, including major trading hubs such as the U.K., the Netherlands, and Switzerland, as well as producer countries like Ghana and Nigeria. The IMF recognizes government and company reporting of these payments as a basic practice, well within the reach of any country or company.

With the EITI currently discussing revisions to its reporting framework, this recognition comes at an important time: the EITI should now embrace sale-by-sale disclosure as a requirement.

State-owned company transparency

For all its strengths, the code falls somewhat short on state-owned resource company transparency.

Pillar IV does devote a section to these companies and reinforces requirements like the EITI Standard and the OECD’s Guidelines on the Corporate Governance of State-Owned Enterprises by including important reporting practices such as the publication of budgets, annual and quarterly reports, quasi-fiscal activities, major procurement and contract awards, and externally audited financial statements.

However, NRGI’s research across dozens of companies shows evolving practice goes further, covering publication of key performance indicators, disaggregated information on transfers between state-owned resource companies and governments or disaggregated production data. State-owned companies play a critical role in the extractive sector of many resource-rich countries. Improved operational and management transparency of these companies remains a pressing issue.

The IMF will use Pillar IV and the rest of the code for voluntary fiscal transparency evaluations, helping countries to spot weaknesses in their resource revenue management transparency and chart a way forward. Several evaluations have been published. Pillar IV can be a valuable tool—but only if it is used. The onus is now on resource-rich countries to volunteer for these evaluations, publish the results and commit to implementing any needed reforms.

Commendation to the IMF for amplifying the efforts of natural resource transparency actors with this new code. These actors must now ensure the code moves from affirming norms to changing practice.

Nicola Woodroffe is a senior legal analyst with the Natural Resource Governance Institute (NRGI).