GOVERNANCE NOTES NOVEMBER 2019 No.18 EITI AS AN INSTRUMENT OF FISCAL TRANSPARENCY AND ACCOUNTABILITY: A CASE STUDY OF TWO FCV COUNTRIES Prepared by Emmanuel F. Cuvillier and Sridar Padmanabhan Kannan, Governance Global Practice Transparency and accountability in sector governance are basic and essential requirements to leverage the extractives Box 1. What Kinds of Data Benefit Fiscal Policy Making? (oil, gas, and mining) sector as an engine of economic growth Fiscal transparency ideally involves ensuring published in fragility, conflict, and violence (FCV) affected settings. fiscal reports: Enabling them involves two vital steps. Transparency · Cover a wider range of public sector institutions; requires obtaining or publishing relevant and actionable data · Capture a broad range of direct and contingent assets about sector governance. Accountability involves having the and liabilities; data to support responsible, efficient, and informed sector · Take a rigorous approach to fiscal forecasting and risk governance. analysis; and Although several mechanisms exist to facilitate · Present actual and forecast fiscal data on a consistent transparent data disclosures, the Extractive Industries basis. Transparency Initiative (EITI) is the preeminent global standard to promote the open and accountable management Fiscal accountability concerns the government and its of oil, gas, and mineral resources. This Governance Note civil servants being answerable to the country’s citizens and presents a case study about how data disclosed through EITI public institutions. Accountability is ensured when actionable has been effectively leveraged to support more transparent data disclosed through fiscal transparency measures are used and accountable fiscal governance in two FCV countries — effectively by public oversight institutions for either sanction- Afghanistan and Iraq. or nonsanction-based approaches. Enforcement is usually vested with a country’s legislative body, such as the National INTRODUCTION Assembly of Afghanistan, Iraqi Council of Representatives, and EITI seeks to strengthen extractives sector governance and the Parliament of the Kurdistan Region of Iraq. promote understanding of natural resource management by Analyses of data disclosed through EITI, especially in disclosing vital sector data. It requires periodic public disclosures countries dependent on extractive industries, often enable the of information about a country’s extractive industries, including identification and delivery of key measures to strengthen fiscal legal and regulatory information; license and contract details; accountability. data on beneficial owners of operations; production figures; and economic and social contributions of companies. Also WHY EITI? required is the disclosure of financial data related to extractive Governed well, the extractives industries sector can be an industries, such as reconciled figures of company payments engine of economic growth and sustainable development. and government revenues; revenue allocations and transfers; When natural resource management is reinforced by data on sector exports; and quantitative information about the appropriate systems, informed and transparent decision sector’s contribution to the economy. making, and efficient institutions, the sector can significantly Fiscal transparency is a vital requirement for effective boost medium-term economic growth, foreign direct fiscal policy making. Budgets, including their underlying fiscal investment, government revenues, and inclusive benefit forecasts, must provide a clear statement of the government’s sharing. This is especially true in resource-dependent budgetary objectives and policy intentions. Credible budgets economies or small-size economies with significant resource also require comprehensive, timely, and reliable data about potential. The sector can also be leveraged to enable economic the evolution of public finances, which enable sound financial diversification over the long term. projections (see box 1). When mismanaged, the sector may become a fertile 1 GOVERNANCE NOTES NOVEMBER 2019 No.18 ground for rent-seeking and corruption. The adverse anchoring infrastructural development; and facilitating environmental, social, economic, and political consequences are inclusive revenue sharing. At the same time, measures would well documented in literature describing the “resource curse” be needed to protect the economy from external shocks paradox. Specifically, many countries with an abundance associated with the sector. of extractive resources often have lower economic growth, Both Afghanistan and Iraq are EITI implementing weaker public institutions, and worse development outcomes countries. While providing technical assistance to them to than countries not similarly endowed. address corrective actions for improved implementation, two The nature of this sector has significant implications for important linkages were observed: (i) at times, administrative FCV countries. It can either help boost peace-building efforts reforms were required to facilitate effective data collection, or fuel conflicts. Either way, it is of paramount importance warehousing, and disclosures; and (ii) the data collected could that efficient, transparent, and accountable governance of the help improve administrative and developmental outcomes. sector be ensured. AFGHANISTAN: DATA SYSTEMATIZATION FOR The Country Cases: Afghanistan and Iraq DEVELOPMENT These two FCV countries offer contrasting scenarios of the Efforts in Afghanistan seek to enable systematized data sector’s potential and role in their respective national contexts. disclosures and simplify data collection efforts, given security concerns that often restrict movement and coordination. In Afghanistan. An International Development Association this context, governance enhancements are being supported country with a small-size economy, Afghanistan largely through new draft mining regulations and digitized systems. depends on external aid funding. The development of extractive industries is at a nascent stage. In 2016, the sector New Draft Mining Regulations accounted for about 4 percent of government revenues and This effort seeks to empower the use of data for improved 5.5 percent of exports, mainly led by coal production and sales, governance and fiscal accountability.2 Using an innovative according to the latest EITI report.1 Significant development approach, technical support was provided to embed and potential in metals, such as copper and lithium, points to a regularize data disclosures, required under the EITI standard, greater relevance of the sector in the context of a global low- into the draft mining regulations — a vital step for good sector carbon future. A large-scale copper mine, under negotiation, governance. also can be a turning point. The most useful contribution of the sector lies in its Box 2. Regularizing Data Disclosures Improves potential to boost government revenues in the medium-term Transparency and Accountability through greenfield projects, thereby reducing reliance on · Greater availability of sector data adds credibility to foreign aid. Afghanistan continues to rely on grants to finance fiscal transparency and enables fiscal accountability. 75 percent of total public expenditures. A clear case exists for · Access to relevant, disaggregated data enhances Afghanistan to sustainably, transparently, and accountably the quality of information for government use. harness its resources for national development. The medium- Consolidation and cross-verification of data sets are term nature of the sector’s returns also lends itself to also possible within and between departments. potentially contributing to peace-building strategies. · Data timeliness is improved significantly through mandatory time-bound data reporting, which enables Iraq. An International Bank for Reconstruction and more efficient and informed administrative decisions. Development country, Iraq depends on its oil and gas sector · Finally, systematized data collection and disclosures are economically. In 2016, it accounted for 99 percent of export facilitated through required maintenance of a publicly values, 96 percent of government revenues, and almost 30 accessible digital mining cadaster, mineral license percent of gross domestic product at a time when the average register, and register of beneficial owners. oil prices were the lowest in more than a decade. These figures remain about the same over the past decade, revealing the extent to which the national economy is exposed to the Digitized Systems volatility of the commodity price cycle and contributing to a The Ministry of Mines and Petroleum (MMP) uses digitized weakening of fiscal resilience. systems to increase fiscal transparency and accountability The sector’s ideal contribution would be toward increasing by collecting and disclosing vital data (see box 3). Its Mineral the country’s revenues, economic growth, and investment; Cadaster Administration System (MCAS) and Non-Tax 1 For more information and to access reports, see EITI’s website at https://eiti.org/. 2 The regulations are pending Cabinet approval.. 2 GOVERNANCE NOTES NOVEMBER 2019 No.18 Revenue System (NTRS) capture license and nontax revenue regarding licensing, revenue sharing and allocation information in a real-time, disaggregated, and automated mechanisms, revenues collected, the roles and functions of manner. Drawing from these internal systems, an online state-owned enterprises (SOEs), and the relationship of SOEs transparency portal3 automatically discloses all federal with government ministries (see box 3). Most importantly, licenses, license coordinates, dates of issue, beneficial coordinates of oil and gas operations in Iraq have been ownership details, and disaggregated nontax revenues. publicly disclosed for the first time. The EITI quality assurance mechanisms add veracity to the data disclosed, now available in consolidated form for stakeholder use. Box 3. How Digitized Systems Help Improve Fiscal Transparency and Accountability in Afghanistan · Nontax mineral revenue administration was enhanced Box 4. Fiscal Transparency in State-Owned Enterprises: at the Ministry of Mines and Petroleum (MMP) through The Next Big Target in Iraq readily available and accessible information on revenue · State-owned enterprises (SOEs) are vital actors in the oil collection and mineral production. and gas sector. All sales and distribution fall under their · Monitoring of mining operations was enhanced by purview. They are also the major players in oil and gas empowering the MMP with readily available data on extraction. license coordinates and attendant details. · Oil and gas SOEs retain a significant portion of their · Investor and civil society organization confidence in earnings, which amounts to a very large portion of sector governance are expected to increase following government revenues. In 2016, SOEs transferred 45 transparent data disclosures in formats that enable percent of their net profits to the Ministry of Finance, further end-user verification and analysis. while retaining 33 percent for themselves and the · Crucial mining tax laws were enabled. Addressing Ministry of Oil. data gaps in the MMP’s digitized systems enabled · Enabling fiscal transparency and accountability in SOEs the ring-fencing of corporate income taxes on a per- is crucial for broader good governance. Ongoing linkages mining license basis, as required by law. The move, are being explored to enable the publication of audited the implementation of which commenced in 2019, is financial statements using International Financial expected to increase tax revenues. Reporting Standards. To adhere to the treatment of confidential data as required Citizen Engagement and Conflict Mitigation under Afghan laws, these data are further automatically Citizen engagement has been enhanced, and conflict aggregated above confidentiality thresholds prior to disclosure mitigation has been supported. Given the sector’s economic through the transparency portal. Crucial data are also manually importance, the role of data disclosed through EITI in uploaded on the MMP’s website, such as data regarding mineral enhancing citizen confidence in sector governance cannot production and provincial licenses and contracts. be understated. During violent protests in April 2018 over oil revenue distribution, data disclosed through EITI served as a IRAQ: BASELINE DATA FOR BROADER REFORMS ready source of information for public engagement. Data from Efforts are being made to facilitate reliable data disclosures in EITI reports were publicized through local radio stations. They the oil and gas sector. They would enable greater stakeholder served as proof to address popular misconceptions, especially engagement and provide a baseline for analyses and sector regarding employment levels of Iraqis in the oil and gas sector. reforms by the government and development organizations. The annual Citizen’s Budget of Iraq for the year 2018, which Governance enhancements are being supported with regard was publicly disseminated, included a chapter that presented to the legal framework, citizen engagement and conflict the main findings of Iraq’s most recent EITI report. A similar mitigation, and public financial management (PFM) systems. EITI based analysis has also been performed for this budget for the year 2019, the adoption and publication of which is Legal Framework currently being considered by the government of Iraq. While the Greater clarity about the legal framework has been citizen’s budget shares details and plans on a forward-looking facilitated. With no unified law governing the oil and gas basis, Iraq’s EITI reports provide an evidence-based look at the sector, it is subject to multiple regulations and frameworks. sector’s past performance. This interlinkage between budget The most recent EITI report offers clarity to stakeholders projections and past performance in Iraq’s most vital sector will about vital aspects of sector governance, such as data further inform citizens about governance performance. 3 For more information, see https://afghanistan.revenuedev.org/dashboard and https://momp.gov.af (transparency tab). 3 GOVERNANCE NOTES NOVEMBER 2019 No.18 PFM Systems perceive the sector as a strategic reform priority. In the longer Ongoing enhancements to PFM systems are being term, these investments will significantly reduce the costs of supported. The Ministry of Finance is moving from paper- data reporting initiatives, such as EITI, and enable enhanced based financial recording to a digitized PFM system.4 To revenue collection and management. complement this effort, a PFM transparency subportal is being developed within the ministry to publicly display Software Compatibility nonconfidential financial data in an automated way. Given Software compatibility is a vital factor when designing the oil and gas sector accounts for the greatest proportion interlinked data systems. The viability of linkages created of Iraq’s financial data, EITI data disclosure standards will be through information technology is as important as the data embedded in the transparency subportal. disclosed. Sometimes, systems cannot be interlinked due to software incompatibility and lack of interoperability. Feasibility CHALLENGES FACING FCV COUNTRIES studies will be required to compare the benefits of data Based on activities undertaken in Afghanistan and Iraq to use integration and automation in relation to the expected costs EITI and data systems for improved fiscal transparency and of interlinking various data systems. As much as possible, it accountability, several challenges are identified as common to is also important to ensure the use of open data software to the FCV context in regard to government reforms, scope of data empower the host ministry to undertake necessary changes. use, automated data systems, and software compatibility. FUTURE FOCUS AREAS Government Reforms When it comes to using EITI or data systems for improved Sequencing of improved data use in relation to broader fiscal transparency and accountability, the steps taking government reforms is a challenge. Legislative and regulatory precedence for the future in both countries are closely linked to reforms are often required before the creation of data their respective priorities. systems, collection, and reporting. However, sometimes data In Afghanistan, the priority is to boost investor confidence, improvements are needed to inform meaningful legislative and increase government revenues, and counter illicit revenue flows. regulatory reforms. The sequencing of reforms depends on It will be crucial to link the internal systems of the country’s the level of baseline data available, which is different for each tax administration, customs and export administration country. Identifying the right sequence is vital toward ensuring system, and MMP systems (MCAS and NTRS) to compare meaningful output delivery. extractive production with relevant data, such as exports, tax revenues, and nontax revenues. Scope of Data In Iraq, the priority is to expand the umbrella of fiscal The scope of data use is influenced by wider governance transparency and accountability to critical sectors and other reforms. Efforts to improve data collection, reporting, and areas of government intervention, which account for significant systematization are best accompanied by wider administrative revenue flows. It will be crucial to support financial reporting and institutional reforms. Where reforms are ongoing, the by major oil and gas SOEs using good practice standards leveraging of data, including through EITI, can add tremendous comparable to the International Financial Reporting Standards value. Data can be used to accelerate reforms, improve and facilitating their audit by Iraq’s Federal Board of Supreme administrative efficiency, and inform governance decisions. Audit. However, in the absence of reforms, only limited improvements can be made. The value added of the systems would be limited, and data gaps would likely remain. Automated Data Systems Large initial investments in the short term are required for GOVERNANCE GLOBAL PRACTICE creating automated data systems. This makes sense only Guiding Results through Public Institutions where there is government buy-in or ownership for sector Governance Notes captures knowledge derived from World Bank development or when overall fiscal accountability exists. Also, engagements and technical and financial assistance requests. institutional capacity would need to be built for operating The views expressed are those of the authors and do not these systems and for using the data to make better informed necessarily reflect the views of the World Bank. governance decisions. In this context, policy makers must For more information, contact: govgplearns@worldbank.org. For more information, see the World Bank’s website at http://documents.worldbank.org/curated/en/home for “Iraq — Modernization of Public 4 Financial Management Systems” (P151357) and “Strengthening Public Financial Management Oversight and Accountability Institutions in Iraq” (P170704). 4