Mr Daniel Kaufmann (bio) is a member of the Board of the Extractive Industry Transparency Initiative (EITI) and President of the Natural Resource Governance Institute (NRGI). His following lecture (and transcript further below) is part of the online course Natural Resources for Sustainable Development: The Fundamentals of Oil, Gas, and Mining Governance‘. This MOOC is managed by the UN Sustainable Development Solutions Network (SDSN).

Let me address the issue of sunshine being the best disinfectant. In other words, what is transparency? What is it for real? What is it all about, and how does it relate, and why is it important in natural resources and more broadly?

So as usual for the sake of rigor, we always start with a question of what is it and how do we define it. So drawing from the literature, we have defined it in some older papers as the flow of relevant, timely, and reliable information. Information in the economic, financial, social, institutional, and political realms, which is accessible to all relevant stakeholders.

Now the role of the public sector in proactively, not reactively or defensively, but proactively providing such information is critical for transparency to be there. The information not only needs to be made public, but it has to fully subscribe to the principles of timeliness, reliability, relevance, accessibility, and being understandable. If the central bank issues a report for instance, but much delayed or hard to access, hard to understand, not with the most relevant data, lots of clutter, we call it zombie transparency. It’s the difference between disclosure on paper and ticking the box, and effective transparency.

Equally damaging to transparency and when it also becomes zombie transparency is when there is a disclosure of a report and the report may contain useful information but it cannot be translated into effective accountability because there’s no free press. Civic space is being repressed so those using the data to make government accountable and trying to analyse it or report about it risk even being put in jail. And that’s happening in quite a number of countries nowadays, increasingly.

So that’s a very particular type of zombie transparency. It’s not effective transparency.

In fact, in natural resources, the evidence does show as we see it in front of us from the research we have been doing, that over the past decade, there have been, on the one hand, some advances in terms of disclosure of extractive revenues, in part thanks to the Extractive Industry Transparency Initiative or EITI, where I’m on the board, but at the same time what has been happening is that civic space is narrowing. There’s increasing suppression of civil society, of NGOs, of a free press, and therefore, in those types of settings, there’s been no translation between disclosures, narrow disclosures, to effective accountability, making the government accountable. So we cannot call that effective transparency.

So that’s a very serious issue, particularly in resource-rich countries and particularly so in oil-rich countries, even more so than in mining-intensive countries.

These facts support the broader point that there are very important roles, not only for the public sector in effective transparency, but also for civil society. It has to have an enabling environment, but it has to also take upon its own responsibility and very importantly the private sector who plays a key role in natural resource, multinationals, and state-owned enterprises also and domestic companies as well.

Oversight bodies such as parliament play a very key role as well. The judiciary and rule of law institutions more generally are absolutely key in this case too. What does it mean if we have disclosure and so we have transparency on paper and maybe some reforms of transparency, but then there is complete impunity? Transparency with impunity does not deliver the goods, another form of zombie transparency. There has to be transparency with sanction. So there is an interaction, one cannot look at transparency alone. Transparency is necessary, but it’s not sufficient alone, and we see that also in the data and the research we have done.

Now, does that mean that everything should be fully disclosed for effective transparency, everything is up to public disclosure? Not necessarily. There are very legitimate exceptions, and we know about national security, about privacy issues and so on. But those are exceptions, and they have to be very narrowly defined and not be used as an excuse for broadening the scope of opacity like it is done in many different countries.

And in natural resources in particular, let’s ask then: what are the main types of transparency that are expected, that are recommended, that are crucial?

One is transparency disclosure for contracts. The contracts that are signed between government and extractive companies and including also all the licensing framework and so on. Critical.

Then, transparency related the operations of extractors, particularly payments but also allocations of licenses, social, environmental assessments, and then the revenues, the payments. And that’s very important to be disaggregated on a project-by-project basis. Otherwise, a lot of corruption or transfer pricing or underpaying government can happen if it’s overly aggregated. So for real scrutiny and being able to make the companies and the government accountable, it has to be very detailed project-by-project information.

Then it’s crucial, important to also have information on state-owned enterprise or company, on the natural resource funds or sovereign wealth funds and how they operate, and last but not least, natural resources. It’s very important to know, to be fully transparent about who the beneficiary owners, the ultimate beneficiary owners of these companies are, which very often are hiding behind the front and sometimes it can be related to public officials or to high-level politicians and also that hiding is another part of the corruption problem facing natural resources.

So from there it’s pretty straightforward and very quick to cover the issue of why transparency in natural resources is obviously so important, because opacity is where corruption breeds.

But natural resources are particularly vulnerable to opacity, so it’s not to be looked at equally to the rest. It’s a particular challenge because natural resources like in oil and mining, there are issues of technical complexity that if one side, if only the companies have the information and not the rest, that gives them an insider advantage which is enormous.

There are real issues also of state control, state control over resources. The fact that they are so concentrated, whether it’s mining and oil resources, basically confers the potential for much more capture by a few particular interest of these vast resources which are incredibly lucrative and subject to rents, and therefore it’s particularly important to open these up to sunshine and to have scrutiny because ultimately these natural resources belong to the people and the ground and it’s part of the national patrimony belonging to all citizens. There are many reasons of scale also in these industries. Why competition is more limited than say for manufacturing or others, which again suggests it’s very important to have transparency.

Transparency is also a very important substitute sometimes to many regulations and many of the countries which are emerging still don’t have enormous capacity to regulate and to oversee. Transparency in essence creates millions of auditors, all citizens and so on. So instead of having the fifty auditors in the public audit agency, it confers and passes much of this responsibility to the people itself and increasingly nowadays NGOs, think tanks, academics, and so many others can play such an important role in this issue of oversight and researching, analysing the data, reporting on that, and making it for more accountable governance and management in the sector.

In this context then, very important tools have been developed including by us and with partners. One is the Natural Resource Charter which is discussed elsewhere and in other chapters. Then there is the benchmarking or index diagnostic at the country level which uses a charter as a guide and right now, it’s taking place in Tanzania very much in-depth, led by the government of Tanzania together with the other stakeholders analysing the whole gamut of issues related to transparency, governance, and accountability.

ResourceGovernanceIndexAnd then there is a Resource Governance Index which we have developed and we’re going to have another measure by next year. We have one from a couple of years ago, we see it in front of us, the whole gamut of fifty-eight countries which are resource relevant, which we assess very much in-depth, and it’s multi-dimensional in terms of contracts, licenses, revenues, oversight mechanism, the broader governance enabling environment as a rule of law, control of corruption. Voice and accountability are very important. So devil in the details is very important in these assessment tools.

The results of when we did it for 2013, recently, were quite sobering actually. Of these fifty-eight countries, only 20% came out with having satisfactory quality of transparency and accountability.

The rest had much more challenge, some in governance crisis. We can say as we see some in the red zone, it’s all available on the web, including going country by country with a very detailed diagnostic if one is interested in going further into the data.

The good news is that there is a 20% that shows that yes, it can be done and it’s not intractable, there is no pre-determined oil or resource curse in this case. And those countries, a set of eleven countries and then there are some that are doing relatively okay, include quite a few emerging economies, particularly in Latin America. There are also some in Africa and so on. So it’s not just the domain of the Norways of this world that one can make progress and do okay. So thanks to political will and to these technocratic approaches and tools, progress can be made.

There’s also progress vis-à-vis the companies, oil companies like Tullow Oil and now Statoil that are paving the way in terms of showing that detailed transparency pays even for them, rather than being opaque like many of the larger oil, big oil companies that still have not fully embraced full disclosure in terms of payments and contracts and so on. The same is happening in mining, that increasingly there is more disclosure, but much more than the private sector needs to be done as well in this realm of transparency.

Let me conclude with three overarching points.

One is that transparency is absolutely necessary. It’s so important in a major way, but it’s insufficient on its own, alone. It has to be complemented with civic space, with accountability, with rule of law, otherwise it’s zombie transparency as we mentioned.

The issue of transparency, that’s the second point, is particularly critical in natural resources, and there it’s a combination in natural resources over transparency in contracts and in payments. How can one assess whether payments are high or not if they are reported and are having these payments to government if we don’t know the details on the contracts and many of the companies are resisting disclosure of the contracts. So one has to look at the two together, who are the real beneficiary owners. So to know about the real owners is critical in this context as well.

Last but not least, the new set of tools, diagnostic tools, like the RGI or the Resource Governance Index, and initiatives like the EITI and others, are promising, and all these are making inroads.

But much more must be done, and we all have to improve with these tools and with these initiatives and learn the lessons so far. Thank you very much.