67195 JANUARY 2011 Extractive Industries Transparency Initiative: ABOUT THE AUTHORS GEORG CASPARY Combating the Resource Curse in Fragile and has served as Task Leader on EITI implementation in Latin Conflict-Affected Countries America and the Caribbean Access to extractive industry resources—and to the revenues springing from them— (LAC), Africa, and Europe and Central Asia (ECA). He has also is at the root of many conflicts. Recent examples include the several wars fought, in worked on a variety of other part, over access to oil in the Middle East and wars fueled by “blood diamonds� in operational tasks in Energy, Natural Resources, and the West Africa. The Extractive Industries Transparency Initiative (EITI), launched in 2002 Environment for the Bank and IFC for the past five years. He and endorsed by the World Bank in 2003, has provided tangible governance was assigned most recently to improvements in resource-rich conflict-affected countries. It works with multiple the Bank’s Cairo office. stakeholders—a coalition of governments, companies, investors, international VERENA SEILER organizations, and civil society organizations (CSOs)—to manage a process of joined SEGOM (World Bank, Sustainable Energy Depart- publication and verification of company payments and government revenues from ment: Oil, Gas and Mining) as oil, gas, and mining (see Box 1). This SmartLesson shares our experience implementing Consultant in October 2010 and works for the oil and gas EITI in five prominent conflict countries (Table 1) and provides recommendations team as well as for EITI, and lessons that may inform implementers of other World Bank programs in fragile currently on Ukraine, Trinidad and Tobago, Suriname, and and conflict-affected countries. Guyana. APPROVING MANAGER Anwar Ravat, EITI Program Manager and Acting Manager, SEGOM. A Liberian diamond miner displays his find while colleagues continue to dig. Two recent civil wars, fueled by “blood diamonds,� killed and displaced hundreds of thousands and enslaved several thousand children as child soldiers. Since the cease-fire, Liberia has become (with the Bank’s help) the fastest implementer of EITI, voluntarily establishing a mineral resources law that goes beyond the EITI requirements to manage resources sustainably. But tensions remain. We could approach the miners only after the head of the Liberian miners association assured them of our good intentions. (Photo by: Georg Caspary). SMARTLESSONS — JANUARY 2011 1 EITI in Action Box 1: About EITI Control over natural resources often plays an important role in armed conflicts, either because warring factions fight over access A fundamental principle of the EITI is its participative to natural resources or because natural resources help finance multistakeholder approach, where CSOs and extractive industry one or several of the factions. EITI facilitates public control over (EI) companies are actively involved in governing the process. the wealth generated by natural resources and limits corruption. The World Bank Group, the EITI Secretariat based in Oslo, and other bilateral donor agencies provide technical and financial EITI has proven highly successful in reducing the risk of post- assistance to almost all countries implementing EITI across five conflict countries’ relapsing into conflict. In this way, EITI continents. The World Bank Group (WBG) administers the Multi- contributes to wider peace and reconciliation processes in post- Donor Trust Fund and supports EITI-implementing countries by: conflict countries, such as those shown in Table 1. • making EITI advisers and consultants available to the Recommendations and Lessons governments; • sharing international best practice; and We present below six general recommendations for operations • providing grants to governments to help support EITI in fragile and conflict-affected countries. The recommendations implementation. are based on challenges that EITI implementation faced in such countries and the lessons learned from tackling these challenges. IFC increasingly uses EITI implementation as a proxy for commitment to governance improvements in a country where it Recommendation 1: For each stakeholder, define a specific is considering investments, and makes EITI implementation an interest that will motivate that stakeholder to come on important part of its investment decision in the natural resources board. sectors of post-conflict countries. Challenge: In post-conflict situations, it is often difficult to bring on board all the stakeholders necessary for the implementation • CSOs that are weakened and traumatized by persecution of the project. There might be, for example: during times of conflict—possibly at the hands of people who might still be represented in government. • deep mistrust between stakeholders, especially if the extractive industries played an important role in the conflict. Lesson Learned • reluctance of companies and governments to disclose their In discussions with stakeholders, emphasize their key payment and revenue flows. interests that will be served by EITI. Table 1: Five Countries Implementing EITI Country Circumstances Achievements Liberia • 14-year civil war (1989–2004) sustained by • Successfully conducted presidential and legislative elections, diamond resources October 2005 • First African country to be designated EITI-compliant, October 2009 • Best EITI Implementing Country award granted by the EITI board in Doha, Qatar (2009), based on Liberia’s rapid progress and trend-setting performance Sierra Leone • 11-year war (1991–2002) sustained by diamonds • Parliamentary and presidential elections, 2002 and 2007 • First EITI report published, March 2010 • “Meaningful progress� and excellent quality of the report acknowledged at an EITI board meeting, October 2010 Timor Leste • Occupied by Indonesia (1975–99), which claimed • Two successful election rounds, 2001–02 and 2007 part of Timor Leste’s oil and gas resources • EITI candidate country since February 2008 • Armed violence after pro-independence referendum, • Declared EITI-compliant, July 2010 1999 Iraq • Several international wars since the 1980s, with • Two election rounds, 2005 and 2010 the world’s third-largest oil reserves as a strong • Iraqi government has formally committed to implementing EITI contributing factor Afghanistan • Extractive industries—extensive mineral deposits and • Two election rounds since 2004 potential for oil and gas production—are urgently needed • Official EITI candidate country since February 10, 2010 to finance reconstruction but remain underdeveloped due to deeply fragile situation 2 SMARTLESSONS — JANUARY 2011 Usually, one stakeholder group takes the lead in pushing for EITI. In Liberia, for example, the government enforced stakeholder participation and data publication via law. In Sierra Leone, highly vocal CSOs were the driving force. Sometimes the key drivers are large Western companies sensitive to their image, not wanting to be seen investing in a nontransparent environment (see also Table 2). Recommendation 2: Provide a platform for institutionalized dialogue among stakeholders. Challenge: In post-conflict situations, distrust still exists among stakeholders, particularly those that were on opposite sides during the conflict. A community outreach meeting in Liberia. (Photo credit: courtesy Lesson Learned of EITI Secretariat, Oslo). Facilitate—as honest broker and through financing— For example: regular collaborative efforts of a multistakeholder group. • CSOs usually have a natural interest in EITI, because it makes governments and companies more accountable This can be done by, for example: to the country’s citizens and is a crucial step toward the broader sharing of the gains of natural resources. • providing initial capacity building on the extractive industries sector and financial transparency issues (notably • governments can use EITI implementation to for CSOs). demonstrate to their own people the benefits derived from large and sometimes controversial EI projects; to • accompanying the collection and comparison of revenue improve credit-worthiness; and to achieve a recognized and payments data. stamp of approval for good governance. • identifying gaps in EITI implementation that might hinder • companies can prove via EITI that they are contributing eventual successful EITI validation of the country. financially to the development of the country. For instance, EITI implementation allowed Arcelor Mittal The multistakeholder platform helps strengthen democracy, Liberia to show publicly that it contributes 75 percent of restore shattered trust, and prevent a relapse into civil war. In the total tax and royalties from the oil, gas, mining and this way, EITI—besides serving its own purposes—becomes a forestry sector, and is meeting all tax and royalty vehicle for encouraging stability and sustainability in post- requirements. conflict countries. Evidently, such arguments need to be tailored to specific Recommendation 3: Use credible and verified data to country circumstances. Ultimately, when each stakeholder allow stakeholders to negotiate peacefully. understands how its own interest is served by EITI implementation, they all begin to understand their common Challenge: In post-conflict situations—in particular where interest in it as well: namely that common ownership of the conflict was about “who gets what� of the natural natural resource data avoids capture of these resources— resources—reliable, official data concerning the extractive and ultimately of the state—by factions prone to fight with industries sector are rarely available in the public domain. each other. Without having the data verified by an independent body, it Table 2: Examples of Motivations for Implementing EITI Country Motivations Iraq • The political class, including the prime minister, shares a consistent, high-level commitment to EITI—seeing EITI as an essential part of the postwar recovery for Iraq. • Despite remaining social and regional fissures, representatives of the Kurdish areas and the nascent CSOs also see the benefit of actively engaging in EITI, because it serves as a convening forum where few, if any, alternatives exist for such dialogue and concrete actions on transparency and better governance. Afghanistan • Despite the ongoing conflict, there is consensus among stakeholders for EITI as a mechanism to address decision making and transparency concerning mining revenues, once donor contributions start drying up. • These insightful stakeholders understand the potential for EITI in a setting where the mining sector may prove to be the foremost source of formal economic activity and national budget revenues when international development assistance begins to draw down. SMARTLESSONS — JANUARY 2011 3 is difficult, if not impossible, for the different parties to have a constructive dialogue. Box 2: Example of Regional Cooperation Lessons Learned To help Sierra Leone benefit from Liberia’s successes in implementing EITI, the World Bank team organized a visit of the To reduce the potential for recriminations and mistrust, Liberian EITI Secretariat to Sierra Leone in 2009. The new Mines ensure the publication of reports containing all the declared and Minerals Act of Sierra Leone, similar to the Liberia Extractive revenue and payment flows. For stakeholders with divergent Industries Transparency Act, was signed into law at the end of interests to cooperate on sensitive subjects, there must be 2009. unambiguous and reliable data to serve as a basis for dialogue. EITI places immensely rich data and information in The Liberian EITI Secretariat’s visit helped motivate the Sierra the public domain. Leonean EITI Secretariat to speed up implementation of EITI, which had stalled during the 2007 elections. Sierra Leone is now Have all stakeholders agree on an independent auditor or well advanced in its EITI implementation process. reconciler to prove the sensitive data, thus ensuring that the correctness of the data is guaranteed and that all Challenge: In post-conflict countries, resource governance discrepancies will be questioned and disclosed. This then problems may go well beyond the need for transparency of allows for the joint planning of the use of natural resource revenue flows into other realms of the EI value chain (see proceeds toward peace building and poverty reduction. Figure 1). Recommendation 4: Use a preemptive approach to avoid Lesson Learned giving involved parties the opportunity for wrongdoing— instead of going after rule breakers after the fact. The institutionalized EITI implementation framework— multistakeholder group, independent reconciler, capacitated Challenge: In post-conflict situations, corruption often CSOs, and reliable data on revenue flows—can be used to remains a huge problem, especially in resource-rich countries. subsequently intervene at other levels of the extractive Traditional anticorruption measures rely on commissions or industries value chain. courts, which carry great potential for conflict by “cornering� perpetrators, who may respond with bribery—or, worse, Thus, EITI often becomes a springboard for broader reform. recourse to arms. Whether to extend EITI—and to which level of the EI value chain—is a country-specific decision. This can eventually lead Lesson Learned to more transparent negotiations of contracts between the government and companies operating in the extractive Reduce the opportunity for corruption by obliging industries, or to better monitoring of EI firms’ activities. companies and governments to disclose revenue flows— rather than going after corruption ex post. It is relatively easy to extend EITI training activities—carried out by the World Bank and bilateral development partners— Recommendation 5: To foster cooperation toward peace to these additional efforts, especially once stakeholders are building among neighboring countries, bring them generally capacitated on technicalities of extractive together to share capacity-building best practice. industries. For example, EITI was closely integrated with the establishment of the national oil fund in Timor Leste to Challenge: Conflicts over natural resources often involve finance the country’s long-term development, and the neighboring countries. Even in post-conflict situations, government used EITI structures to communicate with lingering grievances among neighboring countries may citizens on broader oil-sector issues. prevent deeper efforts toward peace building. Conclusion Lesson Learned Its considerable contribution to good governance in fragile To create a basis for further cooperation and even and conflict-affected situations has helped EITI become a regional integration, take a precise, technical topic (such recognized brand in many countries. As Negbalee Warner, as EITI and management of the natural resource sector) National Coordinator of EITI in Liberia, points out, “... and provide the platform for regional knowledge through this process, suspicion and distrust are being sharing. 1 reduced, helping to diffuse the tensions that led to conflict in the past.� As an increasing number of countries Such regional cooperation is essential for a stable political successfully implement EITI, this lays the groundwork for environment. Countries that are more advanced in EITI the next steps of good governance. Thus, the World Bank is implementation can help newcomers (see Box 2). currently designing assistance strategies for EITI implementation at the subnational level. Given that Recommendation 6: Use the implemented initiative as a revenue sharing between the federal and regional level is springboard for relevant related governance efforts. often a sensitive issue due to spatial concentration of natural resources, subnational EITI holds significant 1 Such cooperation on a similarly technical topic (coal and steel) allowed for regional potential for conflict-prone regions of EITI-implementing cooperation between former warring countries in postwar Europe in the 1950s, pav- countries (e.g., Indonesia, where conflict about EI resources ing the way for regional integration and leading to the European Union. 4 SMARTLESSONS — JANUARY 2011 Figure 1: EI Value Chain: Five Stages of Turning Natural Resources into Development. has caused friction between the central government and regions such as Aceh). For an example of the benefits of EITI implementation in fragile or conflict-affected countries, see the video (approximately 10 minutes) on EITI & Transparency in Timor-Leste. The authors would like acknowledge the contribution of Anwar Ravat, Diana Corbin, Liane Asta Lohde, Victoria Chang, and Mary- Shannon Bui (all WB/IFC) and Sebastien Brack (International Committee of the Red Cross) whose helpful comments contributed to the production of this Smart Lesson. DISCLAIMER SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. SMARTLESSONS — JANUARY 2011 5