The Extractive Industries Value Chain – A Policy Framework
Converting the potential wealth of natural resources into a tangible improvement in the well-being of citizens requires a series of steps that are often referred to as the ‘resource/extractive value chain’. The objective of maximising benefits for current and future generations, and the goal of arriving at efficient, sustainable development, can be broken down into six stages:
1. decision to extract;
2. negotiating the best deal;
3. developing the resource and monitoring operations;
4. collecting and disbursing revenues;
5. tracking and auditing expenditures;
6. sustainable practices in extractive industries.
Policy makers face difficult choices including deciding the pace at which extraction should occur, how best to minimize environmental damage, and implementing measures to take to avoid social conflict. Inter-generational in nature, these decisions have to be made in a highly volatile and uncertain environment largely due to the unpredictable nature of the industry. There are, however, several practical guiding principles that can help boost transparency, accountability and social and economic development in a resource-rich setting.
1. Deciding to extract
Given the potentially huge profits to be derived from natural resources, the process of deciding to extract is often reduced to a swift ‘yes’ vote. It is imperative, however, to consider the implications of such activities in full, both in terms of the direct impact at the local level (environemental, social and economic consequences in the respective locations) and with regards to the need for a new or revised strategic framework that can integrate such significant developments efficiently. Attention should be paid as well to the control, use and management of land, and if relevant, to the existence of artisanal and small scale mining already ongoing.
2. Negotiating the best deal
Negotiating the best deal involves deciding what companies, under what terms and conditions, can undertake the exploration of the natural resources. To arrive at the best possible deal, an almost overwhelming number of requirements must be met: the bidding process must be competitive; the decision-making must be fully transparent; the legal and fiscal framework must be solid; local interests and ownership must be clearly integrated; environmental concerns must be handled appropriately; conflicts of interest must be managed; and so on and so forth.
3. Developing the resource and monitoring operations:
Resource and monitoring operations are put in place to ensure that the terms and conditions stipulated in contracts with mining companies and other relevant actors are respected. These operations chiefly concern environmental impacts, social impacts, local communities, land management, health and safety standards, and compliance monitoring and enforcement. Parliament play a proactive role in this stage through, among others, the following actions:
- Ensure that companies comply with contract provisions, including existing rules and regulations. If need be, hearings and field visits can be used to collect evidence;
- Liaise with the administrative agencies that monitor the implementation of the contracts;
- Produce committee reports on the subject;
- Request regularly scheduled extractive industries briefings;
- Coordinate efforts with local civil society organisations and think tanks;
- Hold briefings or informational hearings;
- Establish select (investigative) committees to examine major problems;
- seek government clarification and action through parliamentary questions;
4. Collecting and Disbursing Revenues
When dealing with the revenues of extractive industries, government can use the resources to create long-term economic growth and development. Thus, government should have publicly states its objectives with respect to revenue management and how it will disburse these revenues. Defining appropriate spending choices requires broad political consensus, which takes into consideration the volatile nature of natural resources, the sustainability and efficiency of expenditure, and the importance of economic diversification.
5. Tracking and Auditing Expenditures
In tracking revenue, parliamentarians have both formal and informal oversight tools, both of which require data on revenue and expenditure data in real time. This information allows the legislature to track progress on budget implementation. As the data are provided on an ongoing basis, problems can be identified quickly and adjusted accordingly.
Regular audits that meet international standards (EITI page link), as well as accounting rules and procedures for EI operations, are critical to assess revenue collection and expenditures. After receiving an audit report, committee hearings are the principal mechanism by which relevant officials answer to parliament, generally through a Public Accounts Committee (PAC).
6. Sustainable Practices in Extractive Industries
Extractive Industries Transparency Initiative
The EITI is a global standard that promotes revenue transparency. It has a robust yet flexible methodology for monitoring and reconciling company payments and government revenues at the country level. Each implementing country creates its own EITI process which is overseen by participants from the government, companies and national civil society. The international EITI Board and the International Secretariat are the guardians of the EITI methodology internationally.
An EITI law strengthens the legislature's role in EITI as well. In the process of drafting, debating and reviewing the law, legislators can shape the program to ensure that it reflects country circumstances, accurately articulates citizens' needs, and complements other laws and programs related to extractive industries. Most importantly, a law will strengthen the formal legislative oversight role over EITI.
To find out more, please visit www.eiti.org.