Kazakhstan’s Transparency Initiative: Curing the “Oil Curse” - RO of the Company “Deloitte & Touche RCS Ltd”

Andrew Coxshall, Audit Partner, Caspian Region

President Nazarbayev sets the objectives

In his Address to the Nation in February 2005, President Nazarbayev stated the objectives of improving governance and transparency in various aspects of public policy. On 15 July, 2005 Nazarbayev confirmed that Kazakhstan would join the Extractive Industries Transparency Initiative (EITI).

The EITI announced by UK Prime Minister, Tony Blair, at the World Summit on Sustainable Development in Johannesburg in September 2002, aims to ensure that the revenues from extractive industries contribute to sustainable development and poverty reduction (extractive industries include oil and gas and also mining). The United Kingdom Department for International Development has spearheaded this initiative since 2002. The EITI is a multi-stakeholder initiative, with partners from governments, international organizations, companies, Non-Governmental Organizations (NGOs), investors and business and industrial organizations.

Catherine Inglehearn, Deputy Head of the Mission at the British Embassy in Almaty commented that, "In launching the EITI in 2003, Tony Blair recognized the importance of transparency in the extractive industries in resource-rich countries, such as Kazakhstan, in promoting economic growth and political stability. President Nazarbayev has made an important commitment to implement EITI. As a regional leader on economic reform and progress, we hope that Kazakhstan will use EITI as another opportunity to set the pace and a higher standard on transparency too. Whilst drawing on the experience of other EITI implementing countries such as Azerbaijan, Kazakhstan should also be looking to others, Norway for example, for other models of how best to build transparent management of extractives revenues."

Astana meeting

At a meeting held in Astana on 29 July 2005, the various stakeholders had the opportunity to hear more about what the EITI would mean for Kazakhstan. The meeting was chaired by Vladimir Shkolnik, Minister of Energy and Mineral resources of the Republic of Kazakhstan and was also attended by Zhanat Yertmesova from the corporate development department of KazmunaiGaz, Pavel Lobachev of the NGO Coalition “Oil Revenue under the control of society”, and Catherine Inglehearn, representing the British Government. Pedro L Rodriguez (senior economist at the World Bank in Kazakhstan) put EITI into an overall perspective, while Andrew Coxshall from the international professional services firm Deloitte, presented the audit perspective. Joel Benjamin from the international law firm, DentonWildSapte outlined the approval process for the Memorandum of Understanding (MoU) that will formalize the EITI for Kazakhstan in a written document.

Representatives from foreign and local oil and gas and mining firms, as well as NGOs and media were also in attendance.

Why the EITI?

One of the participants asked, “Why is the transparency initiative needed?” This question is neatly answered in the EITI website, which sets out the following points:

The lack of accountability and transparency can exacerbate poor governance and lead to corruption, conflict and poverty
Transparency needs to be linked to efforts to improve financial management and to tackle corruption. Without transparency, donors and international financial institutions will be less willing to engage in these countries and companies may be cautious about investing in an opaque (or worse, corrupt) business environment
It is for the individual populations of a country to hold their government to account for the use of the resources

The EITI in operation

In simple terms the receipts (profit tax, royalties, acreage fees, transit fees, rental fees, licenses, signing and other bonuses etc) that the Government declares it has received from oil and gas and mining companies are compared (by an idependent party) to the payments that foreign and local companies declare that they have paid to the Government. These numbers should obviously be the same.
The actual reporting would work as follows: the working group would compile a consolidated national report showing the receipts (both in value and volume terms) into the state budget connected with the extraction of mineral resources in Kazakhstan. This report would be compared, by an independent party, to the individual reports of payments/allocations made to the Government by foreign and local companies engaged in extractive industries in Kazakhstan. Any differences between the two sets of figures would be investigated by the independent auditor and either resolved or reported upon in the independent auditor's report.

The Azerbaijan experience

The EITI was implemented in Azerbaijan in 2003 and the reports for the year ended 31 December 2003 and the six months ended 30 June 2004 are publicly available. Commenting on the process in Azerbaijan, Tim Mahon, Managing Partner of Deloitte in Azerbaijan (which carried out the attest work) said that "based on the media coverage of the inaugural reports, it appears that participants were well satisfied with the process. While some identified possible improvements, they also expressed that it was a very good start. Azerbaijan is now in its second reporting cycle and the 2004 reports should be made public in the next few days.”

So far the experience in Azerbaijan has been used as a template for the EITI in Kazakhstan. The Azerbaijan MoU was modified and a draft circulated to the various stakeholders on 29 July 2005. The MoU simply sets out how the first part of the EITI will work in Kazakhstan and is a Memorandum between the “Working Group” (consisting of representative from the Ministry of Energy and the Ministry of Finance) the “Group of Companies” (representing the interests of local and foreign companies holding subsurface use rights in extractive industries) and the “Group of NGOs” (representing the NGO Coalition) – collectively “the parties”.

The way forward

Events have been moving quickly since 15 July 2005 as a result of the President’s desire to enhance transparency in Kazakhstan and the hopes are that a MoU will have been discussed, agreed by the parties and be ready for signing in early October at the 2005 Kazakhstan International Oil and Gas Exhibition in Almaty. However, there are still obstacles to be overcome. One of the key concerns of the local and foreign companies is the disclosure of information to third parties – most subsurface agreements contain confidentiality clauses that prohibit the companies from releasing information to third parties. While most companies would be comfortable to release this information, they need the Government of Kazakhstan to agree to set aside the confidentiality clauses to enable information to be released to a third party for this specific purpose.

The World Bank perspective

Pedro L Rodriguez, senior economist from the World Bank and team leader of the March 2005 World Bank publication “Getting Competitive, Staying Competitive: The Challenge of Managing Kazakhstan’s oil boom” explained that, “Kazakhstan will benefit significantly from joining the Extractive Industries Transparency Initiative (EITI). As Norway’s experience shows, avoiding the oil curse requires the creation of institutions to inform and foster participation in the decision-making process by society as a whole. In this regard, Kazakhstan will gain a lot by joining EITI. Three obvious commitments can be made immediately: (1) unilaterally commit to disclose the oil revenues received by the treasury from each of the 51 legal entities operating in the oil and gas industry (and any new one that may be established); (2) encourage each legal entity operating in the sector, beginning with all the companies under the umbrella of KazMunaiGaz and in the operating companies where the government owns shares, to make available to any interested party the amounts of tax they pay, as well as detail reports of their social and local content initiatives they pursue in the fulfillment of their Production Sharing or Operating Agreements with the state; and (3) revamp the information base available to the general public on the National Fund of the Republic of Kazakhstan, including publishing the auditor’s opinion and management letter, as well as detailed reporting of the financial results of the fund.”

The EITI represents an opportunity for Kazakhstan to demonstrate to the outside world that it is leading the region in terms of transparency and reform.