Extractive Industries & Public Financial Management: Why Openness Works Better

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The oil, gas and mining sectors contribute significantly to government revenues in resource-rich countries. Despite this opportunity for development, experience shows that the extractive industries sector often contributes to higher poverty rates, corruption and even conflict. This is referred to as the ‘resource curse’.

Fighting the resource curse effectively requires a Public Financial Management system in which budgetary allocations and expenditures are open and transparent. By getting involved in the budget process, parliamentarians can direct the allocation of revenues to alleviate poverty and promote social and economic development. Parliamentarians also play a critical role in scrutinising government expenditure, and in providing implementation oversight.

Parliamentarians can keep a close eye on the extractive industries sector by asking parliamentary questions, organising committee hearings and public consultations, appealing to freedom of information laws, and submitting policy recommendations.

For more examples of parliamentary action, click here

Oil, gas and mining revenues are typically managed through dedicated ‘natural resource funds’. These funds have often been poorly managed: in many countries, a lack of rules and transparency has resulted in nepotism, corruption and wasteful spending.

Stronger synergies between government, parliament and SAIs are key to improving natural resource fund management. Information sharing is critical. First and foremost, parliaments and SAIs should have access to oil, gas and mineral contracts, and should be involved in negotiations where possible. More and more governments are publicly disclosing these contracts, thereby strengthening public and parliamentary scrutiny.

Contract negotiations are complex discussions that tackle exchange rates, taxes, labour and land rights, logistical rules and regulations, and so on. East-Timor and Mozambique recently published several contracts in the petroleum and mining sectors. According to the latest EITI report, São Tomé and Príncipe’s license granting process is transparent and well structured, but requires improvement in terms of information disclosure in official sites.

Beyond this, effective oversight demands that parliaments have access to timely and accurate data. Independent oversight bodies should provide revenue projections and expenditure reports to help legislators assess budget proposals and monitor implementation. Improving the capacity of SAIs and associated institutions is therefore a necessary step in improving governance of the extractive industries sector.

This blog was cross-posted from AGORA’s E-learning course on ‘Public Financial Management: the Role of Parliaments, Supreme Audit Institutions and Civil Society’, developed for the Pro PALOP-TL SAI  project.   Click here to register for this course free of charge.