August 2016

Australia signs up for the EITI

  • By Dr Kathryn Sturman, Senior Research Fellow, Sustainable Minerals Institute, University of Queensland

After a successful pilot of the Extractive Industries Transparency Initiative, Australia is set to adopt the program and ensure continued transparency and best practice in the resources sector

The lasting value of Australia’s natural resources should become clearer as the Extractive Industries Transparency Initiative (EITI) is adopted here. On 6 May 2016, the Minister for Foreign Affairs, Julie Bishop, and then Minister for Resources, Energy and Northern Australia, Josh Frydenberg, announced Australia’s candidature to the EITI. The decision is meant to increase transparency about taxes paid by oil, gas and mining companies in Australia. It also sends a consistent message to other resource-rich countries in the region, between Australia’s foreign policy support and domestic commitment to fighting corruption.

The go-ahead on the EITI came after a successful pilot of the global transparency system from 2011-2014. The pilot considered implications for Australia’s legal and fiscal frameworks and conducted a trial reconciliation of payments from a sample of companies and a cost/benefit analysis. Recommendations were made in a report of the pilot multi-stakeholder group (MSG) to government.

Lessons learned

Policy analysts are now reflecting on the lessons learned – or overlooked – during the resources boom. At the height of demand for minerals and hydrocarbons, there was a robust exchange in the media about whether companies were paying enough taxes and royalties. Industry estimates of their contribution to the economy did not always match the calculations of the Commonwealth government of the day. The EITI was put forward in this context as a well-tested tool for reconciling industry payments with government receipts through a multi-stakeholder process. 

The debate motivating the EITI pilot participants five years ago has lost some momentum since the industry downturn. The taxation of windfall profits has not delivered much of a boost to revenues. But the EITI remains relevant, not least because of the growing political focus on tax avoidance and profit shifting. The Senate inquiry into corporate tax avoidance shed light on a problem that erodes the revenue base and thrives in complex, opaque fiscal systems. Multinational oil and gas companies were identified by the Australian Tax Office (ATO) at the inquiry as in the ‘high-risk category’. The Tax Laws Amendment (Combating Multinational Tax Avoidance) Act of 2015 requires multinationals with global revenue of $1 billion or more to provide similar levels of information that public companies provide to the Australian Securities Exchange.

Wasted windfall

Along with asking ‘how much are companies paying?’, an equally important question is ‘what is Australia doing with the revenues generated by extractive industries?’ According to Minifie et al (2013) in a report by the Grattan Institute, it is estimated that the Commonwealth government earned nearly $200 billion over ten years from the mining boom (2002-2012). Of this, ‘tax cuts and spending increases consumed more than 90 per cent’ (Minifie et al, 2013).

A more informed public debate about resource revenues in general might have helped capture more enduring benefits from the boom. The most basic advice economists offer to resource-rich countries the world over is that minerals are non-renewable and prices are volatile. Prudent policies are to invest in education, research and infrastructure and to save for future generations. Norway’s sovereign wealth fund is often mentioned as an example of how oil drilled years ago can pay for state pensions in decades to come.

Evolving standard

The EITI began in 2003 with the aim of reducing corruption in places where oil and mineral wealth contrasts starkly with human development needs. The dual reporting system introduced a new level of oversight of revenues in countries as diverse as Nigeria, Peru, Azerbaijan and the Democratic Republic of the Congo. EITI candidates closer to home are Papua New Guinea, Solomon Islands, the Philippines and Myanmar. Indonesia was the first ASEAN member to reach compliance in 2014.

Since 2013, the EITI has begun to seek answers to questions on both the revenue and expenditure sides of the budget. It has become more than an effective anti-corruption tool for mostly developing nations. After Norway, the UK and United States are OECD member countries that are currently implementing the EITI. According to the EITI website, the overarching aim of the EITI in 2016 is ‘promoting public awareness about how countries manage their oil, gas and mineral resources’. This broader reach will need to be matched by deeper data collection and impact assessment.

At the 2013 EITI Global Conference held in Sydney, the scope expanded to include losses from the public purse other than corruption. Corporate profit-shifting to ‘shell companies’ registered in offshore tax havens is as concerning to OECD countries as it is to developing nations. This was revealed in the Panama Papers, as the Chairperson of the EITI Board, Fredrik Reinfelt, pointed out to member countries. The latest EITI rule, adopted in February 2016, is that countries will have to report beneficial ownership of mining, oil and gas companies. They have until 2020 to regulate and set up a public registry.

Roadmap to implementing the EITI

The three aspects of implementing the 2016 EITI Standard are:

  • establishing a national MSG of government, industry and civil society representatives
  • reporting a range of information on extractive industries annually
  • widely disseminating the information to inform public debate.

Once Australia’s candidature has been accepted by the EITI Board, the first step will be for the government to appoint a senior official to convene an MSG. The invitation to participate must be open and transparent and each sector should select its own representatives. The role of state governments in mining regulation and the diverse profile of industry players make this a challenging task.

If the pilot MSG structure is followed, there will be seven representatives from each of the three sectors to form a group of 21. The industry sector should include the minerals and petroleum peak bodies as well as a balance of multinationals and mid-tier and junior companies if possible. The government sector has to include state and territory governments, as well as federal ministries and agencies such as the ATO. Civil society participation needs to strike a balance between advocacy groups with the know-how to engage wider public debate and representatives of Indigenous peoples, mine workers and others.

The participation of civil society is essential to the success of EITI implementation. The 2016 EITI Standard includes a Protocol of Civil Society Participation to guide candidate countries. This is especially important in repressive or restrictive political contexts, but the principles are salient for democracies too. The level of civil society representation in the EITI is formally assessed twice – for the approval of candidature and in the validation process. The experience of most EITI MSGs is that initial adversarial relations between the three sectors ease as trust and confidence builds through regular interaction.

Deciding scope and materiality

The first requirement of the 2016 EITI Standard is that the MSG oversees the process and decides the scope of reporting. The pilot reconciliation confirmed the relative complexity of Australia’s tax system and shed some light on how it could be reported according to EITI rules. This laid important groundwork for timely compliance with the EITI reporting rules. As recommended, the MSG is likely to decide on a revenue threshold below which companies will be exempt from reporting. This is important in the current financial climate and for the system to be workable. Payments included in the pilot reconciliation were:

  • company tax
  • state royalties (for Queensland, South Australia and Tasmania only)
  • petroleum resource rent tax
  • upstream excise paid by the North
    West Shelf
  • Northern Territory uranium royalty.

The second requirement is to disclose a range of information about the legal and institutional framework and fiscal regime for the extractive industries. This includes information about ‘award of exploration and production rights, licence allocations, and registers of licenses, contracts, beneficial ownership and state participation in the extractive sector’ (EITI Standard, 2016). Apart from beneficial ownership, most of this information has already been collated by the pilot MSG report to government or is publicly available in Australia. The challenge is in presenting it clearly and simply to enable a layperson to see the big picture.

Tracing ownership

On beneficial ownership (ie who ultimately owns or controls a company), the Australian government has begun to look into establishing a register. This has been within its leadership of the G20 in 2014 to promote the G20 standards on tax transparency. It is also in line with the OECD plan against base erosion and profit-shifting. The Australian Securities and Investments Commission has the power to trace the identity of beneficial owners, but a public register would introduce greater transparency. The UK government implemented a register of beneficial ownership in June.

The third requirement is to report on exploration, production and export figures. This is to provide an overview of the scale and prospects for extractive industries. The fourth requirement sets out how revenues are to be reported and reconciled. The level of disaggregation of data is decided by the MSG, but project-level reporting is now required by the EITI Standard where consistent with the US Securities and Exchange Commission and the EU transparency and accounting directives.

The EITI now also tracks where the money goes after it is raised from companies. This puts the onus on all levels of government that receive revenue transfers to manage resource revenues for the greater good. The ‘royalties for regions’ payments in Queensland and Western Australia were funds that the MSG may want to include, for example. Requirement five is to trace how extractive industry revenue allocations are recorded in the budget and distributed, including at subnational levels. The EITI encourages (this is not mandatory) tracking of any funds earmarked for particular geographic regions or programs. 

Tracking benefits

Social spending by companies, traditionally called corporate social responsibility, is to be recorded as the sixth requirement. This will promote public understanding of the overall contribution of the extractive industries beyond taxes and royalties. This information is commonly disclosed by each listed company in their annual sustainability reports. It is seldom aggregated into a complete story of the economic and social contribution, especially to local communities impacted by resource projects. This requirement is mandatory for jurisdictions where companies are legally obliged to make social investments. It is ‘encouraged’ in places where social spending by companies is voluntary. Where possible, these payments should be reconciled.

The EITI pilot MSG considered whether payments to First Peoples by extractive companies were material. The Minerals Council of Australia provided an estimate of approximately $3 billion in benefits paid to First People groups in 2011-12. This included cash payments, native title land access payments, mining royalty equivalents and negotiated benefit and impact mitigation agreements. The challenge is that most of these payments are confidential, as are many compensation and benefit agreements with private landholders such as farmers. The pilot MSG decided these payments were not material under the 2011 EITI Standard. However, the report also noted that this would need to be revisited when applying the revised EITI Standard.

Measuring success

The final requirement of the EITI Standard (apart from the timelines for compliance) is possibly the most challenging. It is to report on the outcomes and impact of EITI implementation. For example, how should the quality of public debate about resource governance be measured? How could the link between reporting, transparency and fewer cases of corruption or tax avoidance be made? These are issues that could keep social researchers and policy consultants busy for years. But at least the principle of transparency is well established in Australian law and society.

Beyond principles, both industry and government have to be accountable to the public interest for maximum benefits to flow from Australia’s mineral and energy resources. The participation of civil society is a key aspect of the EITI that fosters this accountability. As EITI practitioners Jonas Moberg and Eddie Rich have noted, the key ingredient for success of this initiative is mutual respect between: ‘…government leaders willing to embrace reform and tackle inherent vested interests; company representatives willing to look beyond narrow self-interest to establish long-term licenses to operate; and civil society representatives ready to couple activism with engagement’ (Moberg and Rich, 2015).  

References

EITI Standard, 2016. Edited by Dyveke Rogan. Available from www.eiti.org/document/standard

Minifie J, Cherastidtham I, Mullerworth D and Savage J, 2013. The mining boom, impacts and prospects [online], The Grattan Institute. Available from: grattan.edu.au/wp-content/uploads/2013/07/194-mining-boom-impacts-and-prospects.pdf

Moberg J and Rich E, 2015. Beyond governments: lessons on multi-stakeholder governance from the EITI (Greenleaf Publishing: Sheffield).

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