For developing countries rich in natural resources, nothing matters more than to be able to exercise effective control over their vast profits from mineral resources. The absence of such control is said to lead to poverty, conflicts, and the rise in authoritarianism and corruption.
It was to combat the ‘curse of resources' that at the summit for Sustainable Development in 2002 Tony Blair proposed the creation of the Extractive Industries Transparency Initiative (EITI). The idea of the Initiative was simple. Companies report how much they have paid governments for the extraction of oil, gas and metals. Governments report how much they have received from companies in the form of taxes, duties, royalties, bonuses and other payments. All this data is checked by an independent auditor in accordance with international standards. Then the report is published ‘to a wide audience in a publicly accessible, comprehensive and comprehensible manner.'
In the course of developing the UN Convention against corruption, 17 nations (including Germany, Italy, the UK and France) submitted a draft resolution at the General Assembly supporting the EITI. Since 2003, it has also received regular support from the G8. A declaration was just passed in Hokkaido, for instance, that ‘encourages emerging economies and their companies to support this Initiative'. The international community - for obvious reasons - does not expect to hold the EITI experiment directly in Russia, a country where, according to the pithy observation of one State Duma deputy, ‘a third of the world's resources are controlled by three people'. However, it will do its best to ensure that at least state companies of, say, BRIC (Brazil, Russia, India and China), do not spread unsatisfactory business practices beyond their own countries.
The main driving force for introducing the Initiative came from the UK's Department for International Development(DFID) and the World Bank, which manages the funds of the EITI Multi-Donor Trust Fund. The UK, the Netherlands, Norway and Germany are major donors to this fund.
The World Bank considers the key performance indicators (KPI) of its work to be the number of countries that are introducing EITI, the number of EITI reports, EITI conferences etc. At the last conference in Oslo, ex-World Bank President Paul Wolfowitz reported that the World Bank already supports the EITI program in 22 countries. But ‘improving and expanding global standards' is indeed a difficult task, and so far EITI reports have only been launched in 10 countries. There have been just five pioneers: Nigeria, Azerbaijan, Gabon, Kyrgyzstan and Kazakhstan.
The first thing that strikes one even from a brief glance at all these reports is that they are surprisingly diverse. It is strange that the specially founded World Bank EITI team did not specify a common methodical approach to the results of work.
In Oslo, Blair and Stoltenberg stressed that the EITI was creating a new standard for a unified effort between companies and nations, civil society and investors. Soros, who sponsors the movement ‘Publish what you pay', which preceded the Initiative, confirmed: ‘The EITI is one of the most effective mechanisms for establishing a unified global standard of transparency and accountability.'
However, the only thing the reports have in common is their complete disregard for the criteria stipulated by the EITI. No mention is made of them at all. The problem is that these criteria contain a straightforward requirement: information on all significant payments to the state and revenue from companies should be checked in accordance with international auditing standards. This requirement was not observed in any of the reports. So mentioning the EITI criteria would have been somewhat inconvenient - although in several cases the World Bank specially ordered auditors to express their opinion on the compliance of information about payments with public criteria.
Nigeria - setting the standard for best practice
The most eloquent example comes from Nigeria. It was the first country to join the Initiative. The World Bank and the UK government ‘see Nigeria as the leader in introducing EITI'. Wolfowitz even said that Nigeria ‘had set the standard of best practice for the EITI... and went much further than its requirements...'. What is going on here?
With money from the Multi-Donor Trust Fund, the World Bank established an N-EITI secretariat office in Abuja. This was a good thing. A British accounting firm was paid $2,340,606 for preparing the Nigerian report which the World Bank called a ‘financial audit'. Ah well. But an American consulting firm which took on the technical support for this project carried out a further lot of work, including the terms of reference for this ‘audit' - for another $475,000. This may be a quibble, of course, but it's worrying, as the ‘terms of reference for the financial audit' could only ever be the relevant international standards.
Just imagine: a public company orders a routine audit of its report forms, but the Chief Financial Officer does not just reach an agreement with the auditor on a price and state the standards (e.g. American or international) used for the report. It recommends that a further 20% of the audit sum be paid to certain consultants who will show the auditor how to do the audit. Wouldn't you suspect this manager of financial incompetence, at the very least? And what if the money has already been spent?
The worst of it is not even that the money has already been spent. The Nigerian experience may also be instructive as a way of studying and describing the oil industry of this country. And like any regulatory process, it may help to ‘identify a series of problem areas where the sector management is not transparent'. Perhaps this process of identification may even help to ‘swell the government's coffers by over $1 billion' - as the EITI bulletin claims.... We were not in Nigeria, we took all this data from open sources - so we cannot be sure that this did not happen.
What we can state with confidence, however - despite the claims of the World Bank - is that Nigeria has never been ‘one of the most advanced countries in its implementation of the EITI'. We do know that the so-called ‘financial audit' that was allegedly carried out there not only does not meet international auditing standards. It does not even mention them. But the EITI Sourcebook requires that these standards be observed, because the use of the term ‘audit' creates certain public expectations. The point is that these expectations were deceived. All the interested parties were misled, and the ‘financial audit' in World Bank terms was not at all what was required by the EITI criteria.
Let us take another look at the cost of the audit. The publication of a mere draft report on Nigeria by the EITI audit was one of the conditions for writing off $18 billion of Nigerian debt. The Financial Times, commenting on the ‘success of the campaign' notes that the ‘auditors did not have access to company accounts.' It concludes: ‘Nigeria is still rated sixth bottom in a corruption league table compiled by Transparency International watchdog.' And news reports suggest that some residents of Nigeria prefer to fight corruption in quite different ways, not by means of ‘a successful narrowly targeted iniative which has great popular appeal', as the EITI is described in the World Bank report...
Azerbaijan's report: key information missing
At first glance, things seemed to go better in Azerbaijan. The British government noted on behalf of its embassy in Baku: ‘Azerbaijan is the first country to publish EITI reports examined by an independent audit firm'. And indeed, unlike the Nigerian report, this report does contain a reference to international standards. However, this reference only conceals the proton pseudo, or false premise, of the Azerbaijani report. For the report expresses a reservation about the completeness of payments. Let us return to our Chief Financial Officer (CFO) again. Every half year he pays the auditors, and every year they write the same thing: everything's fine in your country ‘except for adjustments, if any, which might have been required had we tested all payments/allocations'. Wouldn't you find the behaviour of both the CFO and the auditor to be somewhat unusual?
The auditing firm, however, admits that this is an ‘exception from the standards', and only checks the data which have been provided: ‘If payments/allocations were omitted from both the Companies and Government's submissions, our work would be insufficient to detect them'.
If you translate this from the language of auditing this means: we will tell you with a straight face about the errors we found. But we don't know the significance of these numbers. And we don't want to know. Ignoring the standards of the profession, the firm did not do due diligence and intentionally ignored the essence of the EITI. Because even if the ‘payments/allocations' were correct down to the last manta, this still wouldn't mean anything. What if someone from the ‘government' had reached an agreement with someone in the ‘companies'?! This is why the Initiative requires an audit of all significant payments, and not just the ones that ‘have been provided'.
This is why James Wolfensohn told Wolfowitz, his successor at the World Bank: ‘Let's not slap each other on the back and praise each other for our achievements... Transparency by itself means nothing. If everyone in the government is crooked, then transparency's not going to help'. We don't want to say anything bad about the Azerbaijan government here. Especially as the UN awarded the State Oil Fund of this country the prize for ‘Improving the level of transparency of a state service', and for implementing the EITI.
Furthermore, we can state with absolute confidence that the World Bank and the EITI team do not employ swindlers. But why did they allow the release of eight such reports? Perhaps they were only thinking about their Key Performance Indicators? Why did they say that ‘EITI reports allow civil society in Azerbaijan to scrutinize the oil and gas sector and to be more closely in discussions with the government and oil companies'? In the spring of last year protestors in Baku carried banners saying ‘Where's the money from the oil?', and calling for ‘transparency for revenues from oil'. Were they party to those discussions?
Gabon's report: never published, ‘not an audit'
Now for Gabon. As in Azerbaijan, the firm Big Four handled the job. It honestly admitted that what it had done was ‘not an audit', but procedures that had been agreed upon (i.e. coordinated with the client). The firm also referred to international standards, but... to different ones. The difference in these standards was that they directly prohibited the publication of the report, as possible readers who were ‘unaware of the reasons for these procedures might misinterpret their results'.
However, the IMF evidently was able to interpret them correctly. For after the publication of a second report (those Key Performance Indicators again!), it approved a three-year plan to support economic reform in Gabon worth $117.3 million. Of course developing countries must be given money. They also need to have their debts written off. But it's also not a bad idea to help increase transparency... So why is all this done with such blatant disregard for EITI criteria, which are a ‘prerequisite for financial support?' We just don't know.
Secrecy in the ‘‘Stans'
We also don't know why neither international financial institutions nor the public has yet shown any desire to employ specialists to review the reports. But we do know that some NGOs have complained, for example, that the WB itself did not recommend publishing the last Kyrgyz report - and this happened long before the well-known incidents in Bishkek.
In Kazakhstan, the World Bank's ‘unusual stance' on the issue of observing usual standards (not just of auditing, but of ethical standards), prompted the auditor to pull out. And we know for certain: the main responsibility for the fact that the auditors could not carry out their duties did not lie with some nameless corrupt Kazakh officials (as one might assume). It lay with particular functionaries from the World Bank's Oil, Gas and Mining Policy Division.
Although in private talks they admitted that the auditors' approach was correct, in practice bureaucratic considerations won out: ‘It's better to release some kind of report than none at all' - once again, the curse of the Key Performance Indicators! The result was that, when the call came to ‘do it the way they did it in Azerbaijan or Gabon' even Kazakh officials were shocked by this ‘profanity'.
In Kazakhstan, the auditor's position was eventually supported by civil society. It led to the Kazakhstan Government taking on the obligation ‘to ensure integrity of data reflected in the reports of the Government and companies... in accordance with EITI criteria (data based on the financial report conducted by the auditors)'.
This decision would have put Kazakhstan among the world leaders of the EITI - if only it had been realised. But the Government did not pass the promised bills, and found more compliant auditors, the ones who had already ‘tried their hand' in Azerbaijan. So as not to waste their efforts, the auditors started playing the old record which is heard in Azerbaijan every six months: ‘everything is fine, except for the data we have not checked, although we ought to have..'
Do we need to say that here too the report has ‘restrictions on use'? It is ‘intended exclusively for the use of the signatories to the Memorandum of Understanding'. i.e. specific companies, representatives of the government and parliament of Kazakhstan, and NGOs. Thus, the report is to be kept ‘secret' not only from the ordinary citizens of Kazakhstan, but from the international community. This is how they interpret publication in ‘ a publicly accessible, comprehensive and comprehensible manner'..
Failure of will at the top
The problem of the quality of the reports is clear even to a non-specialist. All that would be required to solve it is the will of the driving forces behind the EITI. If, of course, they were able to adjust their Key Performance Indicators..
But for the moment, the World Bank believes that ‘establishing procedures for monitoring and validation is a very urgent problem for the EITI'. In Hokkaido world leaders already made a bid to ‘complete the validation process in a timely manner'.. And the process of rehabilitating the upper bureaucratic structures has begun. Instead of just laying down a common method for preparing reports in accordance with international auditing standards, a new standard has been invented - validation. One wonders what the next unusual standard will be called, when this plan fails. We propose to call it ‘approbation'. If an auditor is replaced by a validator, then why shouldn't someone else be called in to check up on the validator?
And there seems to be enough money in the Multi-Donor Trust Fund to satisfy everyone. Over the next three years it is planned to spend another $15-20 million on introducing the Initiative, $3.5 million on validation, and $5-15 million on further international management of the programme... Goodness knows how many more of these ‘technical requirements', ‘reports' and ‘validations' they're going to commission, as the management of the Supporting Investors Organisations, according to the EITI newsletter for 2008, have over $14 trillion.
What a shame that the countries that introduced the EITI have convinced themselves that the real point of introducing international best practice in reporting and management is to enable the validator to be able to tick the right box, not in order to make the ‘benefit streams' truly transparent. If this really is the ‘new global EITI standard for nations and companies', as Blair called it in Stockholm, then why bother with the usual audit, with putting payments in order and eliminating corruption...
In practice a paraphernalia of transparency has been set up to conceal the insidious lie of audit negligence.And as the snowball of simulated reports and non-standardised checks grows ever larger, it threatens to establish the EITI as a framework for a new unified global standard... of lying.
