A CCOUNTABILITY AND TRANSPARENCY IN THE E XTRACTIVE S ECTOR Tsegaye Lemma, BDP/UNDP (14 Nov 2012, Guyana)

N ATURAL R ESOURCES KEY FOR S USTAINABLE D EVELOPMENT “Protecting and managing the natural resource base of economic and social development is the overarching objectives of and essential requirements for sustainable development” Rio+20 Outcome Document, 2012 Corruption remains as one of the main governance bottlenecks to realizing the full potential of NR

T HE STATISTICS REMAIN STAGGERING … US$2.6 trillion: annual cost of corruption (more than 5% of global GDP) $148 bn or 25% of national income: cost of corruption in Africa US$3.5 trillion in annual gross revenue from the extractive sectors $1 trillion: annual illicit money flowing out of developing countries $10/$1: The ratio of illicit money flowing out of poor nations to the amount of foreign aid

W HY THE EXTRACTIVE SECTOR IS PRONE TO CORRUPTION ? high-level discretionary political control High concentration of resources in one area blurring of public, shareholder, and personal interests with regard to extractive sectors State-owned companies and political influence limited competition and fewer checks and balances complex technical and financial processes open for manipulation of data (cost inflation) Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)

I MPACTS OF CORRUPTION IN NR SECTOR i. the elite capturing those rents and instability, as competing groups fight for control over resources; ii. undermine democracy and the rights of communities including indigenous peoples iii. less accountability to citizens due to overreliance on extractive revenues rather than taxes, and iv. negative externalities as environmental and social safeguards can be ignored or bypassed

R ISKS IN THE E XTRACTION P ROCESS Undue influence and bribery to ignore competing rights to resources Bribery to influence the decision on allocation of land for resettlement 1. Ownership Bribery to award the license to an entity other than the best applicant Licenses awarded to friends and business contacts 2. Exploration Submit false inventories that underestimate actual volume of extraction to receive bribes Bribing security and public officers to facilitate the theft of oil from pipelines and well-heads (e.g., illegal bunkering) manipulating metering systems to conceal outflows 3. Extraction Misreporting on volume or quality by operating company, inflation of operational costs; Undue influence to allow under- and over- invoicing to benefit from illicit financial flows; 4. Revenue collection Embezzlement and patronage during revenue appropriation to local gov’t & communities Undue influence on the design of the benefit distribution system which determines who receives the payments and benefits 5. Investing

R ISKS IN R EVENUE C OLLECTION Issue: illicit flows from the extractive sector through transfer pricing Options: Establish clear and specific rules for calculating cost and prices Example: Bolivian law requires companies to calculate royalties based on official price quotes from the London Metal Exchange. This is easier to enforce than laws that rely on "arm's-length prices," which can be difficult to determine with certainty ( Revenue Watch Institute)

R ISKS IN R EVENUE C OLLECTION Issue: undue influence to allow under-or over-invoicing to benefit from illicit financial flows Options: Promoting revenue transparency Example: EITI In Peru, since the introduction of EITI (2006) corruption has reportedly declined by as much as 14% (no such effect was seen in Mali after EITI) In 2012 Peru has been declared EITI compliant having a functioning civil society is in place prior to EITI implementation

R ISKS IN INVESTING & BENEFIT SHARING Issue: Embezzlement and patronage during appropriation of revenues to local governments and communities Options: promoting transparency portal Example: Transparency Portal & Public Spending Observatory in Brazil

G LOBAL INITIATIVES Contract and revenue transparency instruments (“publish what you pay”; “EITI”) Certification instruments (Kimberly Process) Broader governance standards (“Natural Resource Charter”) LESSONS: Extend transparency and accountability along the value chain; Move from voluntary to mandatory transparency Connect anti-corruption, illegal exploitation and tax agenda

H OW CAN UNDP CONTRIBUTE ? Knowledge capture and policy advocacy educate policy makers & practitioners on challenges and policy options to prevent corruption in NR sector Strategy design and legal reform Corruption vulnerability/risk assessments Improve the governance of NR revenue management Design inclusive and efficient benefit sharing systems, Capacity development Public finance, Procurement, Contract monitoring and oversight Specialized trainings for investigating corruption, e.g., forensic audit, financial intelligence, etc. South-South Knowledge Exchange Facilitate south-south cooperation and peer learning on how best to manage NR

T HANK Y OU !