The EITI is a global standard that promotes open, accountable and inclusive management of natural resources.
The Minister for Foreign Affairs, Julie Bishop, and the Minister for Resources, Energy and Northern Australia, Josh Frydenberg, jointly announced on Friday night that Australia would sign up to implement the Extractive Industries Transparency Initiative (EITI).
What is the EITI?
The EITI is a global standard that promotes open, accountable and inclusive management of natural resources. Governments who sign up to the initiative pledge to publish the information on payments they receive from extractive companies and have extractive companies operating in their jurisdiction publish information on the payments they make. There are currently 51 countries participating in the EITI worldwide.
The EITI is motivated by the idea that extraction of natural resources can lead to economic growth and social development but when poorly managed it has too often lead to corruption and even conflict. Therefore, the idea is that more openness around how a country manages its natural resources wealth is necessary to ensure that the resources benefit all citizens.
The EITI arises from the Lancaster House Conference in London in 2003 representatives from a diverse group of countries, companies and civil society organisations were hosted by the UK Government. They agreed to a Statement of Principles to increase transparency over payments and revenues in the extractives sector. The principles can be regarded as a codification of the terms of the social licence of a company to operate in extractive industries and are expressed as follows:
- We share a belief that the prudent use of natural resource wealth should be an important engine for sustainable economic growth that contributes to sustainable development and poverty reduction, but if not managed properly, can create negative economic and social impacts.
- We affirm that management of natural resource wealth for the benefit of a country's citizens is in the domain of sovereign governments to be exercised in the interests of their national development.
- We recognise that the benefits of resource extraction occur as revenue streams over many years and can be highly price dependent.
- We recognise that a public understanding of government revenues and expenditure over time could help public debate and inform choice of appropriate and realistic options for sustainable development.
- We underline the importance of transparency by governments and companies in the extractive industries and the need to enhance public financial management and accountability.
- We recognise that achievement of greater transparency must be set in the context of respect for contracts and laws.
- We recognise the enhanced environment for domestic and foreign direct investment that financial transparency may bring.
- We believe in the principle and practice of accountability by government to all citizens for the stewardship of revenue streams and public expenditure.
- We are committed to encouraging high standards of transparency and accountability in public life, government operations and in business.
- We believe that a broadly consistent and workable approach to the disclosure of payments and revenues is required, which is simple to undertake and to use.
- We believe that payments' disclosure in a given country should involve all extractive industry companies operating in that country.
- In seeking solutions, we believe that all stakeholders have important and relevant contributions to make – including governments and their agencies, extractive industry companies, service companies, multilateral organisations, financial organisations, investors and non-governmental organisations.
The EITI Standard
The EITI Standard contains the set of requirements that countries need to meet to be recognised as first an EITI Candidate and ultimately an EITI Compliant country. The EITI Standard is overseen by the international EITI Board, with members from governments, companies and civil society and requires:
- effective multi-stakeholder oversight, including a functioning multi-stakeholder group that involves the government, companies, and the full, independent, active and effective participation of civil society;
- disclosures of information related to the rules for how the extractive sector is managed, enabling stakeholders to understand the laws and procedures for the award of exploration and production rights, the legal, regulatory and contractual framework that apply to the extractive sector and the institutional responsibilities of the State in managing the sector;
- disclosures of information related to exploration and production, enabling stakeholders to understand the potential of the sector;
- a comprehensive reconciliation of company payments and government revenues from extractive industries;
- disclosures of information related to revenue allocations, enabling stakeholders to understand how revenues are recorded in the national and, where applicable, sub-national budgets;
- disclosures of information related to social expenditures and the impact of the extractive sector on the economy, to help stakeholders to assess whether the extractive sector is leading to desirable social and economic impacts and outcomes; and
- the facilitation of public awareness, an understanding of what the figures mean and public debate about how resource revenues can be used effectively.
The EITI in practice
Validation of compliance is an essential feature of the EITI process. Where it is manifestly clear that a significant aspect of the EITI Principles and requirements under the EITI Standard are not adhered to by an implementing country, the EITI Board may suspend or delist that country.
The EITI International Secretariat collects data for review by the International Secretariat. Based on consultations with key stakeholders, the International Secretariat prepares reports by making evaluations of progress against requirements in accordance with the EITI Validation Guide for consideration by the EITI Validation committee and ultimately by the EITI Board.
Suspension may also result from political instability or conflict.
The EITI Standard also makes provision for protocols in connection with the way in which civil society's entitlement to participate in efforts to achieve the objectives of EITI, driving at transparency, the sharing of expertise and the provision of data in "granular, machine-readable forms".
The EITI Standard notes that:
"Open data promotes accountability and good governance, enhances public debate, and helps to combat corruption. Providing access to government data can empower individuals, the media, civil society, and business to make better informed choices about the services they receive and the standards they should expect. Open data, can also be a valuable tool for government in improving policy making and sector management."
The Federal Government's press statement said that "by joining the EITI, we ensure that our domestic policy is consistent with international efforts to increase transparency, including in tax systems."
We imagine that there may be some examination of existing taxation and royalty regimes in light of Australia signing up to the EITI. There may also be additional requirements imposed by means of FIRB approvals, ASX Listing Rules and the like. Companies affected by the EITI will likely bear an additional reporting and administrative burden as a result.
However, we note that in its press statement endorsing the move, the Minerals Council of Australia states that, "Many Australian mining companies already participate in EITI-compliant reporting processes around the world."
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.