Extractive Industries: Parliamentary Oversight

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Extractive Industries: Parliamentary Oversight

Through its oversight function, parliament acts as the watchdog of the policies and politics governing the extractive industries sector. Parliament should ensure that the implementation of programmes and policies by the government is carried out in an effective and legal manner.  It can do so through closely monitoring and evaluating government policies and actions in this field, and by actively engaging with the governmental and non-governmental actors involved.  This can be accomplished through the numerous oversight tools at the disposal of the parliament, including – but by no means limited to – committee work, the question period, public hearings, parliamentary debates, audit agencies and so on.  

How effectively a parliament is able to discharge its oversight authority is contigent on a number of factors, including the specific oversight powers provided to parliament under the constitution and standing orders.  Other factors include the ability of parliament to access adequate information, the technical parliamentary capacity of individual MPs, committees, committee leadership, and the political environment in parliament. 

Oversight by the parliament is crucial if a country is to efficiently integrate the extractive industries sector into its national budget and, by extension, into its strategic framework and vision for development.  Extractive industries policies are most effective when they are well-managed and monitored, and when results and findings are publicised. 

Digging Deeper: Committee Work

A committee on extractive industries is an effective way for legislators to organise and coordinate their involvement in the extractive industries sector.  Committees are a prime venue for experts on the subject – both parliamentarians and parliamentary staff – to delve into the information available, and push for information that remains lacking when necessary.  A well-informed committee will be able to make sound policy recommendations provide constructive feedback on the budget. 

Because of the multi-disciplinary nature of the sector, committees focusing on environmental issues, gender impacts, state enterprises, private sector development, public accounts and finances are also relevant, and sometimes committee mandates might overlap.  When several committees–-budget, oil or mining, anti-corruption, lands, public accounts-–have purview of various aspects of the extractives sector, solid coordination is called for.  At other times, depending on collective committee mandates, parts of the extractive industries sector do not fall under any of the committee’s mandates. In this case, adjustments of the committee mandates might be necessary, or the legislature can establish ad-hoc, select or investigative committees to investigate specific issues.

In any case, effective oversight of the whole extractive industries sector requires that the activities of these committees be coordinated and that information be shared between them. Committees need to have clear mandates, roles and responsibilities as well as skilled members and support staff with access to relevant and accurate analysis and information. 

Transparency

A necessary prerequisite for effective oversight is transparency. Transparency in governance entails that information is made available, is timely, is accurate and is released regularly. Transparency along the extractive value chain is essential for improving the governance and management of the industry:  government and industry activities related to licensing, the implementation of contracts, the collection, management, and distribution of revenue, service delivery and so on can only be efficiently monitored in a transparent environment.

Transparency can be fostered among others through Freedom of Information Laws (FOIs), which unfortunately do not exist in many resource rich countries.  FOIs allow citizens and the legislature to request and access information from the government that would not otherwise be made routinely available, including contracts in the extractive industries sector.  Additionally,  it is important that parliamentarians address the culture of secrecy that exists in most governments and public bodies. In many countries endowed with natural resources, the generated revenues are utilised for political patronage.  Where this occurs, there is no political incentive to promote transparency and accountability in the sector.  In many if not most resource rich countries, swift strides in the field of transparency are required if substantial progress is to be made in managing extractive industries.   

Extractive Industries Transparency Initiative

The EITI is a global standard that promotes revenue transparency. It has a robust yet flexible methodology for monitoring and reconciling company payments and government revenues at the country level. Each implementing country creates its own EITI process which is overseen by participants from the government, companies and national civil society. The international EITI Board and the International Secretariat are the guardians of the EITI methodology internationally.

An EITI law strengthens the legislature's role in EITI as well. In the process of drafting, debating and reviewing the law, legislators can shape the program to ensure that it reflects country circumstances, accurately articulates citizens' needs, and complements other laws and programs related to extractive industries. Most importantly, a law will strengthen the formal legislative oversight role over EITI.

To find out more, please visit www.eiti.org.

 

The Annual Budget

Budgeting is a process rather than an event, and budget cycles are ongoing and interconnected. In most countries, the ultimate control over the national budget rests with parliament. This power of the purse constrains governments to tax and spend in only specific ways and seeks to ensure management of funds, disciplined reporting and transparency. It also provides a means for parliamentarians to be heard on how money is to be obtained and spent.

STRATEGIC FRAMEWORK

A country’s strategic framework should be reflected, explained and safeguarded in its annual budget. By getting involved in the budget process, legislatures can direct the allocation of revenues in ways that alleviate poverty and promote social and economic development.  A country’s annual budget documents expected and realised government revenues and expenditures, and explains how these fit into its long-term strategic vision.   The government also must explain how it is going to cope with increases in the world price of natural resources, avoid boom-bust cycles, and coordinate the spending of natural resource revenues.

Fighting the resource curse requires a public financial management system in which budgetary allocations are open and transparent. This requires ex ante transparency, current monitoring and ex-post evaluation of expenditures. To maintain fiscal discipline, parliament has to resist the temptation to add new spending without cutting back elsewhere in the budget. A description of major expenditure and revenue measures and their contribution to policy objectives should be provided, as well as estimates of their current and future budgetary impact and their broader economic implications. Budget discipline requires clear descriptions and costing of both continuing government programs and new policy proposals.

DRAFTING THE BUDGET

In the drafting stage of the budget process, parliament could focus on forecasted revenues from the extractive industries sector. Since commodity prices are highly volatile and unpredictable, they are essentially unreliable. Natural resource discoveries can induce governments to engage in excessive public spending based on the incorrect assumption that windfall natural resource revenues are permanent. This gives rise to unsustainable spending levels.

Overly optimistic revenue forecasts are politically tempting because they create an imaginary space for promises of more money. To avoid overly optimistic forecasts, best practices include taking a highly cautious prediction of oil, gas, or minerals prices, and construct the annual and medium term budget with those precautious revenues. In case prices turn out to be higher than expected, there have to be clear rules for spending the windfall revenues. In case prices turn out to be even lower than expected, losses are limited and not as extreme as in overly optimistic scenarios. Some countries include a non-extractive industries budget. Because oil, gas and minerals prices are so unpredictable, a budget that does not include any revenues from the extractive industries sector can serve as a worst-case baseline budget. The parliament’s estimates committee could play a role forecasting revenues and expenditures related to the petroleum and mining sectors.

The way in which predicted revenues are planned for expenditure is critical. Revenues generated by the extractives should not be spent in an ad hoc manner; rather, their expenditure should be outlined in a strategic framework, and in an annual and medium-term budget. They should be spent according to set priorities and be aimed at harnessing extractive industries for development purposes. To ensure extractive revenues are utilized for economic and social development for future generations, revenue can be deposited into a stabilization fund. Several resource rich countries use these types of funds for long-term sustainable investments or to improve government finances. Should this option be utilized governments should publicly state its objectives with respect to revenue management and how it will disburse revenues.

World Bank Institute: Parliamentary Oversight of the Extractive Industries Sector

This document outlines the role parliaments can play in the extractive industries sector, with particular attention to oversight and the budget.  It offers concrete examples and policy measures that can help reduce the resource curse and harness the extractive industries sector for development:

  • Use revenue windfalls to pay off long-term debt
  • Set up a Stabilization and/or Saving Fund to cope with price volatility and to save for future generations
  • Diversify the economy away from the extractive industries sector by investing in non-extractive industries sectors such as manufacturing and agriculture. Stimulating the local private sector in non-resource sectors will foster economic growth.
  • Target public expenditures to infrastructure, education, health, and other sectors that stimulate long-term growth of a country.  

To access this document, please click here.