10th EAST AFRICA PROCUREMENT FORUM 1 – 3 November - Kampala, Uganda - PROMOTING OPEN CONTRACTING IN THE EXTRACTIVES SECTOR IN EAST AFRICA EDGAR ODARI

The disproportionate nature of mining “The business of mining is perhaps the most disadvantageous lottery in the world, or the one in which the gain of those who draw the prizes bears the least proportion to the loss of those who draw the blanks”. Adam Smith, The Wealth of Nations (1776)

Open Contracting in Extractives The concept of Open Contracting in the oil, gas and mining sector gained prominence in the wake of the ‘boom and bust’ commodity cycle (2000-2012). Commodity prices increased in price significantly with metals and minerals increasing by 260% between the years 2000 and 2007 alone. Between 2002 and 2006 average net profits of biggest mining firms increased by more than 1,400%, going up by 64% between 2005 and 2006 alone. (PWC,2007) However, this windfall did not translate to direct benefits to the countries and citizens where the minerals came from. One of the key challenges was the secrecy surrounding these agreements that made citizens unable to reasonably determine the impacts these projects had on their livelihoods, the local environment, health or that government negotiated a fair deal. The opening up of the contracting process is seen as being important to among other things: (a) create a level playing field for investors; (b) to ensure that information is not lost between different government bodies; (c) to demystify the process for citizens; and (d) to ensure relevant consultations are held and safeguards are met.

Why Transparency is Important in the Extractive Industry Improving trust and managing expectations - Awareness of the terms within contracts helps lay the foundations of trust between society, government and companies, and helps avoid misperceptions around agreements Management of local tensions - Failure to release contracts has led to national and local tensions providing risks to the investments of oil companies Corruption: Lack of transparency facilitates corruption and investments that do not pursue what is in the public’s best interest Attracting Investment: Transparency in contracting process would send a signal that attracts quality investors Increased Tax Revenue: Transparency in tax systems adds pressure for fairer fiscal terms

Governance in the Extracive Sector Mineral • Contract governance Fiscal governance Governance • Institutional governance EIAs Environmental • Environmental liabilities and Governance Remedies Environmental Funds/Bonds Social • Compensation & Resettlement issues Governance • Free Prior & Informed Consent (FPIC)

Agreements/Contracts Contract Governance Geological Information; Open and Competitive Bidding Process Mineral Right Allocation Ownership of Mineral Rights Beneficial Ownership Information, Technical Competence, Financial Capacity Mineral Agreements/Contracts Mandatory Disclosure of primary contracts, appendices, permits, and marketing contracts Anti-corruption in Contracts Conflict of Interest of public officials in contracting

Need for Contract transparency requirements Publish their contracts in an accessible, digestible manner, including summaries of the key contract terms. 1. Adopt open contracting principles throughout whole process of concession award and management of contracts 2. Fully implement contract transparency laws 4. Analyze and use information to negotiate better, more balanced deals, backed up by robust modelling 5.

Requirement: Open contracting principles This must be expressed across the entire contract value chain. Open contracting in the extractive industry requires that: The process for contracting/licensing of oil or mining blocks must be open and competitive, Justification for award of contracts must be published Contract disclosure must be mandatory, and The products of Contracts (oil production data, sales price, revenues, costs) must not be held confidential. Information on beneficial ownership must be disclosed to prevent conflict of interest situations The National Oil Company must be regulated and have financial transparency Citizens must be allowed to make public comments on contracts (citizens participation)

Fiscal Governance Payment Disclosure Tax Avoidance Mandatory disclosure of company payments to host governments – royalties, taxes, surface rentals, participation interest Tax Avoidance Debt loading, profit alienation Illegal Financial Outflows Mis-invoicing, Transfer pricing, Mandatory Disclosure of primary contracts, appendices, permits, and marketing contracts; criminality,

Global initiatives that support payment disclosure G8 Unequivocally Endorses Global Mandatory Disclosure Laws for oil, gas and mining – May, 2011. EU Approves New Laws for extractive Transparency – June 2013 I171 EU-listed co’s 419 large, non-listed co’s and 26 forestry co’s Two years to turn EU law into national law – some countries have already done this. Canada passed Transparency Measures Act Full backing of 2 largest Canadian mining industry associations - the Mining Association of Canada (“MAC”) and the Prospectors and Developers Association of Canada (“PDAC”) - Jan - 2014

Global initiatives on mandatory payment disclosure EITI requires disclosure of payments Approved by oil, gas, mining companies as well as some participating governments US Dodd Frank Reforms Act (Trump Effect Neutralised Benefits) Swiss Parliament and Federal Council Agree on Mandatory Disclosures Major market for oil and mineral trading companies

The AMV - Transparency along the Mineral Value Chain Permitting Exploration Extraction Decision Getting good mining agreements Ensuring revenue declaration Managing Financial resources Investing for sustainable development Decision to permit exploration should be based on clear laws and regulations, community consultation Decision to permit exploitation of mineral deposit should be based on clear laws and regulations Contract discussions & all contract terms and fiscal terms should be publicly accessible – access to information Information on revenues should be in the public domain to facilitate enforcement and reduce tax avoidance Disclosure of operations and financial data of savings, stabilization and/or investment funds The disposal of revenues should be fully transparent Acquisition of Mineral Rights Exploration Activities Mine Development Mine Operation Commodities Marketing Managing Environment Mine Closure 13

Follow up Mechanisms and Dialogue in Open Contracting There is need for collective effort towards promoting open contracting in the extractive sector This can be done through the regional mechanisms such as the African Mining Vision which AU countries have committed to The African Mineral Governance Framework (AMGF) developed under the AMV could be a way to promote open contracting in the extractive sector. This can be further supported by the other existing mechanisms such as EITI but AMGF should be the anchoring mechanism as it goes beyond management of revenues