Preventing Corruption In Extractive Sector Revenues – the NEITI Experience, By Waziri Adio
…the answer to the question about whether NEITI is still relevant to Nigeria’s economic aspirations becomes clearer. Yes, it remains relevant and is needed now more than ever. So much has been done in terms of outputs, but much more still needs to be done to produce the desired outcome, which is abundant life for all our citizens. But this is not what NEITI can do by itself.
You will all recall that about five months ago, a trove of embarrassing financial and corporate secrets were unleashed on the public domain, some of which had been kept since the ’70s, by one of the most anonymous and nebulous custodians of such secrets. Mossack Fonseca, a law firm whose name is as unrecognisable and incomprehensible to the vast billions of the poor and downtrodden of the world, lost a whooping trove of 2.6 Terabytes of data to an anonymous whistle-blower, which contained 11.5 million documents detailing financial and attorney–client information for more than 214,488 offshore entities.
That incident revealed the depth of corruption that has indeed become the true global unifier, around which politicians and leaders of the public and private sectors have converged, fleecing the weak and the helpless of billions of dollars and basic, life-dependent needs such as food, water and drugs. That landmark incident is what the International Consortium of Investigative Journalists (ICIJ), which worked with the single, anonymous source, and 107 media houses spread across 80 countries, including our own Premium Times, has dubbed the “Panama Papers.” Most of us here are conversant with some of the shocking details of the persons and businesses behind this heist of global scale. If anything, the revelations have further put a lie to Jeffrey Archer’s famous title. Indeed, there is no honour among thieves!
The Panama Papers underscores one of the links between corruption (open or disguised) and underdevelopment. This link is both intuitive and empirical. It is also multidimensional. Apart from diverting valuable resources that should otherwise be invested in social development and productive infrastructure, corruption undermines optimal decision making, discourages enterprise, repels investment, and perverts the democratic process. It concentrates wealth in a few hands, widens inequalities, and fuels conflict. These are the common features among poor countries across the world.
It is also not by chance that the countries that have repeatedly scored low on global governance indicators, like Transparency International’s Corruption Perception Index, are largely the same ones that have perennially populated the bottom of the global development indexes, like UNDP’s Human Development Index. This correlation is more remarkable in resource-rich countries, such as Nigeria, where the incidence of abundance should ordinarily lead to the experience of prosperity. In contrast, natural resource endowment has tended to correlate strongly with weak economic development across a significant sample of resource-rich countries. This famous “paradox of plenty” is refracted in the equally well known “resource curse” syndrome.
The theoretical construction of the resource curse phenomenon has been sufficiently elaborated, so it would be redundant to rehash, especially before an audience of accomplished academics. However, a few recollections would be useful to help us move this discussion beyond the point of diagnosing the problem to situating the conversation within the context of Nigeria’s current economic realities and the appropriate remedies for reversing the misfortune.
The resource curse concept has both economic and political dimensions. One economic manifestation is called the Dutch Disease. This is the situation where countries experiencing sudden wealth from natural resources tend to shift productive efforts and resources from manufacturing and other sectors because, due to the massive inflow of foreign exchange and the sudden appreciation of the local currency, other products cannot compete in the international market and products from elsewhere become cheap to import. Two terrible dependencies thus develop: over-dependence on a single product for export and source of foreign exchange and over-dependence on imports. The problem inherent in these dual dependencies would not manifest until the price of the main source of export goes south, as prices of commodities are wont to. In the meantime, the boom season creates an illusion of prosperity, as abundant foreign exchange revenue temporarily bestows on the endowed, the capacity to sustain unprecedented and unsustainable consumption. But then price volatility is a standard feature of commodity markets, and the boom-and-bust cycle a constant reality of commodity economies. The sudden crash of the price of a country’s main commodity usually completes the grim cycle, and ultimately lends validity to the hypothesis that resource abundance could be a curse, rather than a blessing. Here is where Nigeria, sadly, finds itself at the moment.
But the fall in oil price is not the sole culprit for our current economic troubles. Believing that it is would delude the managers of the economy and diminish the country’s capacity to administer the right therapy. Here is where the political element becomes useful as an explanatory variable for this ailment, and also exposes the fall in prices as only an inevitable trigger.
By their nature, natural resource revenues are easy to earn and easy to appropriate and expropriate. And since it is not revenue taxed from the sweat of citizens, the citizens are not involved in the process of generation or computation. This situation creates a huge incentive for capture by public officials. Its non-tax characteristic also makes managers of public resources less accountable. This inevitably fuels corruption and rent-seeking behaviours and intense competition for a time at the trough. According to Jeffery Sachs and Andrew Warner in a 2001 paper, the political process also gets captured, and then the “predatory state eclipses the developmental state”.
It is clear that it is not what natural resources do to countries that causes the retrogression. Rather, it is what countries do with natural resources. Hence, it is not the case that natural resources in themselves are inherently tainted with a curse which, willy-nilly, afflicts the society where they are found and extracted. The exceptions provided by countries like Norway, Botswana and others show that resources do not come embedded with curses. The exceptions also show that when the right lessons are learned, the curse of resources can be reversed.
The Accountability Lever
One obvious remedy for resource-rich countries to avoid this pitfall is to make public officials more accountable for the management of natural resource revenue. But then the accountability relationship between the official and the citizen holding the official to account is that of the principal-agent model. In the classic agency theory, the major challenge to ensuring that the agent is committed to serving the interest of his principal has remained that of information asymmetry. It denotes the situation where the agent (i.e. the public official) has access to information that the principal does not possess or cannot access. This disequilibrium creates opportunity for arbitrage where the agent uses the advantage of privileged information, as he chooses, for private profit.
In the governance of public resources, the use of public office for private gain is a standard definition for corruption. In management of natural resource revenue, the opportunity for corruption is exacerbated by the complex and opaque nature of the transactions and the size of the rent at the disposal of public officials.
It might be useful here to revisit Robert Klitgaard’s famous corruption equation:
C = M + D – A
Simply stated, corruption (C) is the result of monopoly (M) and discretion (D) without accountability (A).
This equation contains the solution to the problem of corruption: we need to introduce competition of operation, democratise access to information, remove the room for discretion, and strengthen instruments of accountability.
EITI as a Transparency and Accountability Tool
Launched by the then UK Prime Minister, Tony Blair in 2002 at the World Summit on Sustainable Development in Johannesburg, South Africa, the Extractive Industries Transparency Initiative (EITI) was borne out of extensive intellectual discussions and lobbying by civil society groups and oil multinationals such as Global Witness, Publish What You Pay and British Petroleum, over the quagmire several oil-rich, but unfortunately development-deprived nations have found themselves. The UK government, using the vehicle of the Department for International Development (DFID), was nudged to found EITI at a conference in London in 2003. At the conference, 140 delegates from governments, companies and civil society groups agreed on twelve principles to increase transparency over payments and revenues in the extractive sector.
In summary, the EITI principles expressed stakeholders’ commitment to prudent use of natural resource wealth by sovereign governments for sustainable development and poverty reduction, against the backdrop of volatility of natural resource revenue; the belief that public understanding of government revenues and expenditure over time would aid public debate and inform choice for sustainable development; recognition of the importance of transparency in enhancing public financial management and accountability; that transparency in the context of respect for contracts and laws creates conducive environment for investment; a recognition that the task of transparency for sustainable development should involve all stakeholders with relevant contributions to make – including governments and their agencies, extractive industry companies, service companies, multilateral organisations, financial organisations, investors and non-governmental organisations. These principles became the main ideas on which the framework of EITI was constructed.
Nigeria’s Experience With EITI
Nigeria voluntarily signed on to EITI in 2003 and started implementation in 2004. Nigeria is today adjudged as one of the leaders of the 51 countries implementing EITI because we continue to push the boundaries. Instead of limiting itself to just financial audits, Nigeria conducts three-part audits that include financial, physical and process data. These audits put in the public domain previously unavailable information about a sector that remains the mainstay of our economy, and in the process providing practical tools for checkmating corruption, exposing infractions, empowering citizens, and surfacing systems in need of repair. Since inception, Nigeria has conducted six oil and gas audits, four solid minerals audits, and one cycle of Fiscal Allocation and Statutory Disbursement (FASD) audit. These audits are carried out through independent validators who reconcile payments made by companies with revenues declared by the government. Beyond the audits, other functions performed by NEITI are dissemination of the audits and remediation of the identified gaps in collaboration with other stakeholders.
NEITI’s audit reports contain nuggets of otherwise difficult to obtain information that should interest citizens and policy makers alike. For example, the following are some of the highlights of the 2013 oil and gas audit report released a few months ago:
• An outstanding of $3.8 billion and N358.3 billion yet to be remitted to the Federation by NNPC and its subsidiaries;
• Losses to the Federation amounting to $5.966 billion and N20.4 billion. (Out of the $5.9 billion, crude oil theft and vandalism alone accounted for $4.7 billion;)
• Under-assessments/under-payments of petroleum profit taxes and royalties by oil and gas companies as a result of the use of different pricing methodologies by the government and the companies amounting to $599.98. million;
• Non-remittance of NLNG dividends to the government by NNPC for eight years amounting to $12.9 billion;
• Total subsidy on petroleum products amounting to N1.3 trillion;
• Lack of metering infrastructure, more than ten years after this was flagged in the first NEITI audit reports. etc.
In summary, these losses show disturbing levels of inefficiencies, poor governance and abuses that have cost the nation trillions of naira yearly and overtime, and a clear indication of why the country is at the current pass after several years of consistently high oil prices. NEITI has continued to seek ways to address these issues including the enthronement of clear fiscal terms, open and transparent processes, removal of discretion, metering etc.
You may want to ask, and legitimately, if the EITI is still relevant in Nigeria, given that the 12-year existence of NEITI did not prevent mind-boggling malfeasance and an economic recession. Has NEITI failed to justify its existence? Are the current methods still relevant or do we need new tools and instruments?
Attempting to answer these questions in a simplistic monosyllabic format would be as misleading as thinking that the EITI mechanism was the only solution to the problem in the first place. The reality is that it is not. This conclusion does not just stem from the incidence of the recession or the lingering governance issues in the petroleum industry. The realisation that extractive industries transparency is only one of several complementary tools for reversing the curse has always been established from the beginning.
In practice, the case for complementarity of roles, efforts and tools for achieving better governance of the extractive sector can be made both within and outside the EITI framework. As earlier stated, the boom to bust cycle is an integral feature of the commodity economy, owing to the volatility of this market. Nigeria’s economy has experienced significant dip in oil prices at least twice within the last seventeen years. Alongside the establishment of NEITI, Nigeria began a stabilisation fund known as the Excess Crude Account (ECA), where money in excess of the oil benchmark price was saved for the rainy day. The ECA was later institutionalised with the Nigerian Sovereign Investment Authority, which was backed by law in 2011. When the global crisis set in and crude oil prices dipped in 2008/09, Nigerians hardly noticed. Nigeria’s ability to weather the shock then was due in large part to the existence a relatively robust reserve fund. But politics and bare-faced corruption and profligacy ensured that when oil price started tanking in 2014, there was not enough in either the stabilisation fund or in the external reserves to tide Nigeria over the slump. Thus a major missing element in the two dips was the availability of a sizeable buffer in 2008/2009 which sadly is absent in the present situation. In order for resource-rich countries to insure themselves against the shocks that come with mineral resource prices, the countries must curb their appetite for consumption, political actors must find the will to save and the foresight to invest in physical and human infrastructure. And money meant for public services must not be cornered or diverted.
Citizens must support government’s efforts against corruption however imperfect, and efforts against corruption must be institutionalised and sustained over time across regimes. In the extractive sector, these efforts must be institutionalised in the legal, regulatory and governance frameworks for the oil and gas and the solid minerals sectors. As a transparency tool, the NEITI audit was designed to serve as enabler of democratic accountability. Hence the audits are largely output rather than outcome measures. For NEITI audits to be useful and effective as more than a mere transparency and accountability instrument, citizens, civic groups and the media must take greater interests in the management of natural resource revenue and use the evidence provided to do their civic duties by themselves and their society. They must demand accountability as a right, not a privilege bestowed on them by NEITI or by the government. In the classic principal-agent relationship, the agent (government) exists at the pleasure and for the exclusive interest of the principal (citizens).
Citizens must be willing to organise and make their voices count; they must demand equitable, sensible and sustainable allocation of revenues from mineral resources; they must question and challenge rules and practices that undermine the ability of society to derive optimum value from their endowment. It is not ‘government money’; it is the people’s money. Citizens must take advantage of their numbers. But they must organise and engage on the basis of knowledge, and not just passion.
Knowledge Is Power, Especially In the Extractive Sector
The EITI process is committed entirely to empowering the citizen by dismantling the huge knowledge barrier in the extractive sector. Citizens can take full control of the management of their resources by monitoring and demanding changes using the myriad of accountability instruments at their disposal such as the NEITI reports. Now, more than ever, citizens must seize the opportunity to hold the government to its commitment to openness, accountability, good governance and anti-corruption. Political will is critical to the success of any campaign against corruption. There is enough political will in the present administration to encourage collective action against corruption. But citizens need to ask for more, not less.
On its part, NEITI will continue to push the boundaries of transparency by expanding its focus into contract and ownership transparency and into how revenues are utilised. NEITI will continue to improve on the quality and the relevance and usability of the information in its audits.
At this point, the answer to the question about whether NEITI is still relevant to Nigeria’s economic aspirations becomes clearer. Yes, it remains relevant and is needed now more than ever. So much has been done in terms of outputs, but much more still needs to be done to produce the desired outcome, which is abundant life for all our citizens. But this is not what NEITI can do by itself. All stakeholders need to play their parts effectively and all mechanisms for transparent, accountable, prudent and impactful use of resources must be fully deployed. This is especially important now more than at any other time, given the current economic exigencies. Now is the time to mainstream and strengthen accountability and good governance mechanisms like NEITI not only to help us survive the slump but to ensure that the next boom season, when it happens again would be optimally utilised, and that the next bust, when it happens, will not lead us to a hard place.
The EITI emerged as a by-product of a growing global movement towards greater openness that emerged in the last decade preceding its formation. This campaign was very strident within the academic, policy and non-state constituencies, and also resonant in other strata of society. This development came on the heels of the near universal realisation that openness is a key success factor of development. Open society is a precondition for the good society. Today, we hear about the need for openness in almost everything, and that is the way it should be. We hear about “open government”, “open data” “open oil” etc.
This growing clamour for openness exists within the broader context of the acknowledgement of the centrality of openness as a tool for checking corruption, enthroning good governance, tackling poverty, and advancing the greatest good of the greatest number. Can we have too much openness? No. Here, less is not more. We actually need more openness, not less. Let me end by repeating this well-known adage: sunshine remains the best disinfectant. Let’s continue to insist on this disinfectant of openness, of transparency, of accountability. And let’s use it appropriately.
Waziri Adio is the Executive Secretary of the Nigerian Extractive Industries Transparency Initiative (NEITI).
This was a paper presented as “Preventing and Enhancing Transparency and Accountability In the Management of Revenues from the Extractive Sector – the NEITI Experience” at the Second Annual Conference of the Academics Stand Against Corruption (ASAP) Held at the University of Lagos on Thursday September 8, 2016.