Cover Story

International Journal of Government Auditing – January 2015

Photo: John F. S. Muwanga

Extractive industry resources provide an opportunity for current generations to redeem what they have borrowed from their grandchildren, and restore what they inherited from their forefathers.

The products of the extractive industry are a common good for the citizens of a nation. Regrettably this reality has seldom been realized in many developing nations, where the abundance of natural resources from the extractive industries has not created the much-needed relief from poverty. Instead, the natural resources have turned out to be a source of mounting problems, which have culminated in hostility, conflict and aggression— thus creating a scenario which is often referred to as the “resource curse.”

The resource curse

When compared to countries with much less natural resource endowment, many countries with rich natural resources—particularly in the developing world—continue to exhibit both slow economic growth characterized by weak governance structures and greater vulnerability to conflict. This resource curse phenomenon is inextricably linked to a lack of accountability and transparency in the extractive sector. In a nation, strengthening institutions of accountability is one of the necessary tools to transform the discovery of natural resources, however modest, into revenue flows that will bring about improved and significant impact on the quality of life of its citizens.

Supreme audit institutions (SAIs) are a critical link in this chain. SAIs are mandated to provide assurance to citizens that the governance structures that oversee the utilization of public resources are sound, transparent, and attain best value. SAIs must therefore assume a significant role in the oversight of this key sector.

This role can help in creating a conducive environment, one that will generate economic growth and promote the welfare of citizens while also ensuring that the processes of extraction does not amount to irreversible environmental damage.

Within the INTOSAI community the roles of SAIs in the extractive sector vary tremendously. SAIs are faced with many challenges, particularly those arising from the technical complexity of this sector (lack of knowledge of business processes, the government set-up, and associated risks) as well as the need for capacity building and retention of specialized staff. The mandate of the SAIs may also be constrained by the absence of an adequate legal framework.

Working Group on the Audit of Extractive Industries

It is with these considerations in mind that the INTOSAI community established a Working Group on the Audit of Extractive Industries (WGEI) in October 2013 during the XXI INCOSAI conference held in Beijing. This was a landmark in the progress toward facilitating SAIs to acquire appropriate skills and expertise to provide needed guidance in the audit of extractive industries.

“The extractive industry presents great opportunities for the impact of SAIs’ work on the lives of citizens to be realized, due to this sector’s significant potential and, when it is properly managed, its considerable revenue contribution.”
—John F. S. Muwanga

The WGEI provides an appropriate forum for SAIs to work together to promote better understanding of the sector and to effectively play their role in the promotion of transparency and accountability of public funds. The WGEI working group will provide the opportunity for members to learn best practices from each other. In addition, an opportunity will be created to form strategic liaisons and to partner with actors central to achieving WGEI objectives. Key actors in this partnership will include—among others—national governments, development partners (donors), revenue authorities and civil society organizations. Through this working group, SAIs can improve the management of extractive industries: there is an emerging trend in recognition of their role in this sector, and an overwhelming willingness by various players to support their initiatives. And, the coming together of SAIs to confront extractive industries challenges as a community provides better synergetic opportunities.

Empowering SAIs

Some SAIs, especially in developing countries, may not yet have the mandate to audit certain entities, especially where private companies are involved. This calls for the urgent expansion of the mandate of SAIs to be able to audit Public Private Partnership (PPP) arrangements in the extractive industry. Sovereign governments should work closely with SAIs and empower them to acquire this mandate. Further, they should encourage SAIs to take leadership in fostering transparency and accountability through such initiatives as becoming signatories to world agreements such as the Extractive Industries Transparency Initiative (EITI).

The extractive industry presents great opportunities for the impact of SAIs’ work on the lives of citizens to be realized, due to this sector’s significant potential and, when it is properly managed, its considerable revenue contribution. There is a need to protect nations against the “resource curse,” and SAIs, if they are adeptly empowered, are ably placed to contribute significantly to this cause. As SAIs form the nation’s pillar upon which accountability and transparency initiatives are anchored, particularly in developing countries, they can and should be used as tools to bring about the transformation of extractive industry revenue windfalls into sustainable development outcomes.