February 2015

Should Australia sign up for the EITI?

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

An Australian pilot of the Extractive Industries Transparency Initiative highlights the benefits of good global practice.

Should Australia sign-up for the EITI? This was the question put to a multi-stakeholder group (MSG) of Australian government, industry and civil society members tasked with piloting the Extractive Industries Transparency Initiative (EITI). The group recently concluded their work and answered the question. They reported options for the EITI to go ahead based on their findings and discussions. A ‘hybrid model’ was proposed to maximise the benefits of this initiative without incurring significant costs for industry.

Whether the advice is taken up by the current government remains to be seen. The Minister of Industry and Science may be hesitant to ask resource companies to comply with more ‘red tape’ in the present economic climate. What is clear from the pilot, though, is that a convergence of interests exists around all stakeholders wanting a better understanding of the value of mining, oil and gas revenues to Australia.

In the last decade the EITI has become an international standard for promoting greater transparency in governance

In the last decade the EITI has become an international standard for promoting greater transparency in the governance of revenues from mining, petroleum and other resource sectors. It entails voluntary reporting by companies of payments made to host governments. Governments in turn report all payments received from companies operating in their jurisdiction. An independent auditor verifies and reconciles the figures. A multi-stakeholder group in each country oversees the process, decides on the scope and materiality of payments and companies to be included and reports to an international EITI Secretariat. The rules were refined and broadened in 2013 (www.eiti.org for details).

The EITI pilot was announced by then Foreign Minister Kevin Rudd and Minister for Resources, Energy and Tourism Martin Ferguson at an Australia-Africa mining event at the 2011 Commonwealth Heads of Government Meeting (CHOGM). The pilot had to consider the implications of EITI candidature for Australia’s legal and fiscal frameworks, conduct a trial reconciliation of payments and a cost benefit analysis of the process.

Extractives’ value to the economy

Industry participants have supported piloting the initiative from the start for a range of reasons. In 2011, Mitch Hooke, who was CEO of Minerals Council of Australia (MCA) at the time, said:

‘The MCA proposed the pilot and we are very pleased the Government has decided to support a program that contributes to the global pursuit of greater transparency and accountability. The EITI will also help inform current and future debates about mining’s economic contribution to Australia. In the absence of the EITI, there has been no mechanism to fully measure mining’s total contribution to all levels of Government in Australia.’ (MCA media release, 27 October 2011).

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At the time, the mining tax debate had divided Australians over whether the extractive boom was delivering enough value to citizens through federal and state coffers. There was value to be had in compiling and communicating full, independently verified figures for mining taxes, royalties and other payments that all parties could agree upon. The EITI was seen as a tool that could deliver this to Australia in addition to its main purpose of guarding against corruption.

Unlike many of the EITI implementing countries, corruption is not the overriding concern here. It is the complexity of taxes and royalties across different levels of government, onshore and offshore, that make it difficult to follow the money from resource extraction in Australia. The diversity of the extractive industries here also means a complete picture is elusive. The mining industry includes some of the most powerful global majors, but also hundreds of junior companies. The petroleum sector spans a wide array of production models and locations, and is an increasingly important part of the revenue mix. Royalties for coal seam gas, for example, are calculated for multiple points of extraction and transportation. The royalty formula for each project is not easy to explain to a public with high expectations of this new sector.

Strengthening accountability

Of course, Australia is not immune to corruption risks. The Independent Commission Against Corruption (ICAC) investigations of mining exploration licences in New South Wales were a reminder of the importance of robust oversight. The pilot reviewed the established transparency and reporting frameworks to consider what value EITI principles could add to existing controls. This aspect of the pilot’s work has much to offer the current debate in legal and government circles on strengthening accountability laws and agencies.

Civil society organisations involved in the pilot have been most vocal about the international and local value of greater transparency of the extractive industries. Transparency International, Oxfam Australia and Publish What You Pay have lobbied for EITI to be adopted in Australia since its inception. As the pilot completed its work, these organisations hoped the G20 Summit in Brisbane would be a stage for Australia to commit to the EITI and other measures against corruption and tax evasion.

There are several different Australian state laws on disclosure of information about mining, oil and gas royalties

Their argument has been two-fold. First, Australians have a right to know and question the flow of revenues between extractive companies and all levels of government. Second, as one of the most resource-rich developed countries within the Organisation for Economic Co-operation and Development (OECD), Australia could lead by example in adopting EITI to verify transparent, efficient revenue collection and oversight of its extractive industries.

During the commodities price boom, the accountability question was whether enough revenue was being collected for government to distribute the benefits to all Australians. Watchdog bodies were concerned about the power of mining, oil and gas companies to influence the governance agenda. The recent downturn in the market should come as a reminder of the cyclical nature of the business. Efficient, appropriate taxation and royalty systems are seen as even more important in this light.

Having a seat at the table of the pilot MSG was a valuable opportunity for civil society organisations to play an equal part in this dialogue with industry and government representatives. Several of the international non-government organisations emphasised the global picture of foreign policy gains to be made by participating in the EITI.

From development agenda to global norm

Australia is one of the largest financial backers of the EITI globally, with $18 million committed for the period of 2006 to 2015. This support is in the vein of overseas development assistance to other countries though, rather than a domestic transparency drive. A commitment to implement EITI here would be a change of course in line with that made by several OECD countries in recent years.

The EITI has been implemented by a total of 48 countries to date. Most are in Africa, and more recently Asia Pacific, Central Asia and Latin America. UK Prime Minister at the time, Tony Blair, outlined the original concept in a speech prepared for the World Summit on Sustainable Development in Johannesburg in 2002. It was initially seen as part of Blair’s African development agenda as one way to deal with the ‘resource curse’ of rent-seeking and graft by kleptocratic elites.

Unsurprisingly, the North-South divide in global politics has been a hurdle for consolidation of the EITI. The BRICS countries – Brazil, Russia, India, China and South Africa – have not signed up to the EITI. As host to the international EITI Secretariat, Norway, early on became the first OECD country to implement the initiative. By applying the standard to their own lucrative oil industry, the Norwegians hoped to align their mouths with their money when calling for better governance in developing countries.

United States (US) President Barack Obama announced EITI candidature for the US around the same time as the Australian pilot in 2011. The pilot MSG here closely followed the US preparations for implementation. The federal system of government in the US offers lessons for Australia, although the state-level mineral rights and royalties system here is quite different. Canada will also be an important case to follow if it moves toward EITI implementation. In June 2013, consultations around mandatory reporting of payments from the mining, oil and gas sectors were announced by the Canadian government.

Peer pressure

The peer pressure for Australia to join the EITI is certainly building. The United Kingdom (UK) and France took the spotlight in Sydney in May 2013 by announcing their candidature plans at the Sixth International EITI Conference. Since then, Italy and Germany have also signed up. The EITI Board accepted the UK’s candidature in late 2014. According to the rules, they now have 18 months to publish an EITI report and two and a half years to be validated as EITI compliant.

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Indonesia was the 31st country to reach compliant status in October 2014. EITI chair, the Rt Hon Clare Short said that ‘By reaching compliance, Indonesia has shown the world that a country with a large and complex natural resource sector can be transparent about its resource revenue.’ The Australian government could point out that accountability is stronger here than in Indonesia without the EITI. In that case, though, it should be less rather than more challenging to implement here.

The pilot has enhanced the credibility of Australian support for EITI implementation in neighbouring countries such as Papua New Guinea, Solomon Islands and Myanmar. Many of the foreign delegations attending the EITI Conference in Sydney last year were looking for comparative practice to get the most from their natural resources. The pilot provided some useful lessons for implementation, such as how to align EITI reporting with other international standards for transnational companies with reporting obligations in several countries. Undoubtedly, what the government decides to do next will be keenly observed in the region.

How the pilot worked

The pilot was chaired and supported by then Department of Resources, Energy and Tourism, which became the Department of Industry in late 2013. The MSG had 21 members, with seven representatives each from industry, government and civil society. Most implementing countries have either 15, 18 or 21 members of the MSG. The relatively large size for the pilot was appropriate given the multi-tiered governance of taxes and royalties and the large, diverse extractives sector in Australia.

Key participants in the MSG were:

  • Federal Treasury, Department of Labour and DFAT
  • The Australian Tax Office (ATO)
  • Queensland, South Australia and Tasmania governments
  • The MCA, BHP Billiton, Rio Tinto and Mandalay Resources
  • ExxonMobil Australia, Shell Australia and BP Australia
  • Transparency International, Oxfam Australia, Corporate Analysis Enhanced Responsibility (CAER) and Jubilee Australia
  • The National Native Title Council, and National Congress of Australia’s First Peoples
  • The Construction, Forestry, Mining and Energy Union (CFMEU).

Important observers of the MSG meetings were the government of Western Australia and the Association of Petroleum Producers of Australia (APPEA).

The 15 meetings of the pilot MSG allowed for a new level of engagement between and within sectors of industry, government and civil society about revenue transparency. This could be expected to deepen if a new MSG was convened for full EITI implementation.

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 more timely compliance should the EITI be implemented. Payments included in the pilot reconciliation were:

  • company tax
  • State royalties (for Queensland, South Australia and Tasmania only)
  • Petroleum Resource Rent Tax (PRRT)
  • upstream excise paid by the North West Shelf
  • Northern Territory Uranium Royalty.

The original idea was also to include the Mineral Resource Rent Tax (MRRT). But it was too early to test this, since the companies participating in the pilot that pay MRRT were only due to report their first payments of this tax (2012-13) in February 2014.

The administrator for the pilot was Deloitte Touche Tohmatsu Ltd. It collected and reconciled the payments listed above using data for a one-year reporting period starting 1 July 2012. Eight companies supplied data for this period: BHP Billiton, Rio Tinto, ERA, MMG, Oz Minerals Ltd, BP Australia, Shell Australia and ExxonMobil Australia. The administrator reported that these payments were reconciled to ‘a high degree of accuracy, with a total of $4 million (0.03 per cent of the total payments) presented as an unexplained variance’ (Pilot MSG communiqué, 27 September 2013).

The administrator also worked with the pilot MSG to map Australia’s revenue collection and reporting system. If communicated well, this should enable more informed public debate on the contribution of the extractive industries to the Australian economy; and in turn the Australian government’s use of these funds.

Who should host an Australian EITI secretariat?

Where to house an EITI secretariat in Australia needs careful consideration. The sensitivity of state governments to perceived interference in their jurisdiction over mineral rights and royalties could make or break successful EITI implementation. For this reason, the common practice of government hosting the EITI in other countries may not be the best option. However, an industry-led EITI may not be acceptable to civil society.

One of the early lessons of the pilot was that consultation on EITI needed to be thorough and inclusive. This degree of consultation goes beyond the terms of reference of the pilot MSG, which may explain the silence from Government since the pilot concluded mid-2014.

Legal implications

Privacy provisions in Commonwealth and State legislation were considered by the pilot as something other EITI candidate countries have had to deal with.

In Norway, the Petroleum Taxation Act prohibits disclosure of tax information received by the government bodies to the public. In order to be compliant with the EITI, Norway issued specific regulations enabling this disclosure to an administrator appointed by the King to reconcile payments and revenues from the extractive industries. In the US, the Inland Revenue Service does not have the authority to report tax receipts from individual companies.

In the UK, Her Majesty’s Revenue and Customs (HMRC), UK’s tax authority, is currently bound by a strict duty of confidentiality to taxpayers as is the United States’ Internal Revenue Service (IRS). The UK EITI is considering two options:

1. as in Norway, enacting law that would provide HMRC the right to disclose EITI data

2. as in the US, to only disclose the information with companies’ consent.

The Australian pilot found that the Tax Administration Act 1953 prevents the ATO from disclosing taxpayer information to a third party. The law does not allow the entities involved to consent to disclosure, as they may in the US. During the course of the pilot, however, an amendment was enacted to reduce legal constraints on information disclosure about company tax. The Tax Laws Amendment (2013 Measures no.2) Act 2013 requires the Commissioner of Taxation to make public the income tax payable by corporate taxpayers with accounting incomes of A$100 million or more per year. This should allow for disclosure of the majority of current company tax payments at the federal level from mining, oil and gas companies. It does not apply to royalties or other taxes.

There are several different state laws on disclosure of information about mining, oil and gas royalties. For example, Queensland has a broad prohibition on disclosure of information regarding royalties in both the petroleum and minerals sectors and New South Wales (NSW) for onshore petroleum. The EITI could get around this in these states by asking companies to consent to this disclosure by the state treasury to the administrator.

In Western Australia, the Victorian and South Australian minerals sector and NSW offshore petroleum, the law is silent with respect to disclosure of information. A more detailed legal review of all participating state and territory governments may be needed as one of the early tasks of EITI implementation.

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Will the benefits outweigh compliance costs?

Costs of the initiative will depend on the scale of it, which payments would be included and how many companies and levels of government would need to report. The pilot began the cost benefit analysis by looking at costs for two scenarios. The first was inclusive of all extractive companies in Australia. The second had only the top 20 companies reporting, which would be likely to capture most of the total revenues paid to government. This model could suit the way in which the industry is structured in Australia and avoid burdening small and medium-sized companies.

After the penultimate meeting of the pilot, a communiqué was released that proposed a third ‘hybrid model’ for EITI implementation. This model:

‘…allows for companies to voluntarily report to the Administrator their material payments to governments and for the Administrator to reconcile a statistically valid sample of these payments. The model would not require all reporting companies to be reconciled annually against all material payments’ (MSG Communiqué, 18 February 2014). The pilot did not try to quantify the benefits of EITI implementation, but found these to be worth the costs if implemented ‘through a practical, considered model for Australia that complements existing systems’ (MSG Communiqué, 18 February 2014).

The lessons drawn from the pilot are likely to have value whether the EITI goes ahead or not. The dialogue between stakeholders within different levels of government, industry and civil society has resulted in a nuanced recommendation to government. If communicated well, this could contribute to a broader awareness within Australian society of how to maximise the benefits of these revenue flows. The EITI applied here could translate the experiences of this resource-rich economy into leadership of global governance in mining, oil and gas.

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