Statement of Bennett Freeman, Senior Vice President, Sustainability Research and Policy, Calvert Asset Management Company, Inc.
Board Director of the Extractive Industries Transparency Initiative (EITI), Oxfam America and the Revenue Watch Institute
The U.S. Helsinki Commission
The Link Between Revenue Transparency and Human Rights
May 14, 2009
U.S. Capitol Visitors Center
I want to thank Senator Cardin and the members of the Commission for inviting me to testify on the link between resource revenue transparency and human rights related to the extractives sectors. This is an especially timely hearing on the eve of the first meeting of the Extractive Industries Transparency Initiative (EITI) Board in Washington, just as the new Administration and Congress are examining ways to address revenue transparency in the broader context of U.S. foreign policy and development goals.
I will address these issues from several perspectives. I am Senior Vice President of Sustainability Research and Policy at Calvert, a diversified investment company with more than $12 billion in assets under management. Calvert manages one of the largest families of sustainable and responsible funds in the U.S., among which our new Large Cap Value Fund includes holdings in several of the world largest oil and mining companies.
My testimony is also informed by my perspective as member of the boards of the Extractive Industries Transparency Initiative, Oxfam America, and the Revenue Watch Institute. In addition, I served as Deputy Assistant Secretary of State for Democracy, Human Rights and Labor in the U.S. Department of State from 1999 to 2001. In that capacity, I led the development of the Voluntary Principles on Security and Human Rights, now established as the global human rights standard for the oil, gas and mining sectors operating in zones of conflict.
More than 60 percent of the world’s poorest people live in countries rich in natural resources, according to Oxfam America. Yet, developing countries that are dependent on resource wealth are characterized by higher rates of conflict1 and are likely to grow more slowly and demonstrate greater income disparity than their more economically-balanced peers2. These shortcomings are due in large part to the lack of accountability in the way resource revenues are collected, accounted for and distributed.
Opaque and inequitable resource revenue distribution is due to a combination of raw political calculation, gross corruption, and sheer mismanagement. The squandering of public revenues skews patterns of investment and further enriches elites; it corrodes governance and the rule of law; it undermines the impact of and support for foreign assistance; it exacerbates regional conflicts and threatens national unity; it deprives local communities of their right to development and condemns them to poverty. Companies’ bottom lines may not be affected in any one year, but the cumulative squandering of revenues takes a toll: it challenges their social license to operate; endangers their local operations; and threatens their global reputations. It does so by stoking tensions between resource-producing communities and the companies operating amidst or in close proximity to them. It puts companies in the unwanted and unsustainable position of acting as de facto surrogate governments, due to the lack of capacity on the part of the sovereign authorities and community demands responding to neglect.
There is no magic wand that can break these interlocking vicious circles and lift the resource curse. But greater accountability through transparency of resource revenues cuts to the heart of the problem. Opening the books to understand just how much money is flowing into these countries is a vital first step. Tracing these revenue streams can enable civil society in developing countries to hold their governments accountable for their priorities and expenditures. When the sources and beneficiaries of resource wealth are exposed to what Justice Brandeis called the “disinfecting sunlight” of transparency, governance, the rule of law and respect for human rights are all enhanced.
Seeking to ground post-9/11 energy security in political stability and good governance, UK Prime Minister Tony Blair proposed the Extractive Industries Transparency Initiative (EITI) in 2002. The EITI is a global, voluntary framework through which governments and companies disclose reciprocally revenue payments, which in turn they reconcile with the active involvement of civil society. The U.S. is one of the 11 supporting countries that provide the EITI with political leadership and financial contributions. To date, 23 resource-exporting countries have begun implementing the EITI and 37 of the world’s largest oil, gas and mining companies have committed to the process.
Launched in October 2006 with a sophisticated multi-stakeholder governance and accountability structure, the EITI is now facing a series of critical tests. For any voluntary initiative, the proof is in the pudding and for the EITI the pudding is validation that it is being implemented according to very specific standards. Over the coming months, a number of governments will be validated – or not – in ways that will demonstrate whether the EITI is beginning to achieve its objectives.
It is important to highlight that the EITI requires the engagement of local civil society in countries that have committed to the initiative. The involvement of civil society helps ensure that the EITI process is grounded in the needs of the communities that suffer most from the inequities of the resource curse. If communities know how much extractives companies are paying their governments for natural resources, they can advocate for a fair share of the benefits to address communities’ needs such as education, health care and jobs. In order for civil society stakeholders to play their vital roles, their basic human rights – including freedom of expression and association – must be respected. Civil society groups and individuals engaged in the EITI process must be free from harassment while participating in the initiative and related anti-corruption and revenue transparency activities. My EITI board colleagues and I have been vigilant in defending this principle, and we have appreciated the consistent support of the State Department in responding to specific incidents and threats.
Unfortunately, several EITI candidate countries (including Congo Brazzaville and Gabon) have taken unfortunate actions against groups and individuals working on these issues that not only undermine the goals of the initiative but also their prospects for validation. Moreover, one EITI candidate government in particular – Equatorial Guinea – must take concrete and credible steps to allow civil society to emerge in a country still subject to severe corruption and repression even as it has gained access to vast oil and gas wealth over the last decade.
The EITI is an extraordinarily positive initiative that merits the support of extractives companies, civil society and both implementing and supporting governments alike. But while the EITI is absolutely necessary, it is by no means a sufficient vehicle for promoting revenue transparency. Many governments whose countries could benefit most from revenue transparency have declined to join the EITI, which after all remains a voluntary initiative. Moreover, the revenue data collected under the auspices of the EITI is often aggregated to a degree that diminishes its value, especially to civil society and investors. A mandatory disclosure rule covering as many countries and companies as possible would go a long way toward achieving the transparency and ultimately the accountability that would be so desirable. For these reasons, Calvert as well as Oxfam America and the entire Publish What You Pay coalition supports the Extractive Industries Transparency Disclosure Act (EITDA).
The EITDA would require oil, gas and mining companies registered with the Securities and Exchange Commission to publish the payments they make to the governments where they operate. Although it would cover many more countries, EITDA reporting is consistent with the requirements of EITI and therefore should pose little additional burden to companies already engaged in the initiative. For these reasons I believe that the EITDA is complementary to – not in conflict with – the EITI. The EITDA attracted significant support when it was introduced in the previous Congress, and should attract even broader support when it is reintroduced in the coming months.
At the same time, the International Accounting Standards Board (IASB) is considering an International Financial Reporting Standard (IFRS) requiring country-by-country royalty and tax reporting by companies in the extractive industries. This recognition of the material risk represented by secrecy in resource revenue payments and the importance of the reporting of payments to governments by type at the national level, would be a very constructive step alongside passage of the EITDA.
Revenue transparency is far more than an economic or technical accounting improvement. It is a fundamental governance imperative that cuts a narrow but deep trench that reveals and addresses some the deepest roots of the resource curse. By making revenue flows more transparent, equally transparent national budgets can deliver better governance that meets the needs of ordinary people in resource-rich but otherwise impoverished countries.
The U.S. and many other governments share with investors and companies a fundamental interest in promoting greater transparency and accountability in resource-rich countries around the world. Revenue transparency is a playing field on which our interests in promoting greater respect for the human rights, good governance and sustainability development converge with our fundamental energy security, national security and foreign policy goals in an interconnected world.
To its credit, the Bush Administration supported the EITI especially through its participation on the board through the initiative’s critical first several years. Now the Obama Administration has the opportunity to reinforce U.S. support for revenue transparency not only by supporting the EITDA, but also sharpening its focus on the EITI itself. Participation on the EITI board should be elevated to the Assistant Secretary of State level with closer coordination with the Treasury Department, consistent with the level of commitment made by other supporting governments. The Administration and Congress should also increase funding of bilateral technical assistance and civil society development necessary for EITI to succeed through the U.S. Agency for International Development (USAID).
Promoting revenue transparency can be reinforced by sharpening the focus on other extractives-related governance issues and initiatives. The State Department should strengthen its support for the Voluntary Principles on Security and Human Rights, a multi-stakeholder initiative that it launched in 2000 together with the UK government and many of the leading extractive sector companies and human rights NGOs in the world. The Voluntary Principles guide oil, gas and mining companies operating in zones of conflict as they balance necessary security concerns with appropriate international human rights standards in their operational arrangements with public and private security forces. The State Department should contribute to a more capable international secretariat, and elevate its own bilateral diplomatic and assistance resources to support implementation in priority countries such as Nigeria, Indonesia, Colombia, and the Caspian countries among those in the OSCE region.
As with the EITI’s focus on revenue transparency, the Voluntary Principles’ focus on the conduct of security forces addresses much deeper issues of the rule of law and accountability in many of the same countries in which natural resource wealth has degraded governance and distorted development. Neither initiative has yet to fulfill its potential, and a renewed commitment by the U.S. Government can contribute to the success of both.
Finally, the Obama Administration should reinforce the initial commitments of its predecessor to deny corrupt officials access to the international financial system, as indicated in its National Strategy to Internationalize Efforts against Kleptocracy. The first and most important step in achieving this objective is to ensure that U.S. laws require banks to do effective due diligence to avoid and identify the proceeds of corruption.
Over the last decade we have seen that even as we belatedly begin to transition to a carbon-constrained world, the oil, gas and mining industries will remain crucibles for some of the most complex challenges we will continue to face in the 21st century. In this new century, security of energy supply depends not just on access to natural resources, but also on the quality and stability of governance structures in the countries where natural resource extraction is concentrated.
Our ideals and interests should be intertwined with the ideals and interests of the communities around the world, which for too long have been excluded from the decisions and denied the benefits that can lift them out of poverty. Together we share the opportunity to make natural resources a potential blessing rather than an enduring curse.
Thank you again for the chance to share my view on these important issues.
1Collier, Paul. “The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It.” Oxford University Press. 2007.
2Gelb, Alan and Grasmann, Sina. “Confronting the Oil Curse.” AFD/EUDN. November 2008. http://www.afd.fr/jahia/webdav/site/afd/users/administrateur/public/EUDN2008/Gelb22oct2008.pdf