Governance and the Lucrative Extractive Industries

Note: This interview first appeared in the newsletter of the New South Wales Independent Commission Against Corruption (ICAC) in June 2015.

Economist Daniel Kaufmann believes natural resource governance is the greatest developmental challenge of the next decade. As president of the Natural Resource Governance Institute, US-based Dr Kaufmann leads an organisation that aims to ensure that people – ultimately – are the greatest beneficiaries of their country’s own oil, gas and mineral resources. In November this year, Dr Kaufmann will speak at the biennial Australian Public Sector Anti-Corruption Conference in Brisbane.

In June last year, the Revenue Watch Institute and the Natural Resource Charter combined to become the Natural Resource Governance Institute (NRGI). What prompted the new identity?

Dr Daniel Kaufmann of the Natural Resource Governance Institute will speak at APSACC in November. The biennial anti-corruption conference will be held in Brisbane this year.

United, rebranded and re-launched as NRGI, we bring together the intellectual and research strength, independence, field-based expertise, and innovative approaches needed to take our work to the next level. Together with our colleagues and partners, we aim to make a difference in the countries where we operate, and also champion global governance reforms in natural resources.

In describing NRGI’s role briefly, is it appropriate to say it aims to influence and teach governments to better manage their natural resources for public good?

Support to governments is one important component of our work, but there is more. Broadly, NRGI helps people to realise the benefits of their countries’ endowments of oil, gas and minerals. We do this through technical advice, advocacy, applied research, policy analysis and capacity development. We work with (and also learn from) innovative agents of change within not just government ministries, but also civil society organisations, the media, legislatures, the private sector, and international institutions – promoting accountable and effective governance in the extractive industries.

Your Resource Governance Index (RGI) report reveals that, of the 58 countries measured, 80% failed to achieve good governance in their extractive sectors. You describe this as a governance deficit. Findings from that report, however, show that satisfactory performance in resource governance is possible in some countries, including several emerging economies. Which country would you describe as a major success story?

The governance deficit is real and clearly codified in the RGI report. The plight of many resource-rich countries nowadays is symptomatic of such deficit, which has been further exposed by the fall in commodity prices. But a number of countries have shown that good governance in extractives is possible.

Some are in the industrialised world, some are in Africa, Asia and particularly in Latin America. Colombia’s petroleum sector, for instance, is noteworthy. Its solid institutional framework, including an open licensing process, and good reporting practices and safeguards, earned Colombia a score of 74 out of 100. The government publishes comprehensive information on the management of the oil sector, and the country also recently joined the the Extractive Industries Transparency Initiative (EITI), and follows extensive audit requirements. Ecopetrol, the national oil company, has shown good transparency standards too since its restructuring in 2003. However, more can still be done to improve the governance of the sector in Colombia.

Although not ranked among the very top performers, Timor-Leste was another noteworthy example of a success story, with a score of 68/100, ranking 13th out of 58 countries. The country has set up a comprehensive legal framework and an independent licensing process, along with extensive audit requirements, and releases substantial data on many aspects of the hydrocarbons industry, including on almost all petroleum contracts, and is performing well in EITI.

Western Australia is the focus of the Australian contingent of the 2013 RGI. It ranks fourth out of the 58 countries; a great result. In relation to the category of safeguards and quality controls WA received a “partial” score of 65 out of 100. But it performed extremely well on rankings of overall governance, accountability, democracy and the rule of law, receiving a score of 96 out of 100. Are there any specific comments you would like to make in relation to Australia’s RGI report card that year or results from the forthcoming index?

As you suggest, Western Australia ranked well overall. Among others, this is the result of very high overall performance on national-level governance, accountability, democracy and the rule of law. On some particular other aspects, however, there was room for improvement, such as on the quality of some government reports, incomplete oversight of the licensing process, and a lack of robust conflict-of-interest disclosure requirements (including the absence of a specific requirement for government officials with a role in the oversight of the mining sector to disclose their financial interests in extractive activities). It was also noted that information regarding exploration and mining licences is publicly available, but there is no general role for the legislature in their approval.

Let me note that the RGI report was issued in 2013 and based on data collected in 2012. In the meantime, changes are taking place in many countries. The RGI is a major data collection and analysis project; one that has now started for the next such report, with data being collected this year.

Are there any observations you would like to make about Australia’s corruption/anti-corruption practices?

I approach this with a bit of humility, since I am not an expert on Australia, and there are many in your own country, including obviously in public service! Let me try to contribute by raising a few issues, drawing from international experience and evidence from around the world. Taking a global comparative perspective and looking at worldwide indicators (including our own Worldwide Governance Indicators, or WGI), it is evident that, generally, Australia has done relatively well controlling corruption; yet, in looking ahead it may also be able to do even better.

The first question relates to “direction of travel”: the data suggests that, in 2005, Australia ranked among the top 10 countries in terms of corruption control; in fact it was 9th and it maintained this ranking until later in the decade. Yet, according to the more recent data from the WGI, it slipped to 14th. These are relative rankings among over 200 countries, so it is still performing satisfactorily overall, but there is a question about a possible downward trend, and if so, why. Further, why not aspire to be among the top five countries in the world?

The second question relates to variations across jurisdictions within Australia. The seriousness of the efforts by the Independent Commission Against Corruption in NSW are well known globally, while questions arise about a more lax approach by other states, such as Victoria, for instance. Related to this significant variation across states is the question about why Australia doesn’t have a national anti-corruption body with investigative powers at the federal level. And it is also important to unbundle corruption and analyse whether there are particularly vulnerable aspects, such as in political and party finance, in trade unions and in the media.

The final question is about how Australia could do better in the global effort to combat corruption; for instance, by tough implementation of the Organisation for Economic Co-operation and Development’s (OECD) foreign bribery regulations, by enacting legislation mandating transparency in the payments by Australian mining multinationals, and also by becoming a fully implementing country in the EITI, which already has 48 member countries.

You head an organisation that is now approaching 100 members of staff based in over a dozen countries. Your staff work with actors in a lucrative industry. What strategies does NRGI employ to ensure it maintains its independence and that good internal governance is achieved?

Good governance and integrity has to start at home, so we work hard at it within our organisation. We have an independent governing board that oversees us, which is comprised of notables and experts of the highest integrity, representing the key stakeholders who oversee us. We have also built up a large advisory council of experts. And we continuously strive to do better.

For instance, last year Transparify, a new group that rates organisations in terms of their transparency regarding funding sources, gave us three out of five stars. Some may have considered that satisfactory. Not us, so we reviewed our practices and implemented a plan to become as transparent as possible. We were recently awarded the maximum five stars by Transparify, singling us out because of our major improvement in a short period of time.

The NRGI’s five-year strategy places importance on partnerships. Please explain what you mean by this.

Simply, it means concretely working with others. We walk the talk, as illustrated by the fact that we engaged in the most extreme form of partnership, namely a marriage – the merger of two organisations that became NRGI.

There are other partnerships as well, such as the work we do together with many non-governmental organisations and training institutions in many countries; the partnership we have with EITI globally; as well as collaborative work with a number of implementing governments and parliaments regarding their reform programs in extractive industries.

We also have a special partnership with a number of international foundations (such as with the Hewlett, Gates and Open Society Foundations), as well as with some governmental donor agencies, such as UK’s Department for International Development, and a bit more modestly with the World Bank and Australia’s Department of Foreign Affairs and Trade. The pending task of transforming natural resource governance is arguably the development challenge of the decade, and no single organizsation can make a difference alone.

On a personal level, reflecting back on your career, are there any insights you would like to give?

Llifelong learning is key and one must extend oneself beyond the narrow confines of one’s own original specialisation, embracing a multidisciplinary approach. Rigorous analysis with sophisticated statistical tools is important for sound evidence-based policy analysis and advice. But they should not be applied to economic matters alone; they should also be integrated into political and governance challenges.

Related to that, partnerships and teamwork has also been crucial. When it comes to research, policy analysis and concrete projects I have worked with hundreds of co-authors and partners in many countries.

Finally, persistence – in forging ahead with your convictions regarding what matters for contributing to development is important, as is speaking truth to power in sensitive fields – such as governance and anti-corruption, where one is unlikely to win many popularity contests.