New index shows extractives governance lacking in some countries

Compliance and risk officers in the oil, gas, and mining sectors have a new index by which to compare countries’ natural resource governance efforts. The index also can be used to gauge which countries pose a high risk of corruption in these sectors.

The Natural Resource Governance Institute (NRGI) last month published its Resource Governance Index, comprising 89 sector-specific assessments that together produce 82 percent of the world’s oil, 78 percent of its gas, and a significant proportion of minerals, including 72 percent of all copper. The index assessed a total of 81 countries (in eight countries NRGI assessed more than one sector).

The NRGI’s mission is to support countries’ pursuit of their use of natural resources with the objective of development. “We believe that natural resources must be used, first and foremost, to foster the economic and social development of countries,” Ernesto Zedillo, chair of the NRGI and former president of Mexico, said at a recent panel discussion unveiling the index results.

In some countries, it is “strikingly evident” that natural resources are wasted due to corruption and the mismanagement of spending, contributing in extreme cases to an economic, financial, and political crisis, Zedillo said. The goal of the index is to measure whether countries are managing their oil, gas, and mining revenues from their natural resources in the right way, he said.

The index, formulated using a framework of 149 questions, scores countries on a scale of zero to 100. To arrive at each country’s score, the index analyzed the following three index components and their related subcomponents:

“Companies have the greatest influence where they act collectively, rather than unilaterally.”
Aidan Davy, Chief Operating Offficer, International Council on Mining and Metals

Value realization: governance around the allocation of extraction rights, exploration, production, environmental protection, revenue collection, and state-owned enterprises.

Revenue management: national budgeting, subnational resource revenue-sharing, and sovereign wealth funds.

Enabling environment: measures the broader governance context, considering political stability, control of corruption, rule of law, freedom of expression, and other factors based on pre-existing research.

Based on each country’s composite score, results were grouped into the following performance bands:

Good (a score of 75 or better): A country has established laws and practices that are likely to result in extractive resource wealth benefiting citizens, although there may be some costs to society.

Satisfactory (a score between 60 and 74): A country has some strong governance procedures and practices, but some areas need improvement. It is reasonably likely that extractive resource wealth benefits citizens, but there may be costs to society.

Weak (a score between 45 and 59): A country has a mix of strong and problematic areas of governance. Results indicate that resource extraction can help society, but it is likely that the eventual benefits are weak.

Poor (a score between 30 and 44): A country has established some minimal procedures and practices to govern resources, but most elements necessary to ensure society benefits are missing.

Failing (a score below 30): A country has almost no governance framework to ensure resource extraction benefits society. It is highly likely that benefits flow only to some companies and elites.

Overall, the index data found 66 countries to be weak, poor, or failing in their governance of extractive industries. Less than 20 percent of the 81 countries assessed achieved an overall rating of “good” or “satisfactory.”

With an overall index score of 88, Norway ranked highest in its governance of oil, gas, and mining followed closely by Chile (81), the United Kingdom (77), and Canada (75). All four regions received “good” performance rankings.

Fifteen other countries received overall “satisfactory” scores. Among them were the United States (Gulf of Mexico), with an overall score of 74, followed by Brazil, Columbia, and Australia (Western), each with a score of 71, and India with a score of 70.

The lowest scores were concentrated in Eritrea with a score of 10, followed by Turkmenistan (11), Libya (18), Sudan (21), and Equatorial Guinea (22). The five other countries to receive failing scores were the Democratic Republic of Congo, Myanmar, Mauritania, Zimbabwe, and Uzbekistan.

Compliance and risk officers would be amiss to risk-rank each country based on either the country’s wealth or the wealth of its natural resources. Of the 13 high-income countries in the index, for example, six countries—all in the Middle East—fail to achieve either good or satisfactory composite scores. The worst-performing in this group is Saudi Arabia, with a score of 36 points.

Conversely, several middle- and low-income economies do comparatively well, as in Brazil, India, and Colombia. Even many of the poorest countries in the index, while failing to achieve good or satisfactory composite scores, perform well in specific sub-components.

Moreover, scores for resource governance vary within countries, and even within the same region. In Latin America, for example, Chile scored 81 points, and Colombia’s oil and gas sector 71, in contrast to its neighbor Venezuela, which scores only 33. 

Corruption, disclosure, and governance. It appears that the countries that have better control over corruption are more likely to follow the rules, laws, and regulations that they’ve implemented for extractives governance. In the index, countries received an average score of 54 for their legal frameworks (e.g., whether a country has a rule requiring the disclosure of contracts), but just 45 points for the implementation of those laws in practice (e.g., whether officials have disclosed contracts).

This gap between law and practice, however, is larger in countries where corruption is systemic, the index found. “Where there is endemic corruption, there can be laws on the book, but they are not implemented,” said Daniel Kaufmann, president and CEO of NRGI, who also spoke on the panel. “For countries performing relatively well, there is almost no gap.”

The index also measured the extent and quality of three types of disclosures: payments made to governments; the identities of individuals who personally benefit from companies with which the government does business; and the deals governments and companies strike.

The analysis revealed progress in the disclosures of revenues generated by the sector, showing company-level information, how many royalties, fees, taxes, and licenses these countries have received from companies.

One area where transparency can be improved, however, applies to the disclosure of the terms of agreements that governments sign with a company in their contracts. “By and large, those are still not available for public scrutiny,” said Elisa Peter, executive director at Publish What You Pay, a group of civil society organizations that advocates for financial transparency in the extractive industry.

Twenty-two countries have laws in place requiring the disclosure of public contracts, but only eight have disclosed contracts they’ve signed. “If you don’t have access to those terms of the agreement, then citizens cannot hold companies and governments to account,” Peter added.

In fact, the index showed a strong correlation between civic involvement and good governance. In countries where citizens are limited in their ability to participate in selecting and monitoring their government and lack freedom of expression, governance of the extractives sector is fundamentally impaired.

Being able to have an open debate about governance practices in the extractives sector is important. “There are countries where we cannot have these kinds of open debates,” said Carole Nakhle, chief executive officer at Crystol Energy.

Open communication allows for the exchange of ideas, expertise, and knowledge, Nakhle added. “In the countries that rank poorly, this kind of open debate is still lacking,” she said.

State-owned enterprises. The index further revealed room for improvement in disclosures by state-owned enterprises (SOEs). Of the 74 extractive-sector SOEs assessed, Chilean state-owned copper mining company Codelco received the highest score for its disclosures and corporate governance, with India’s Oil and Natural Gas Corporation receiving the second highest score. In total, nine SOEs ranked in the “good” category.

From a compliance standpoint, it may be helpful to learn from their leading governance practices. These practices include establishing independent governing boards, making appointments based on well-defined processes, and emphasizing technical expertise in contracts and licenses.

Of the 14 SOEs classified as failing, Eritrean National Mining Corporation scored the worst. This group includes Saudi Aramco, the largest energy company in the world, with a failing score of 27.

TOP AND BOTTOM TEN—RESOURCE GOVERNANCE INDEX

Below is a ranking of the top and bottom ten from the Resource Governance Index.

SOEs on average score 56 points for disclosures and rules related to other aspects of SOE governance, but score only 22 for their conduct in selling oil, gas, and minerals. “The index shows this is an area of great opacity,” Peter said. “Yet, one that, if it is addressed, has the potential to curb corruption in the sector.”

The sales of many oil-producing countries produce the most public-resource revenues, and without strong governance, these sales are susceptible to corruption, the index stated. Countries that provide minimal information on how they sell their countries’ oil include SOEs in Ecuador, Kuwait, Mexico, Saudi Arabia, Sudan, United Arab Emirates, and Venezuela.

Another 48 countries’ SOEs received unsatisfactory ratings. The index identifies weak governance in the China National Petroleum Company, and failing governance in the Abu Dhabi National Oil Company, the Gabon Oil Company, Turkmengas, and Saudi Aramco.

Industry call to action. From an industry standpoint, engaging in governance debates is of utmost importance. “Companies have the greatest influence where they act collectively, rather than unilaterally,” said Aidan Davy, chief operating officer of the International Council on Mining and Metals (ICMM). “Therefore, we see it important to engage in governance debates.”

ICMM, for example, is a collective group of 23 mining and metals companies, as well as 34 national and regional mining associations and global commodity associations in 58 countries of operation. All ICMM members are required to implement ICMM’s 10 Principles into their corporate practices, which serve as a best-practice framework for sustainable development in the mining and metals industry.

Those 10 principles, which are described in further detail on ICMM’s website, are:

Principle 1: Apply ethical business practices and sound systems of corporate governance and transparency to support sustainable development;

Principle 2: Integrate sustainable development in corporate strategy and decision-making processes;

Principle 3: Respect human rights and the interests, cultures, customs, and values of employees and communities affected by [the extractive sector’s] activities;

Principle 4: Implement effective risk-management strategies and systems based on sound science and which account for stakeholder perceptions of risks;

Principle 5: Pursue continual improvement in health and safety performance with the goal of zero harm;

Principle 6: Pursue continual improvement in environmental performance issues, such as water stewardship, energy use and climate change;

Principle 7: Contribute to the conservation of biodiversity and integrated approaches to land-use planning;

Principle 8: Facilitate and support the knowledge-base and systems for responsible design, use, re-use, recycling and disposal of products containing metals and minerals;

Principle 9: Pursue continual improvement in social performance and contribute to the social, economic and institutional development of host countries and communities; and

Principle 10: Proactively engage key stakeholders on sustainable development challenges and opportunities in an open and transparent manner.

For companies willing to step up their disclosure efforts, a good starting point would be to endorse the principles of the Extractive Industries Transparency Initiative (EITI), a leading voluntary initiative with the objective of improving transparency and accountability in countries rich in oil, gas, and mineral resources.

Even with uncertainty surrounding implementation of a U.S. rule requiring extractive payments disclosure, the pressure placed on oil, gas, and mining companies to be more transparent and accountable will only intensify, particularly since other countries have passed stringent extractive disclosure laws of their own.

The European Union, for example, requires listed and large non-listed extractive and logging companies to report all material payments to governments country-by-country and by project, where payments have been attributed to specific projects. Canada, too, requires oil, gas, and mining companies active in the country to publicly disclose on an annual basis specific payments made to all governments in Canada and abroad.

Companies in the extractives industry are encouraged to closely watch developments in the payment disclosure space as other countries may decide to implement similar initiatives in the coming months and years.