From “Curse” to “Cure”: Governance Work in Extractive Industries and Beyond Brown Bag Lunch 25 July 2007

From “Curse” to “Cure”:

Governance Work in Extractive Industries and Beyond

Brown Bag Lunch

25 July 2007

2

Agenda

• Governance practice at Dalberg

• Overview of the issue: the role of governance & differences in country performance

• Review of the approach: objectives, phases, & timeframe

• Efforts to-date: high-level analysis & country-level pilot projects

• Implications and potential relevance across the World Bank

“The common curse of mankind: folly and ignorance” – William Shakespeare

3

Dalberg – what we do

a professional services firm

that promotes global development

by helping leaders of the most significant public, non-profit and private sector institutions affecting international development

to develop the right strategies, to enhance organisational and operational performance, and to introduce innovative ideas

Dalberg is…

Dalberg brings leading private sector methodologies to organizations focused on international development

• Placer Dome Inc./Barrick Gold Corp.

• UPM-Kymmene Corp (U.S-Finland) and Imerys Ltda. (France-Brazil)

• Inter-American Development Bank

• Fortune 10 Oil and Gas company

• Top 10 global mining company

Dalberg has worked on governance issues with…

4

Dalberg – our organization

Global Presence

• Founded in October 2001 with offices in New York and Copenhagen

• Geneva and Washington DC added in 2005

• Johannesburg and Santiago added in 2007

• Now establishing strategic presence in London

Clients• Over 40 clients, served on more

than 150 projects since 2001

People• 40 full-time consulting staff from 13 countries• Top-tier strategy consulting experience –

McKinsey, Bain, BCG, etc.• Distinguished advisory board

StrategicPresence

Offices

Geneva

CopenhagenLondon

Johannesburg

Santiago

New York

Washington DC

5






Agenda “There is no such thing as a free lunch” – Milton Friedman

6

Role of governance – countries with significant extractive industries tend to have low rankings in governance indicators

Rule of Law - 2006G

UIN

EA

BO

LIV

IAN

IGE

R

BO

TS

WA

NA

NO

RW

AY

CH

ILE

SO

UT

H A

FR

ICA

GA

BO

N

ZA

MB

IAM

OZ

AM

BIQ

UE

IND

ON

ES

IAIR

AN

AZ

ER

BA

IJA

NK

AZ

AK

HS

TA

N

EC

UA

DO

RP

AP

UA

NE

W G

UIN

EA

TO

GO

CA

ME

RO

ON

TA

JIK

IST

AN

SIE

RR

A L

EO

NE

NIG

ER

IAC

ON

GO

VE

NE

ZU

EL

AC

HA

DA

NG

OL

A

Co

ng

o, D

em. R

ep.

IRA

Q

-3

-2

-1

0

1

2

3

211 Countries

No

rmal

ized

Ru

le o

f L

aw I

nd

ex

HIGH

LOW

(Chosen comparator also shown for selected countries)

Note: Blue dots represent estimates for the 2006 governance indicators. The thin vertical lines represent standard errors around these estimates for each country in world-wide sample. Black dot represents the chosen year comparator (if any). To add or delete countries from the chart, click on the "Country Selection" tab below.Source: "Governance Matters VI: Governance Indicators for 1996-2006 " by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi.

Disclaimer: The governance indicators presented here reflect the statistical compilation of responses on the quality of governance given by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries, as reported by a number of survey institutes, think tanks, non-governmental organizations, and international organizations. The aggregate indicators in no way reflect the official position of the World Bank, its Executive Directors, or the countries they represent. As discussed in detail in the accompanying papers, countries' relative positions on these indicators are subject to margins of error that are clearly indicated. Consequently, precise country rankings should not be inferred from this

90th – 100th percentile 75th – 90th percentile 50th – 75th percentile 25th -50th percentile 10th – 25th percentile 0th – 10th percentile

7

Role of governance – weak governance contributes to a number of policy distortions, resulting in poor economic performance

• More costly public investments

• Lower government revenues • Lower operations &

maintenance expenditures

• Lower resource surpluses

• Foreign exchange overvaluation

• Loss of competitiveness of non-extractive sectors

• “Please effect” – incremental recurrent expenditures

• Diminishing human capital formation

Weak governance normally associated with:

Policy distortions normally involve:

Poor economic performance

8






Agenda “To lead people, walk behind them” – Lao Tzu

9

Phases and objectives – the current effort involved developing a systematic framework & conducting two pilot projects, in Ghana and Mali

Development objectives:

(i) Develop and test a comprehensive Governance Framework for Extractive Industries in Africa;

(ii) Provide governments with practical, operational measures to support sustainable mineral resource development; and,

(iii)Develop and mainstream practical measures regarding transparency, accountability, information-sharing, and consultative & scrutiny mechanisms.

Key expected outputs/ results:

• Taxonomy of countries and types of governance issues;

• How well issues can be addressed with instruments & tools;

• Types of implementation issues to address for success; and,

• Capacity building to support application of the framework by governments in two countries.

BNPP Grant

•In-depth diagnosis of governance vulnerabilities and mapping of institutional vulnerabilities in two pilot countries:

—Ghana

—Mali

•Designing an action plan for implementation including an assessment of implementation issues.

•Development of a systematic approach to governance assessment, remediation, and evaluation in extractive industries, including:

—Demand as well as supply;

—A systemic view, rather than purely sectoral;

—An emphasis on fact-finding; and,

—A customized approach.

2 Phase 2: Pilot Phase

1Phase 1: Framework Development

10

Framework and guidance – the approach has entailed a high-level analysis, detailed country diagnostics, and designs for action plans

Tools providedRelevant fact baseObjectiveStage of Bank involvement

Strategic approachFull description of governance vulnerabilities and dynamics among institutions, and key participants

Create a customized approach to meet governance goals

Action Plan

14 Diagnostic Guides• First hand meetings with institution staff

• Field visits

Provide the necessary information about a corrupt system to prioritize and plan interventions at the outset of a Bank program in a specific country and in the context of a specific investment

Detailed Diagnostic

• Governance Typology

• Prioritization matrix• Institutional forces

framework

• In-house expertise

• WBI Statistical database

• Compare countries and chart progress against peers

• Segment countries according to stage of governance, and type of vulnerability. This enables the development of segment-oriented product portfolios

• Provide task teams initial guidelines to diagnose, analyze and develop strategies to address areas vulnerable to corruption

• Outline a detailed work plan to carry out the full initiative

First Cut Analysis

Tools providedRelevant fact baseObjectiveStage of Bank involvement

Strategic approachFull description of governance vulnerabilities and dynamics among institutions, and key participants

Create a customized approach to meet governance goals

Action Plan

14 Diagnostic Guides• First hand meetings with institution staff

• Field visits

Provide the necessary information about a corrupt system to prioritize and plan interventions at the outset of a Bank program in a specific country and in the context of a specific investment

Detailed Diagnostic

• Governance Typology

• Prioritization matrix• Institutional forces

framework

• In-house expertise

• WBI Statistical database

• Compare countries and chart progress against peers

• Segment countries according to stage of governance, and type of vulnerability. This enables the development of segment-oriented product portfolios

• Provide task teams initial guidelines to diagnose, analyze and develop strategies to address areas vulnerable to corruption

• Outline a detailed work plan to carry out the full initiative

First Cut Analysis

11

Next steps

Overall timeframe – framework development was completed in 2006 and the two pilot projects were recently completed

June – July 2007

May – June 2007

July 2006

• Phase 1: Governance Framework development

• Phase 2: Ghana pilot project

• Interviews with relevant stakeholders

• Analysis & reporting

• Phase 2: Mali pilot project

• Interviews with relevant stakeholders

• Analysis & reporting

July 2007

• Finalization of cross-pilot findings & report submission

• Discussion of key findings with relevant stakeholders, including country teams

• Evaluation of applicability and extension of methodology to other regions, countries, and sectors

• Follow-up on Ghana & Mali report recommendations and implementation

12






Agenda “Sunlight is the best disinfectant” – U.S. Supreme Court Justice Louis Brandeis

13

High-level analysis – countries were analyzed in terms of the current and potential impact of improvements to mining sector governance

Countries selection:

•Potential impact

•Moderate ability to absorb assistance

•Country willingness to engage

•Integration with World Bank objectives and country team willingness to engage

0%

5%

10%

15%

20%

25%

30%

0 10 20 30 40 50 60 70 80

Congo-DRC Botswana

South Africa

Namibia

Ghana

Mauritania

Tanzania

Mozambique

Zambia

Niger

Cameroon

Guinea

Togo

Angola

Level of impact [Desirability]

•% of GDP from ore/ metals exports

Country ability to absorb assistance [Feasibility]

• Government effectiveness• Rule of law• Regulatory quality• Control of corruption• Voice and accountability• Political stability / no violence

Primary focus

Difficult to engage

Fewer challenges

Madagascar

Moderate number of contracts

Highest number of exploration contracts

Ethiopia

Mali

No or low number of contracts

14

Country-level analysis – the pilots considered three key perspectives of the mining sector, the demand-side, supply-side, & revenue flows

• Emphasize the collection & redistribution of mining sector revenues & royalties

• E.g., Ministries of Finance, etc.

• Highlight the mechanisms for accountability and the demand for good governance

• E.g., civil society, small scale miners, media, local populations

• Concentrate on the most vulnerable institutions in terms of capacity

• E.g., Ministries of Mines, etc.

• Build on specific findings of previous efforts (e.g. EITI, etc.)

• Largely missing in existing efforts

• Vital to long term development objectives & sustainability

• Strategic prioritization of capacity & institutional issues beyond financial corruption

Key objectives:

Value added by effort:

“Revenue Flows”“Demand” side “Supply” side

15

Sector-level analysis – key demand-side and supply-side mining sector stakeholders were evaluated across the project cycle to rank issues

Project Phases

Institution Preparation Investment Operations Closure

Department of Mines (Licensing Agency)

X X X

Environmental Authority X X X

Social Services(Education and Health)

X X

Taxation Authorities X X

Central Bank / Investment Board Agency

X X

Ministry of Finance X

Local Business Partner(State or private)

X X X

Regional / Local Authorities and Stakeholders

X X X

Customs X X

Inspection Agencies (Mines, Health and Safety)

X X X

Infrastructure Providers (State or Private)

X

Trusts X

Oversight Institution (Supreme Audit Authority)

X X

Budget Finance and Surplus Management

X

Political Authorities (President, Cabinet, etc…)

X X X

• Where are the most critical governance vulnerabilities?

• Where are governance interventions most likely to foster improvements?

• Which institutions should be prioritized?

• How can the “demand” side best be addressed, in conjunction with “supply” side institutional issues?

Institutions with a focus broader than mining

16

Institutional-level analysis – for selected institutions, the approach looked at six key areas of potential governance vulnerabilities

Organizational structure• Is authority properly

delegated and limited?

• Are appropriate reporting relationships in place among the organizational units?

Policies and processes• Are financial and management

controls well established & safeguarded?

• Are budgeting and reporting procedures well specified & effectively implemented?

Leadership & authority

• To what degree is management committed to strong internal control?

• Is authority properly delegated & limited?

Culture and incentives

• To what degree are staff of the organization sufficiently compensated to ensure competence and integrity?

Transparency• Are policies and procedures clear

to employees?• Can outside stakeholders view

and react to internal processes?

Transparency• Are policies and procedures clear

to employees?• Can outside stakeholders view

and react to internal processes?

2

3

4

56

Resources & capacity• Does the organization

have sufficient resources?

• Can it maintain adequate capacity?

1

17

Preliminary high-level findings – the approach has yielded insights into critical differences across pilot countries in order to tailor responses

• Relatively well developed, with greater need to harness sector activity for broader exploitation & development

• Nascent mineral development for gold only, with ambiguous regulatory and taxation regimes

Ghana Mali

Status of sector development

Large & small scale mining

Corruption

Civil society & demand-side

• Strong large scale regulation, but lacking capacity & strategies for small scale mining

• Significant gaps in large scale mining oversight with little attention to small scale mining

• Ingrained in structure of decision-making, with most concerns at local level

• “Little C” widely recognized as endemic with greater worries over newly emerging “large C” as sector develops

• Relatively well developed local civil society with need to re-orient towards action & community mobilization

• Nearly non-existent civil society with calls for international civil society assistance

18






Agenda “Everything is in the execution” – Napoleon Bonaparte

19

Key differences – the present approach differs in key ways from other approaches, to provide a comprehensive & customized methodology

• Focus on demand as well as supply – not just government effectiveness in the areas of laws, policies and institutional development, but also pull from indigenous civil society and private sector

• Not limited to the sector – inclusive of institutions and parties peripherally involved in extractive industries activities who play critical and often leading roles in permitting corruption to happen in the sector

• Emphasis on fact finding and not symptoms – focus on ground-level, inside-out analysis to diagnose problems and develop solutions

• A customized and adaptable approach – fit and adapt to the unique corruption challenges in a country, and be able to evolve as those challenges change

20

Constraints – the approach requires continuous iterations to arrive at “good fit” recommendations

• This is a work in progress – the best approach will be adaptive and iterative, with continued improvements

• This would require a shift of emphasis from replicating “good practices” towards designing “good fits”

• These are guidelines not questionnaires – the emphasis is on probing, figuring out how specific institutions work, identifying critical vulnerabilities, and crafting a strategy from the ground-up

• This may demand a new approach to address the problems – the reality is that corruption is unwieldy, often times pervasive, and dynamic – the World Bank might consider continuing with an adaptive approach, with greater emphasis on systemic issues and thus cross-sector teams, etc.

21

Implications – integrating this approach may enhance the sustainability of methods to improve governance & foster mining-sector led development

• EITI discloses and tracks royalties, taxes and associated payments of major mining companies– BUT, it does not address the development impact of the resources

• Some institutions rightly focus on the latter– BUT, caution is needed in simply extending tracking locally, due to

intensive information- and institutional- needs, & potential establishment of entitlements

• Efforts are needed to build vehicles of transparency, feedback, contestation, checks and balances, that provide incentives for locally-driven accountability– Demand side improvements would effectively complement institution-building

efforts

• The approach systematically analyzed issues around leadership & authority, policies & processes, culture & incentives, organizational structure and transparency

• The effectiveness of this approach may be enhanced if:– “Mainstreamed" into normal policy, sector and project work– Properly integrated governance dimensions into operational work

• The result could help reduce claim of Bank staff on government officials' time by approaching institutional issues with a common framework

22

Possible future directions & next steps – Lessons of Mali & Ghana could significantly inform future country efforts with very different conditions

•The Mali pilot could inform efforts in more difficult countries that require greater institutional improvements

•The Ghana pilot could inform efforts in countries seeking greater competitiveness globally for their mining sectors

0%

5%

10%

15%

20%

25%

30%

0 10 20 30 40 50 60 70 80

Congo-DRC Botswana

South Africa

Namibia

Ghana

Mauritania

Tanzania

Mozambique

Zambia

Niger

Cameroon

Guinea

Togo

Angola

Level of

imp

act

[Desir

ab

ilit

y]

•%

of

GD

P f

rom

ore

/ m

eta

ls e

xp

ort

s

Country ability to absorb assistance [Feasibility]

• Government effectiveness• Rule of law• Regulatory quality• Control of corruption• Voice and accountability• Political stability / no violence

Basic Institutional/ Governance Issues

Policy/ Thematic

Issues

Madagascar

Ethiopia

Mali

Documents

From “Curse” to “Cure”: Governance Work in Extractive Industries and Beyond Brown Bag Lunch 25 July 2007