Enhancing Transparency in budgets and oil revenues in the Caspian Basin: civil society has a key role to play

Oil boom in Caspian Basin Countries

This article focuses on problems of transparency in oil revenues in Caspian Basin Countries (CBCs), including Azerbaijan, Kazakhstan, Russia and Turkmenistan's oil sectors excluding Iran's. The Caspian Base consists of five countries and four of them are Former Soviet Republics and these have no experience of establishing transparency and the paper focuses on these countries. It could be expected for the CBCs to follow the path of the so many oil-producing countries in the Middle East and Africa - where a corrupt elite, not the majority, benefits from oil resources - but Azerbaijan and Kazakhstan, where the oil wealth is just beginning to flow and where an oil regime is not yet established, could still get it right. That is if civil society organisations continue to do their part.

It is a great paradox that countries rich in natural resources tend to have lower economic growth rates, and greater political unrest than their resource-poor neighbors. One of the main reasons for such a situation is lack of transparency. It is widely accepted that more transparency over revenue flows between oil, gas and mining companies and resource-rich developing country governments is necessary to enhance accountability and to curb corruption. Transparency is a fundamental first step to lifting the "resource curse", so that resource revenues promote economic growth and poverty reduction in developing countries around the world. World Bank President John Wolfensohn said that "The World Bank has endorsed the Extractive Industries Transparency Initiative and is actively engaged with several developing countries - Nigeria, Azerbaijan, and Kyrgyzstan - to develop a more systematic approach to disclosure of revenues from extractive industries."

The natural resource-rich states, Caspian Basin Countries face huge revenues from the sale and transport of oil and natural gas. In Azerbaijan, oil revenues will play a key role in economic performance; 92 percent of Azerbaijan export is oil products. Oil investments by private foreign oil companies are also high - 95 percent of Foreign Direct Investments. Azerbaijan experienced an oil boom at the beginning of the Twentieth Century and later served as a major refining centre in the former Soviet Union. Production peaked at about 500,000 barrels per day (bbl/d) during World War II, then plummeted after the 1950s as the Soviet Union redirected resources elsewhere. Out of a population of eight million, production is expected to peak to more than 1,5 million barrels per day by 2010.

Oil companies are protected from the corruption that is endemic in the Caspian Basin, but local businesses have to operate with the sharks and often cannot get off the ground (Transparency International rates Azerbaijan as number three, after Nigeria, among the world's most corrupt nations.)

In Turkmenistan, gas revenues are deposited into a foreign account controlled by the President for life, international financial officials say. Another Caspian Basin country, Azerbaijan, has the same problem: it is predicted that the 8 million population' country will receive more than 100 billion dollars from oil sells in the next two decades. However, at present more than 40 percent of the country's budget revenues are from oil revenues.

The lack of transparency in the international oil industry has been increasingly criticised by international and domestic NGOs and human rights defenders. Regional oil producers such as Azerbaijan and Russia are highlighted as worst cases for the oil revenues. In these countries, major parts of oil revenues that could be used to raise living standards are lost to corruption.

Sergey Zlotnikov, Executive Director of Transparency Kazakhstan (TK), a local anti-corruption group, said earlier, from Almaty, that contracts between the government and oil companies lacked transparency, noting that corruption in the country's lucrative oil and gas industry was rampant. "There is high corruption in the oil industry. For example, the former Finance Minister Zeynulla Kakimzhanov said that in 2003, 80 percent of oil companies operating in Kazakhstan are [registered as] working in offshore zones," he said.

Transparency in using oil revenues is very essential for Caspian Base countries. These countries' future economic and social development directly depends on how much oil revenues will be transparently used. Today there are a number of fundamental questions for the country: "Who will control the resources" and "How will they be used?" But, how can transparency be achieved? New leaders, economists and politicians with liberal ideas, market economy skills and knowledge can play a crucial role in controlling oil revenues and establishing transparency.

Civil society organizations (CSOs)'s activities are mostly focused on establishing transparency in the broad economic system, and the Centre for Economic and Social Development in Azerbaijan works to ensure that future revenue funds will be invested in the region and expended for the benefit of the public - in poverty reduction, education, and public health - through the promotion of transparency, civic involvement and government accountability. The Centre has put the issue of transparency on the national agenda in Azerbaijan, as a key to reducing poverty and achieving economic growth.

The role of civil society institutions in enhancing transparency

Azerbaijan civil society organisations were the first in the world to support the Extractive Industries Transparency Initiative (EITI), whose objective is to increase transparency over payments and revenues in the extractive industry sector in countries heavily dependent on these resources. The idea was generated by the British Primer Minister and spread through oil rich countries. Azerbaijan's NGOs were the first in the world to sign a memorandum to support the EITI. Twenty other oil-rich countries' NGOs later followed suit. Azerbaijan's CSOs have since continued to play a key role in establishing transparency in the oil sector and in combating corruption in the country.

A significant step towards implementing the EITI in the Republic of Azerbaijan was taken on November 24, 2004. The governmental Committee on EITI, foreign and local extractive industry companies (oil and gas) and the NGOs' Coalition for Increasing Transparency in Extractive Industries signed a memorandum of understanding on a mechanism for the implementation of EITI in the country - which was a first in the world. The memorandum was between Azerbaijan NGOs, foreign and local state oil companies and the Azerbaijan Government. Earlier, in May the same year, more than 30 Azerbaijani (Azeri) NGOs had signed a memorandum amongst themselves, and announced the establishment of the NGOs Coalition with the aim of "improving transparency in extractive industries", in an effort to ensure public control over the revenue obtained through the exploitation of the country's natural resources and their effective use.

The memorandum compels the EITI Committee - vested with the powers to prepare a consolidated national report on receipts by state authorities the revenues from state companies and other state owned entities that relate to extraction of mineral resources, and the local and foreign companies operating in the oil and gas production industry - to produce a report twice a year. The reports should include information on the payments/allocations:
received by the government from foreign and local oil and gas production companies;
made by the foreign companies engaged in the extractive industries to the government; and
made by local companies engaged in the extractive industries to the government.
The Parties to the Memorandum have established a Selection Group to identify an audit company through a competitive bidding process. The EITI Committee, the Companies Group and the NGOs Group each assign two representatives to the Selection Group. Each representative holds one vote. All decisions are made in accordance with a set of Terms of Reference and the criteria for the selection of an audit company and the Rules of Procedure that have been developed for the proper functioning of the Selection Group.

According to a survey conducted by the Economic Research Centre among oil companies, government bodies and NGOs, 70 percent of all respondents emphasised that CSOs have a key role to play in enhancing transparency and combating corruption in Azerbaijan. Only after pressure from NGOs, the Azeri government and some oil companies have publicly disclosed information and periodically give the public information on their activities in the sector. The Azerbaijan NGOs Coalition continues to actively participate in monitoring the use of oil revenues and the building of "Baku-Tbilisi-Ceyhan", an oil pipeline, and to play a key role in anti-corruption initiatives. CSOs are now working to strengthen awareness on oil revenue issues.

The EITI Committee has the power to instruct foreign and local companies operating in extractive industries in the country of the reporting formats and to instruct them to deliver completed reports directly to the audit company by the specified reporting date. The audit company's findings (Independent Accountant's Report) are then submitted to all the Parties to this Memorandum within 30 days after the submission of all reports to the auditor.

The Azerbaijan EITI NGO Coalition also works to strengthen its networks and support foreign CSOs working in similar sectors, as and when the need arises. For instance, NGO Coalition expressed deep concern and protested against arrests of two human rights activists in the Democratic Republic of Congo (DRC) and wrote a protest letter to Mr M. Pellegrini, Publish What You Pay Co-ordinator for Africa, saying: "We know that the arrests were made on false charges and the real reason is their activities in advocating for the country's oil revenue transparency and anti-corruption. The incident upset us very much and we join in all efforts that are being made to effect Mr Brice Makosso and Mr Christian Mounzeo's release soon."

At the same time NGOs in the country are working towards enhancing transparency of budget expenditure, where oil money is more than 50 percent of the total budget revenues. The government has again conceded to NGOs pressure and campaigns and has published the state budget and distributed it among different groups, and also through informative methods such as live TV talk-shows and published articles. The Attention of influential groups such as government, parliament and the media and others was drawn to oil and budget issues. The Centre for Economic and Social Development (CESD) and Economic Research Centre's (ERC) also attended parliamentary discussions and some of the suggestions they submitted were considered in the formulation of the budget. Prior to this intervention, budget documents had never been publicly published in the country. However, due to the ERC campaign the government now publishes budget documents and some CSOs have taken this advocacy on budget transparency further, and now, four years after the initiative started, even ordinary people have access to budget information! That's the power that civil society has in ensuring transparency and accountability.

References

1. EITI Azerbaijan reports, 2003, 2004, 2005, Baku, Azerbaijan
2. Barbara Pagano, Elizabeth Pagano, Stephen Lundin (2003) The Transparency Edge: How Credibility Can Make or Break You in Business, McGraw-Hill
3. Brunetti Aymo and Beatrice Weder (1995): "Political Sources of Growth: A Critical Note on Measurement" Public Choice
4. Svetlana Tsalik (2003) Caspian Oil Windfalls; who will benefit? Caspian Revenue Watch