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Revenue distribution

Extractive operations have an impact on the regions and communities where exploration and production take place. Taxation regimes may therefore provide for transfers of taxation revenue from extractive sector projects to the subnational governments of hosting regions, either directly from companies or as redistributed revenue from central government.

Revenues can also be allocated to local development funds, where they are redistributed across the country. In addition, extractive companies frequently make mandatory or discretionary contributions in cash or in kind to support the social and economic development in communities surrounding operations.

These revenues and payments are often important sources of income for local governments. EITI implementation has shown strong demand from local communities to increase transparency on their collection and allocation, to ensure that they meet their intended purpose of contributing to sustainable local development.

Why is reporting on subnational revenues and social expenditures important?

Local stakeholders are often unaware of the contributions that are made or that should be made in terms of extractive contracts. This can erode trust and, in some cases, may lead to conflict.

Publishing any legislation, contractual obligation or agreement surrounding payments, as well as the actual amounts paid or in-kind donations given, provides a more complete picture for all stakeholders involved and can help manage expectations.

Transparency can also be instrumental in ensuring that payments mandated by tax legislation or regulations reach the intended subnational government body, and that stakeholders are able to hold local authorities to account for the allocation and use of this revenue. 

Key benefits

Benefits for governments

  • National governments seeking to use extractive operations to promote sustainable local development will have increased clarity and oversight over revenues allocated to local communities and their use. They will be able to track and manage revenues more efficiently.

  • Developing an understanding of future tax revenue flows can facilitate improved planning, particularly during periods of commodity price volatility and through the energy transition, when revenues may increase, fluctuate or decline.

  • Subnational governments benefit from understanding what revenues they should receive from extractive companies or from national governments and can ensure that these revenues are received. Timely disclosures can help them plan better to respond to demands from local communities and may support community representatives and local governments in negotiating benefit sharing agreements. .

  • National and subnational governments benefit from extractive operations where there are good relations between operations and local communities. Conflict can occur when subnational revenues are not well managed or where expectations for local development impact are not met. Such conflict is costly and may deter investment into resource-rich regions.

Benefits for citizens

  • Where there are payments due to local governments or directly to communities, being aware of these payments and their allocation will help citizens hold government to account for their use. Transparency can help deter corrupt activity relating to these payments.

  • In several countries, EITI reporting has led to changes in the applicable regulatory framework and has helped ease bottlenecks, so that local communities receive the revenues to which they are entitled.

  • Payments by companies are likely to be more effective in promoting social and economic development where they are transparent and where there are opportunities for citizens to participate in decisions on how they are used. For example, integrating gender considerations into decisions on the use of extractive revenues may help redress gender imbalances and promote more equal participation in the sector.

Benefits for companies

  • Companies are increasingly held to account by investors for their social and economic impact. Companies with robust policies relating to social expenditures will benefit from increased transparency over the allocation of these payments.

  • Clarity over the terms of agreements can help companies be more certain that their payments are contributing meaningfully to local development plans and support them in demonstrating the value of their contribution to both investors and local communities.

Using data on subnational payments and social expenditures

Tracking revenue transfers in Madagascar

In Madagascar, the EITI played a key role in informing mayors and citizens and promoting debate on subnational revenue distribution from large mining operations, becoming a trusted and reliable source of information. Regulations are often complex and there is value in informing stakeholders about the mechanisms for calculating payments and the amounts that should be transferred.

Shedding light on the distribution of mining royalties in the Democratic Republic of the Congo

The DRC’s 2018 Mining Code provides for 25% of mining royalties to be paid by extractive companies to accounts identified by provincial authorities. This distribution of revenues was a departure from the previous mechanisms and the EITI has played a role in shedding light on the new system. It has helped identify challenges in determining which territories are eligible and ensuring that these large sums are managed responsibly and transparently by local authorities. 

Allocations to Local Development Funds in Mongolia

Mongolia’s General Local Development Fund consists of shares of VAT of goods and services, mineral resource royalties, oil resource royalties and grants and donations. Shares of the fund are transferred to provincial governments, or aimags, via their Local Development Funds. EITI reporting has focused on clarifying the parameters used to calculate subnational transfers and on publishing the calculations. Reporting also confirmed the absence of discrepancies between planned revenues and actual transfers to aimags.

Empowering communities in Ghana, Indonesia and Colombia

Research undertaken by the EITI International Secretariat with support from the Ford Foundation identified opportunities to strengthen the communication and dissemination of data on the extractive sector at a local level. 

Three scoping studies were undertaken by independent consultants in Buriticá in Colombia, Obuasi in Ghana, and Samarinda and Palu in Indonesia, all areas hosting and affected by mining activities. The outcomes of this work are expected to inform further communications and dissemination activities by national multi-stakeholder groups. They show that there are opportunities for EITI implementation to more proactively address barriers in the oversight of extractives encountered by local community organisations and citizens. 

Ensuring social payments benefit gender groups equally

Several countries – including Ethiopia and Zambia – disclose gender-sensitive data on social expenditures by extractive companies. This information can help track the extent to which social payments meet priorities identified by women and are used to benefit women’s groups in areas hosting extractive operations. 

Now the new system ensures greater transparency of revenues and accountability of local governments on social investment payments from oil, gas and mining companies. It is fascinating to see how the EITI reporting affected change in bringing more responsible management of the extractive sector in Kazakhstan.
Ruslan Baimishev, National Coordinator, EITI Kazakhstan

What the EITI Standard requires

The 2019 EITI Standard includes provisions on subnational payments and transfers and social expenditures by companies.

Requirement 4.6 requires multi-stakeholder groups to establish whether payments from companies to subnational government entities are material, and to disclose them where this is the case.

Requirement 5.2 enables stakeholders to assess whether the transfer and management of subnational transfers of extractive revenues are in line with statutory entitlements. It requires the disclosure of material transfers of revenue generated by the extractive sector between national and subnational governments. It also requires disclosure of the revenue sharing formula and the actual amount transferred.

Requirement 6.1 requires implementing countries to disclose social expenditures where they are mandated by law or contracts, including benefits provided in kind. Multi-stakeholder groups are encouraged to publish discretionary social expenditures where these are material.

Requirement 6.3 requires implementing countries to disclose information about the contribution of the extractive sector to the economy and can provide important contextual information for data on subnational transfers and social expenditures.

Requirement 7.1 requires implementing countries to consider access challenges and information needs of different genders and subgroups of citizens.

Helpful resources for implementation

  • EITI guidance: Guidance Notes on EITI Requirements 4.6 and 5.2 and Requirement 6.1 provide step-by-step guidance on disclosing subnational payments, subnational transfers and social and environmental expenditures.

  • NRGI: A primer developed by the Natural Resource Governance Institute explains the basics of subnational revenue distribution.

  • World Bank: Programs led by the International Finance Corporation’s Sustainable Infrastructure Advisory facilitate access to and use of information to improve natural resources investment processes, promote social accountability and demonstrate how natural resource wealth contributes to reducing poverty and boosting shared prosperity. 

  • Responsible Mining Foundation: The RMI Report 2020 provides an assessment of the economic, environmental, social and governance (EESG) policies and practices of 38 large-scale mining companies.

  • IIED: The International Institute for Environment and Development has developed a catalogue and interactive map of community development laws related to the mining sector featuring legislative arrangements from 54 countries.

  • Oxfam: Oxfam offers three recommendations for mining companies during the COVID-19 crisis.