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investors and international organizations™. It aims to ˜improve governance
in resource-rich countries through the full publication and verification
of company payments and government revenues from oil, gas and
mining™.
Each EITI-implementing country commits itself to six EITI
˜criteria™:
1. Regular publication of all payments received by the government from
oil, gas and mining companies.
2. Independent audits for all such payments, applying international
auditing standards.
3. Checking of all payments by an independent administrator.
4. Inclusion of all oil, gas and mining companies, including state-owned
enterprises.
5. Involvement of civil society in the design, monitoring and evaluation
of the reporting process.
6. A work plan for the government, ˜including measurable targets, a
timetable for implementation and an assessment of potential capacity
constraints™.
As of July 2008, twenty-three developing countries were EITI-
implementing countries. They were: Azerbaijan, Cameroon, Congo,
Democratic Republic of the Congo, East Timor, Equatorial Guinea,
Gabon, Ghana, Guinea, Ivory Coast, Kazakhstan, Kyrgyzstan, Liberia,
Madagascar, Mali, Mauritania, Mongolia, Niger, Nigeria, Peru, São
Tom© and Príncipe, Sierra Leone and Yemen.
As of July 2008, the EITI was formally supported by sixteen oil and
gas companies, including BG group (UK), BP (UK), Chevron
(USA), ConocoPhilips (USA), Eni (Italy), Exxon (USA), Hess
Corporation (USA), Marathon (USA), Pemex (Mexico), Petrobras
(Brazil), Repsol YPF (Spain), Shell (UK/Netherlands), StatoilHydro
(Norway), Talisman Energy (Canada), Total (France) and Woodside
(Australia).
Source: EITI website at www.eitransparency.org/
(accessed 18 July 2008).
The governance challenge 143
*




gas and mining companies to host governments, which in turn would
limit corruption related to such revenues. A key strength of the
initiative was that it would involve all companies in a member country,
which avoids the collective action problems that BP faced in Angola.
Another strength was the requirement to involve civil society and
independent auditors, which helps to properly oversee the implemen-
tation of the EITI in a given country.
The establishment of a ˜revenue savings fund™ is one example of
how revenue transparency can help towards reducing resource-curse
effects. For instance, the creation of the State Oil Fund of the
Azerbaijan Republic (SOFAZ) has to some extent protected the
local economy in Azerbaijan from extreme currency appreciation
and oil price fluctuations, by depositing a part of the country™s oil
revenues in an overseas account. SOFAZ became (in the words of the
Economist Intelligence Unit) ˜the most transparent government body
in Azerbaijan (Economist Intelligence Unit 2006, 26). The establish-
ment of SOFAZ was conducive to EITI membership, and the EITI
helps to ensure the publication of annual data on Azerbaijani revenue
flows. Beating the resource curse requires more than just a transparent
revenue savings fund, but Azerbaijan achieved more in this respect
than the majority of other resource-rich countries in the past.
The most far-reaching external policy initiative to avoid the pit-
falls of the resource curse in an oil-producing country was the
Revenue Management Program in Chad. The programme was ini-
tiated by the World Bank, and oil companies were not directly
involved. The Chadian experiment yielded some positive societal
benefits, and it helped to insulate the country from the resource curse
for a number of years (see Box 6.2).


Potential and limitations of transparency

Transparency can contribute towards minimising the effects of the
resource curse, but transparency initiatives are relatively young, and
144 Beyond Corporate Social Responsibility
*




Box 6.2: Revenue Management Program in Chad
In 1998, the World Bank and the government of Chad agreed on a revenue
management programme, which was designed to ensure that future oil
revenues would be used to the benefit of wider society. Ten per cent of
Chad™s direct oil revenues (dividends and royalties as opposed to petro-
leum taxes) were to be placed in a London-based Future Generations Fund.
Of the remainder, 80 per cent of royalties and 85 per cent of dividends
were to be devoted to priority sectors including education, health and
social services, rural development and infrastructure. Revenues were
transferred into an escrow account in London.
The Revenue Management Program established mechanisms for over-
seeing the use of oil revenues. This included an oversight committee with
participants from politics, the judiciary and civil society. The World Bank
also strengthened public sector capacity, including providing Chad™s min-
istry of finance with training in public resources management.
Between the start of oil production in July 2003 and June 2006, the
country had earned US$537 million in direct oil revenues, of which US$295
million was reportedly allocated to ˜priority sectors™ including health, edu-
cation and roads. The Revenue Management Program also helped to avoid
a number of resource-curse effects, including the appreciation of the coun-
try™s exchange rate. The country™s real exchange rate increased by only 2 per
cent over the period 2004 5 at a time when oil export growth was highest.
However, the government of Chad unilaterally reneged on earlier
agreements on priority spending and abolished the Future Generations
Fund in December 2005. The World Bank consequently temporarily
suspended all loans to Chad in January 2006. A new agreement between
the World Bank and Chad was signed in July 2006, which provided the
government of Chad with greater autonomy in the spending of oil
revenues. Finally, the World Bank withdrew from the Revenue
Management Program in September 2008.
Sources: World Bank website at www.worldbank.org/
(accessed 2 April 2008); Gould and Winters 2007; Kojucharov 2007.


few academic studies have been carried out to date on the most
appropriate use of transparency initiatives and the actual impact
of transparency. However, extensive quantitative studies clearly dem-
onstrate the positive development effects of transparency (Alt and
Lassen 2006a,b; Gelos and Wei 2005; Shi and Svensson 2002).
The governance challenge 145
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Benefits of transparency initiatives

There is strong evidence that transparency has positive political,
economic and social effects:

Political effects. Transparency improves informational flows
*

between the rulers and the ruled. It ensures that financial flows are
reported to a wide audience in a publicly accessible, comprehensive
and easily understandable manner. Studies show that transparency
in revenue and expenditure flows reduces the scope for corruption
and generating political budget cycles, which means that politicians
have less scope to overspend budgets at certain times (e.g., during
election years) (Alt and Lassen 2006a,b). In turn, informational
flows improve the management of these revenues, for example by
the creation of effective ˜revenue savings funds™ mentioned earlier.
Political leaders also benefit in that their policies and statements
gain higher credibility, the reputation and legitimacy of the govern-
ment and public institutions are strengthened and relationships with
international organisations and aid donors are improved.
Economic effects. Transparency improves a country™s credibility
*

among foreign investors and the international banking commun-
ity. There is evidence that high-transparency countries enjoy lower
costs of borrowing in sovereign debt markets, and investment
funds make larger investments in high-transparency countries
(Gelos and Wei 2005; Glennerster and Shin 2003). Adoption of
transparency initiatives can therefore contribute to an improved
investment climate by providing a clear signal to investors and the
international financial institutions that the government is commit-
ted to improved accountability and good governance.
Social effects. The positive political and economic effects of trans-
*

parency can have many indirect social effects. By improving the
quality of government policy, lowering the costs of government
investment and attracting foreign capital, transparency indirectly
results in various positive impacts, including contributing to
146 Beyond Corporate Social Responsibility
*




poverty reduction. Furthermore, a general climate of transparency
empowers civil society groups to monitor budget decisions at the
micro-level: for instance, the award of specific contracts in the
health service (see Box 6.3). Central government transparency
therefore has role-model effects for other parts of economic and
public life (Shultz 2004).


Box 6.3: Transparency in health services
According to Transparency International (2006), more than US$3 tril-
lion is spent world-wide on health services annually, but probably
hundreds of billions are lost every year through corruption, overspending
on medical supplies or bottlenecks in budget execution. In gold-
exporting Ghana, it has been estimated that as much as half of the
overall budget allocated to clinics and hospitals did not actually reach
them, and 80 per cent of non-salary funds did not reach health facilities.
Transparency improves the effectiveness of health services and
reduces health care costs. There is evidence that transparency has two
main positive effects on health services:
Central government transparency can encourage the development of
*

formal transparency in the health sector, such as independent audits,
release of information about tendering processes, dissemination of
information about costs of procurement and transparency in overseas
development aid. For example, a study from Argentina demonstrated
that the variation across hospitals in prices of medical supplies was
reduced by 50 per cent after the Argentinian Government began to
disseminate information about how much hospitals were paying for
supplies (Transparency International 2006).
Transparency of government spending can encourage civil society
*

groups to monitor budget decisions at the micro-level. In Mexico,
FUNDAR a centre for the analysis and research of budget issues
started a project to examine how state funds were spent to address
maternal mortality. In an alliance with other civil society organisa-
tions, FUNDAR produced over 100 pages of data, analysis and argu-
ment and disseminated this analysis widely in Mexico. As a result of
civil society efforts, the budget of an important maternal health
programme increased almost tenfold (Shultz 2004).
The governance challenge 147
*




There is thus abundant evidence that transparency potentially has
many benefits for countries that adopt it. Indeed, high-transparency
countries consistently perform better than low-transparency coun-
tries on different measures. One key positive impact, which has been
studied in some detail, is lower debt accumulation. Statistical analysis
by Alt and Lassen (2006a,b) clearly shows that high-transparency
countries have consistently lower government budget deficits and
consequently lower debt levels than low-transparency countries.
Lower debt accumulation is crucial to poverty reduction, given that
country indebtedness is in itself a cause of poverty. Twelve out of the
world™s twenty-five most resource-rich countries and six of the world™s
most oil-rich countries were classified by the World Bank as Highly
Indebted Poor Countries, displaying some of the worst Human
Development Indicators (World Bank 2003, 12).
However, most studies on transparency suggest that a number of
conditions must be fulfilled in order to maximise the positive impact
of transparency. Based on the literature, at least three conditions
are necessary: (1) free media; (2) involvement of civil society; and
(3) timing of introduction of transparency. In other words, the success
of the EITI depends on these three conditions, which we shall discuss
in the following section.



Conditions of success and limitations of transparency

As revealed by previous research, the success of transparency initia-
tives in the oil and gas sector depends on the following conditions:

Media. Evidence suggests that independent media is an important
*

tool for increasing accountability and the beneficial effects of
transparency (Besley and Prat 2006). Better flows of information
about revenues and spending allow the public and interest groups
to observe the causes and effects of fiscal policy and thereby
improve political accountability. There is anecdotal evidence, for
148 Beyond Corporate Social Responsibility
*




example, that the publication of the federation account in Nigeria
provided journalists with a powerful tool to scrutinise the expen-
diture of local government authorities and helped to increase
accountability. The success of EITI depends on reporting revenue
flows to a wide audience, and the media therefore assist the EITI
process.
Civil society. It has been found that the involvement of private
*

associations and non-profit organisations is crucial for the success of

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