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harder push is required to stop theft in extractive industries

More than transparency and accountability will be required to end the plunder in Africa's extractive industries

In Brief

  • Created to promote transparency and accountability in the extractives sector, EITI may have prompted governments and corporates to find creative ways of hiding corruption
  • Despite the EITI, corruption is entrenched in the extractive industry
  • Governments lack the capacity to assess and qualify the costs involved in the industries and surrender the responsibility to external experts
  • Global clampdown on corrupt practices is rattling investors who considered bribery as a ‘cost of doing business’ in Africa



In September the Extractive Industries Transparency Initiative (EITI) will be marking its twelfth anniversary. The initiative, which promotes better management of mineral revenues for economic growth and poverty alleviation through increased transparency and accountability, hasn’t been quite successful. 

Despite Africa’s massive mineral resources, grinding poverty remains amidst apparent wealth diverted from public coffers. The siphoning of oil and mining revenues is as old as European imperialism in Africa, but today’s culprits are corrupt and unaccountable governments and businesses.

To instil good governance, it is now apparent more needs to be done to ensure transparency and accountability of players in the sectors.

Deputy director of MacArthur Foundation in Nigeria, Oladayo Olaide, argues that EITI’s push for revenue transparency is limited in scope. Amendments and cooperation with various agencies are required.

“A mere demand for transparency is not necessarily a check for acts of briberies that happen in the industries. Corporations and political players involved in the underhand deals have perfected the means of hiding the proceeds of such acts beyond the unqualified eyes of the public. How do we assess the ‘cost build-ups’ and ‘in-kind’ payments? Most states lack the capacity to query figures and fees that the involved corporations present,” says Olaide.

States that manage highly valued commodities invoke national security to shroud their dealings and to stop unwanted scrutiny. “Commodities draw both national and international politics, and with very powerful actors to boot. If a financially powerful country can sweet-talk its way into securing what seems to be an exclusive supply of petroleum from a producing country, they would gladly do whatever it takes to maintain that supply,” he says. 

The value of the commodities and the backroom power plays would explain why change has been slow to come, over a decade since the launch of EITI. States and businesses have taken advantage of the limitations of the initiative to operate improperly.

Several economists agree that the actors who have benefited from questionable concessions ‘are the same actors who define the rules of the game’, with a view of protecting their interests.

For a country to be deemed compliant, EITI requires a simple sign-up and regular audits and reconciliations of operations. There are no measures (punitive or otherwise) to ensure that identified discrepancies are rectified conclusively.

Nigeria signed up for EITI compliance in 1999, following demands for economic reforms by its international trading partners. Despite achieving full-compliance status, the country has not addressed the gaps revealed in previous audits, and the EITI secretariat is unable to do anything about it. It is business as usual for defaulters.

Tracking corruption is difficult. Parties involved try, and in most cases with great success, to keep illicit deeds secret. Ingenious ways of hiding proceeds of illicit payments have been formulated, the most common being ‘cost build-up’ and ‘in-kind payments’.

Some corporations make payments in off-shore secret accounts operated by influential players who guarantee successful outcomes for concession bids. But, secret banking systems are not so secret anymore especially since the fight against terrorism gained ground. So other routes for in-kind payments have created.

A corporation offers to lease an office space from an individual with the right political connections at a rate higher than the prevailing market price. Due to free-market systems, one can’t question why the multinational is paying above-market value for the property. Other companies actively recruit relatives or proxies of an influential individual and retain them on payrolls as ‘facilitators’ or ‘consultants’. Since such illicit payments are factored into the concession bid, the winning company tries to recover the costs as soon as possible.

Many African countries lack the capacity to assess and qualify the costs involved in the industries and surrender the responsibility to experts provided by the World Bank, the United Nations, the International Monetary Fund as well as various international oil companies.

Unfortunately, these external experts rarely prioritise the interests of the local communities, particularly during contract negotiations. Once the contracts are signed, these countries lack the expertise to evaluate the exact quantities of the resources extracted and have to accept whatever value the corporations declare.

Since taxes are often based on culminating profits, under-declaration is often beneficial to the investing company. Other unqualified costs are documented in form of bills to ghostly subsidiaries, which are often disguised as consultancy services. Because awards of the various concessions had been ‘paid for’ through bribes, even if the bills are suspected to be bloated, there are hardly any questions asked by the responsible government officials or agencies.

Costing practices for replacement of equipment and parts is another issue. Olaide said most multinationals have perfected the art of exaggerating their real overheads to tax authorities; “An oil company would document the need for a particular ‘proprietary item’, which can only be supplied by one of its numerous subsidiaries at a self determined price. It’s not like a water or wine glass where one can go to the market and establish the average going price.”

Whether the documented item is really supplied or not, the tax authorities and other government agencies, due to lack of technical knowledge of the industry, are not in a position to verify the true value of the invoiced items.

“Even EITI, as narrow as its objectives are, has not been able to address the issue of bloated costing. It only looks at the final products - the information that has been provided by the executives of the extracting corporations. It does not go out to verify the validity of those cost items.

“When an oil company claims to have paid US$100 million to consultants who helped maintain an oil rig, the audit and reconciliation team isn’t going to ask about the fairness of the bill,” he says.

So if EITI only offers a superficial veil of a clean bill of health, should itbe maintained?

While the advocates for EITI seem uninterested in addressing the watchdog’s evident shortfalls, all is not lost. Some information is better than nothing.

Olaide, whose post-graduate research was on the EITI, says for decades the extractive industries were seen as a preserve of governments who entered into secret contracts with mining, oil and gas exploration companies without any involvement of communities or civil societies.

“Now at least with the limited publication of information civil society as well as citizens are slightly armed to an extent that they are able to interrogate details of contracts entered into by their governments.”

EITI’s vision of an environment where every government and corporation is held accountable is still a long way from being fully realised.

Oversight mechanisms such as the African Union’s Peer Review, ECOWAS Conflict Prevention Framework, SADC Protocol on Mining, and the African Mining Vision need to domesticate the EITI through laws that can boost the fight against illicit payments.

“Citizen’s movements are crucial in the push for good governance, democracy, peace and stability on the continent. Regional and pan-African institutions will soon be under enormous pressure to be more responsive to the demands for better living standards,” says Olaide.