August 2019 - Number 176 EITI AS AN INSTRUMENT OF FISCAL TRANSPARENCY AND ACCOUNTABILITY IN CONTEXTS OF FRAGILITY AND VIOLENCE (FCV): A COMPARATIVE CASE STUDY OF AFGHANISTAN AND IRAQ (PART 2) Emmanuel Cuvillier, Sridar Padmanabhan Kannan1 ➢ Data timeliness is improved by requiring time-bound reporting of data. This A. Afghanistan: Data Systematization for empowers the Government to take more Development efficient and informed administrative decisions. Efforts in Afghanistan have sought to enable ➢ Systematized data collection and systematized data disclosures and simplify data disclosures are facilitated through the collection efforts, given security concerns that maintenance of a publicly accessible often restrict movement and coordination. In this digital mining cadaster, a mineral license context, the following governance enhancements register, a register of beneficial owners, are being supported: and other such systems. ◼ The new draft mining regulations seek to ◼ Digitized systems of the Ministry of Mines and empower the use of data for improved Petroleum (MoMP) now increase fiscal governance and fiscal accountability. 2 In an transparency and accountability. Informed innovative approach, technical support was by vital data, collected and disclosed for provided to embed and regularize some of improved transparency and accountability, the data disclosures required under the EITI the MoMP’s internal Mineral Cadaster standard into the draft mining regulations, Administration System (MCAS), and Non- which are also vital for good sector Tax Revenue System (NTRS) capture license governance. The improved availability and and non-tax revenue information in a real- accessibility of sector data adds credibility to time, disaggregated, and automated manner. fiscal transparency, and enables fiscal An online Transparency Portal3, which draws accountability as follows: from these internal systems, automatically discloses federal licenses, license ➢ Data quality is enhanced through coordinates, issue dates, ownership details, availability of relevant, disaggregated and disaggregated non-tax revenues. data. Consolidation and cross- Regarding confidential data under Afghan verification of data sets are also possible law, this data is automatically aggregated within and between various prior to disclosure via the transparency departments of the government. portal. Crucial data is also manually uploaded to the MoMP’s website, such as 1 The authors work in the World Bank’s Governance 3See: https://afghanistan.revenuedev.org/dashboard; and Global Practice. https://momp.gov.af/ (tab on ‘transparency’) 2 The regulations have been finalized and await formal adoption by the Ministry of Mines and Petroleum (MoMP), Government of Afghanistan. August 2019 · Number 176· 1 data on mineral production, and provincial frameworks. In this context, the most recent licenses and contracts. EITI report has provided clarity to stakeholders about vital aspects of sector governance, such as data regarding licensing, Box 2: How did digitized systems help revenue-sharing and allocation mechanisms, improve fiscal transparency and revenues collected, the roles and functions of accountability in Afghanistan? various state-owned enterprises (SoEs), and Non-tax mineral revenue the relationship of these SoEs with the administration has been enhanced at governmental ministries. The EITI quality the MoMP by providing readily assurance mechanisms have added veracity available and accessible information to the data disclosed, which is now available regarding revenues collected and in a consolidated manner for stakeholder use. mineral production. ◼ Citizen engagement has been enhanced, and Monitoring of mining operations has conflict-mitigation has been supported. Given been enhanced by empowering the the importance of the sector in Iraq’s MoMP with readily available data on economy, the role of data disclosed through license coordinates and attendant EITI in enhancing citizen confidence in sector details. governance cannot be understated. During Investor and civil society organization violent protests in Basra over concerns (CSO) confidence in sector governance regarding oil revenue distribution in April has increased following transparent 2018, the data disclosed through EITI served data disclosures in formats that enable as a ready source of information for public further end-user verification and engagement. Data from EITI Reports were analysis. publicized through local radio stations, and Crucial mining tax laws were enabled. served as proof to address popular Addressing data gaps in the MoMP’s misconceptions, especially regarding digitized systems enabled the ‘ring- employment levels of Iraqis in the oil and gas fencing’ of Corporate Income Taxes sector. (CIT) on a per-mining license basis, as required by the laws of Afghanistan. Commencing with 2019, the annual Citizen’s The move, to be implemented from Budget of Iraq, which is publicly the next tax reporting year, is expected disseminated, also has a chapter that to increase tax revenues from the presents the main findings of the most recent sector. EITI report. While the citizen’s budget shares details and plans on a forward-looking basis, Iraq’s EITI reports provide an evidence- based ‘look-back’ at past performance of the B. Iraq: Providing Baseline Data for Broader oil and gas sector. This interlinkage between Reforms budget projections and past performance in Iraq’s most vital sector will further inform Efforts are being made in Iraq to facilitate reliable Iraqi citizens about governance performance. data disclosures in the oil and gas sector. Such disclosures would enable improved stakeholder ◼ Ongoing enhancements to Public Financial engagement and provide a baseline for analyses Management (PFM) systems are being and sector reforms. The following governance supported. The Iraqi Ministry of Finance is enhancements are being supported: undertaking efforts to move from paper- based financial recording to a digitized PFM ◼ Greater clarity regarding the legal framework has been facilitated. In the absence of a unified law governing the oil and gas sector in Iraq, it is governed by multiple regulations and August 2019 · Number 176· 2 system4. As a complement to this effort, a accountability, the following challenges are PFM transparency sub-portal is being identified as common to the FCV context: developed within the Ministry, which will publicly display non-confidential financial ◼ Sequencing of improved data use vis-à-vis data in an automated manner. Given that the broader governmental reforms is a challenge. oil and gas sector accounts for the greatest Legislative and regulatory reforms are often proportion of Iraq’s financial data, good- required before the creation of data systems, practice EITI data disclosure standards will data collection, and data reporting. However, be embedded into the transparency sub- sometimes improvements in data are portal. required in order to inform meaningful legislative and regulatory reforms. The Box 3: Fiscal Transparency in Iraqi SoEs: The sequencing of reforms depends upon the Next Big Target level of baseline data available and is SoEs are vital actors in the oil and gas different for each country. Identifying the sector. All oil and gas sales and right sequence is vital toward ensuring distribution fall under the purview of meaningful output delivery. SoEs. They are also the major players ◼ The scope of data use is influenced by wider in oil and gas extraction. governance reforms. Efforts at improving Oil and gas SoEs retain a significant data collection, reporting, and portion of their earnings, which systematization are best accompanied by amounts to a very large portion of wider administrative and institutional governmental revenues. In 2016, these reforms. Where such reforms are ongoing, SoEs transferred 45 percent of their the leveraging of data, including through net-profits to the Ministry of Finance, EITI, can add tremendous value. Data can be while retaining 33 percent of their net used to accelerate reforms, improve profits for themselves and the administrative efficiency, and inform Ministry of Oil. governance decisions. However, in the Enabling fiscal transparency and absence of such reforms, only limited accountability in these SoEs is improvements can be made. The value added therefore crucial for broader good of the systems would necessarily be limited, governance in the country. Ongoing and the existing data gaps would likely to linkages are being explored with EITI remain. to enable the publication of audited ◼ Large initial investments are required for financial statements using creating automated data systems in the short International Financial Reporting term. This will only make sense where there Standards (IFRS) standards by pilot is governmental buy-in/ownership for sector SoEs. development or when overall fiscal accountability exists. Institutional capacity will also need to be built for operating such systems, and for using the data to make I. Challenges Facing FCV Countries better informed governance decisions. In this context, policymakers must perceive the Based on the activities undertaken in sector as a strategic priority in need of Afghanistan and Iraq in using EITI and data reform. However, in the longer term, these systems for improved fiscal transparency and investments will significantly reduce the costs of data reporting initiatives, such as EITI. Importantly, it will also enable 4 See the WB “Modernization of Public Financial Oversight and Accountability Institutions in Iraq” Management Systems” Project (P151375) and WB- Project (P170704). EU “Strengthening Public Financial Management August 2019 · Number 176· 3 enhanced revenue collection and management. ◼ Software compatibility is a vital factor for creating interlinked data systems. The feasibility of information technology (IT)-- based linkages is as important as the data disclosed. Sometimes, various systems cannot be interlinked due to software incompatibility and thus the lack of interoperability. Therefore, feasibility studies will be required to compare the benefits of data integration and automation vis-à-vis the expected costs of interlinking the various data systems. As far as possible, it is also important to ensure that open data software is used to empower the host ministry to undertake any necessary changes to the software in the future. II. Future Focus Areas: Afghanistan and Iraq When it comes to using EITI or other data systems for improved fiscal transparency and accountability, the priority steps for the future in both case study countries are closely linked to their respective priorities: ◼ In Afghanistan, the priority is to boost investor confidence, increase governmental revenues, and counter illicit revenue flows. As such, it will be crucial to link the internal systems of the country’s tax administration (SIGTAS), customs and export administration system (ACYCUDA), and the existing MoMP systems (MCAS and NTRS) to compare extractive production with relevant data such as exports, tax revenues, non-tax revenues, and so on. ◼ In Iraq, the priority is to expand the umbrella of fiscal transparency and accountability to critical sectors and other areas of government intervention, which account for very significant revenue flows. Thus, it will be crucial to support financial reporting by major oil and gas SoEs using the IFRS standards and facilitating their audit by the Federal Board of Supreme Audit. August 2019 · Number 176· 4