Technical Note Related to the Central Bank of Iraq, and the Extractive Industries Transparency Initiative (EITI) and the Santiago Principles
On 11 -13 June 2010, FSVC staff and Volunteer experts met with H.E. Dr. Sinan al-Shabibi, the Governor of the Central Bank of Iraq (CBI), and members of his staff in Amman to consider the future of the Development Fund for Iraq (DFI).
The discussions were part of a long-term dialogue between FSVC and the CBI through which FSVC is providing advice to the CBI on ways in which the CBI can enhance its good standing in international financial markets. Central to this dialogue is the desire of the Government of Iraq (GOI) and the international community (as represented by the United Nations Security Council) to agree successor arrangements for the DFI.
In an agreed minute, posted on FSVC’s Website on 14 June 2010, FSVC and the CBI noted that the Amman discussions had included consideration of how Iraq could become compliant with the terms of the EITI and ways in which the Santiago Principles on the management of sovereign wealth funds could be applied to the DFI.
FSVC has taken the initiative to write this technical note, with the objective of providing more information on the EITI and the Santiago Principles and how they may be helpful to the GOI’s on-going efforts to promote accountability and transparency in the management of its natural resources and sovereign assets.
The EITI and the Santiago Principles
In many ways the EITI and the Santiago Principles have similar objectives – they both seek to promote transparency and accountability in the use of natural resources and sovereign assets. But there are differences of emphasis. At the risk of over-simplification, it can be said that EITI focuses on the management of natural resources, such as oil, gas and minerals, whereas the Santiago Principles focus on the management of the financial proceeds which have resulted from the sale of those natural resources.
Taken together, EITI and the Santiago Principles cover the full range of issues which the GOI is facing as it moves to improve accountability and transparency in the use of its oil revenues -- all the way from the oil wells in Iraq to the DFI bank account at the Federal Reserve Bank of New York.
Article 103 of the Iraqi Constitution provides for the establishment of a public commission, “to audit and appropriate federal revenues.” The responsibilities of such a commission are to include, “[Ensuring] the ideal use and division of federal financial resources.” Although compliance with EITI and the Santiago Principles will not in themselves result in the creation of such a commission, compliance will nonetheless be entirely within the spirit of Article 103 and will serve to demonstrate both the GOI’s underlying commitment to its implementation, and its ability to do so.
The Extractive Industries Transparency Initiative (EITI)
The EITI was launched in 2002 as part of broader initiatives which were being undertaken by the G8 countries and other international bodies to improve transparency and combat corruption. EITI provides guidance on how national governments can achieve good governance and transparency in the management of revenues which arise from the sale of natural resources.
It also offers countries the opportunity to demonstrate their commitment to good governance and transparency through becoming EITI “Candidate Countries” or EITI “Compliant Countries.”
Candidate countries are those which have signed up to implement EITI but have not yet finished a full round of EITI reporting. In order to be acknowledged as an EITI Candidate Country, a government needs to fulfill at least the following four validation indicators:
1.The government must issue an unequivocal public statement of its intention to implement EITI.
2.The government must commit to working with civil society and private companies on EITI implementation.
3.The government must appoint a senior individual to lead EITI implementation.
4.The government must have a fully-costed work plan which has been published and made widely available. The work plan should contain measurable targets, a timetable for implementation, and an assessment of capacity constraints.
A recurring theme of the EITI is the need to involve all parts of society in decisions related to the management of a country’s natural wealth. The document “Implementing the Extractive Industries Transparency Initiative” lists 24 types of stakeholders who may be involved in the EITI process, although the same document also recognizes that, “governments must ultimately act as the main driving forces for implementation.” (Pages 14-15 and page 47).
The GOI has already stated its commitment to become a “Compliant Country.” The experience of existing Candidate Countries would imply that it will take some time before Iraq is able to fulfill the conditions necessary to become “Compliant” but there is much that Iraq can do in the short term to improve on current transparency and accountability, all of which will contribute over the longer term to the ultimate objective of EITI compliance.
For example, the “Extractive Industries Transparency Initiative, Source Book” gives examples of templates which governments and private companies can use when reporting on oil and gas production. (Page 49) The document “Implementing the Extractive Industries Transparency Initiative” provides guidance on the auditing of payment and revenues related to the extraction and sale of natural resources (pages 27–30) and on how to prepare a work plan for EITI implementation. (Page 41). Both documents can be accessed at www.eiti.org.
“Candidate” status offers the GOI an achievable short-term goal which will demonstrate to the international community and the Iraqi people the GOI’s commitment to managing its oil resources and their proceeds in a transparent and accountable manner. More broadly, the documents accompanying the EITI give examples of discrete initiatives which will enhance the confidence of the international community and the Iraqi people in the GOI’s long term commitment to EITI compliance.
The Santiago Principles
The “Santiago Principles” comprise general accepted principles and practices for the governance and accountability of sovereign wealth funds (SWF) and the conduct of their investment policies. They were published in October 2008 and be accessed via the link: http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf .
The principles were drafted in part by an International Working Group (IWG) of SWF. The IWG remains in being, with member countries and permanent observers. The International Monetary Fund provides the secretariat.
Twenty four General Accepted Principles and Practices (GAPP) make up the Santiago Principles. They cover questions of ownership and accountability, governance, disclosure, and policy coordination with other branches of government. For example:
•GAPP 3 states that when the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities.
•GAPP 4 states that there should be clear and publicly disclosed policies, rules, procedures or arrangements in relation to the SWF’s general approach to funding, withdrawal and spending operations.
•GAPP 6 states that the governance framework for the SWF should establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF.
•GAPP 7 states that the owner of the SWF should set its objectives, appoint members of its governing bodies in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.
•GAPP 12 states that the SWF’s operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner
•GAPP 16 states that the governance framework and objectives, as well as the manner in which the SWF’s management is operationally independent from the owner, should be publicly disclosed.
•GAPP 18 states that the SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance and investment strategy, as set by the owner or the government body(ies).
•GAPP 23 states that the assets and investment performance of the SWF should be measured and reported to the owner according to clearly defined principles or standards.
Importantly, the Santiago Principles do not prescribe or recommend specific legal or organizational structures for SWFs. The Principles recognize that SWF may take many forms, from legally independent institutions managed separately from other branches of government to sub-accounts within a government’s routine financial architecture.
As such, the Santiago Principles provide useful guidance to any government – including the GOI -- which is engaged in reviewing the management of its sovereign assets. Of particular relevance are those Principles which highlight the need to clearly define the roles and responsibilities of different actors (GAPP 6), the need to ensure that the activities of the fund are consistent with a government’s broader macro-economic priorities (GAPP 3), and the need for a fund to exercise operational independence within a context of clearly-defined objectives set by the fund’s owner (GAPP 7 and 9).
The GOI could apply for “Permanent Observer” Status in the IWG and it could apply to join the International Forum of Sovereign Wealth Funds (the Forum), which was set up in April 2009. The Forum comprises a voluntary group of SWFs which meet at least once a year to exchange views on issues of common interest and to facilitate understanding of the Santiago Principles. (More information on the forum can be found at www.iwg-swf.org.)
Involvement in the IWG and the Forum would open up to GOI officials a wealth of information and advice on the management of SWF world wide, and could be the simplest way to open channels of communication to the bodies managing sovereign assets in the Middle East. (The Abu Dhabi Finance Department played a leading role in the IWG and the discussions leading up to the publication of the Principles, and the Kuwait Investment Authority played a leading role in the creation of the Forum. The Forum’s members also include Bahrain, Libya and Qatar.)
Another useful reference point is the annual report sent by the Norwegian Ministry of Finance to the Norwegian Parliament regarding its management of the Government Pension Fund. Since the receipts of this fund are derived primarily from oil revenues, many of the issues which the GOI is considering in regard to the DFI are issues which have already been addressed by the Norwegian authorities. The Norwegian Ministry of Finance’s report for 2009 can be seen at the following website: http://www.regjeringen.no/en/dep/fin...html?id=604725
FSVC Stands Ready to Assist the GOI Implement EITI and the Santiago Principles
As part of its on-going program to support the efforts of the CBI, and the GOI as a whole, to enhance its good standing in international financial markets, FSVC staff and Volunteer experts stand ready to assist the CBI and the GOI as a whole to implement the EITI and the Santiago Principles.
9 July 2010
FSVC and Central Bank of Iraq meet to discuss new Central Bank HQ and Future Arrangements for Development Fund for Iraq