Large mining projects such as Cascabel coexist in the country with small artisanal mineral exploitations. Photo: Courtesy
Last year, Ecuador officially began its journey towards transparency in the extractive industries, but the road ahead is a difficult one. While neighboring countries such as Colombia and Peru have made rapid progress in the implementation of the EITI standard, a global initiative aimed at facilitating transparency in oil and mining exploitation, the country is just preparing formats and adjusting details to start this process.
The Extractive Industries Transparency Initiative (EITI) is a global standard to promote open and accountable management of oil, gas and mining resources.
The proposal is for governments and companies to develop and comply with a commitment to disclose information along the extractive industry value chain from the point of extraction to how revenues reach the government and explain how they benefit the general public.
EITI'S PROPOSAL IS FOR GOVERNMENTS AND COMPANIES TO DEVELOP AND FULFILL A COMMITMENT TO DISSEMINATE INFORMATION ALONG THE EXTRACTIVE INDUSTRY VALUE CHAIN FROM THE POINT OF EXTRACTION TO HOW REVENUES REACH THE GOVERNMENT AND EXPLAIN HOW THEY BENEFIT THE GENERAL PUBLIC.
Hence, among the relevant information is how licenses are awarded and registered, who are the real beneficiaries of such operations, what are the legal and tax provisions, how much is produced, how much is paid, how that income is distributed, and what is the contribution to the national economy of these activities, including employment. Currently, 55 of the more than 180 countries in the world have joined. Ecuador has been officially part of the process since last year, although the first steps were initiated in July 2019, when the World Bank delivered to the country the diagnostic report of the current situation of the extractive industries in the country. In September 2019, the official announcement of Ecuador's interest in participating in the initiative was made, and in June 2020 the multi-stakeholder group was created, composed of state entities, civil society and extractive industries.
In October 2020, Ecuador was accepted into EITI and has 18 months to deliver its first report.The multi-stakeholder group is led by the Vice Minister of Mines (champion). On the government side, it is made up of the Vice-Presidency of the Republic, the Ministry of Energy and Natural Resources, the Ministry of Economy and Finance, and the Ministry of Telecommunications and the Information Society. The Chamber of Mining of Ecuador, Lundin Gold, Repsol and Petroamazonas are attending on behalf of the extractive industry. Finally, Foundation Ciudadanía y Desarrollo, Corporation Participación Ciudadana and Faro Group are participating on behalf of civil society.
According to the home page of EITI, which is based in Oslo, Norway, Ecuador is scheduled to start its validation in July 2023, along with countries such as Armenia, Mauritania and Togo.
Thus, on the global map, countries in the region such as Ecuador, Argentina, Mexico and Guyana appear as pending to be evaluated by the standard, while Colombia appears with satisfactory progress and Peru with significant progress. Guatemala and Honduras failed to implement EITI and appear with a suspended process.
COUNTRIES IN THE REGION SUCH AS ECUADOR, ARGENTINA, MEXICO AND GUYANA APPEAR AS PENDING EVALUATION BY THE STANDARD, WHILE COLOMBIA APPEARS WITH SATISFACTORY PROGRESS AND PERU WITH SIGNIFICANT PROGRESS.
Colombia is currently leading the implementation of the EITI standard in the region. The official website, which is maintained by the neighboring country's Ministry of Mines, contains statistical data on oil, mining and gas and shows annual reports between 2013 and 2019. The latest report available, corresponding to 2019, includes abundant statistical information, mostly from official sources, on the industries dedicated to mining and hydrocarbons in Colombia, how much they generate and how much they pay in taxes, although it omits the detail of the final beneficiaries of the process.
In this aspect, apparently the most sensitive, the page presents documents evidencing the study of the problem dated in 2016 and 2019. According to these diagnoses, 76% of the companies in Colombia did not disclose the names of their shareholders, 85% did not indicate the percentage of shareholder participation, 47% did not make public the names of their board members, and 74% omitted to report the names of their main managers.
In this regard, EITI Colombia explained that "On the other hand, companies that have voluntarily joined EITI-Colombia are still maturing in the process of reporting and verifying data for compliance with the requirements of this initiative, so the requirement of new information at this time exhibits some resistance, added to the fact that companies historically, due to the public security situation in the country, have been cautious in the handling of this type of information, so it would be expected that its use would be strictly confidential, or of controlled and limited access".
Natural resources in Ecuador
Our country is an economy based on the exploitation of natural resources. For example, oil production reaches 523,644 barrels per day (b/d), of which at least 423,381 b/d are produced by the State and about 100 thousand barrels per day are extracted by private operators.
According to information from the outgoing Government cut to March 2020, from September 2017 to March 2020, Petroecuador has carried out 11 spot crude oil sales processes (9 Oriente and 2 Napo), which until December 2023 should generate around USD 2,739 million product of the direct sale of 45 million barrels of Oriente and Napo crude.
The Government also maintained that mining has generated more than 33 thousand sources of direct employment and around 100 thousand indirect jobs on a national scale. From the third quarter of 2017 to the first quarter of 2020, the mining sector contributed USD 1,267 million from tax collection and more than USD 1,164 million from exports of small and large metallic and non-metallic mining. In addition, 45.74% of foreign direct investment, which entered Ecuador, came from this industry, said the regime.
Currently, two large-scale mines have been operating in the country since 2019. They are called Mirador and Fruta del Norte (Zamora Chinchipe, southern Amazon) and produce copper and gold respectively, as well as countless artisanal mining ventures.
The initial phase of construction of Fruta del Norte. The project has been denounced by environmental activists for affecting protected areas. Photo: Dipromin
The Mirador project is a large copper concentrate mine in the south of the country. Photo: Mongabay
The challenges in the Ecuadorian case
According to a World Bank diagnostic report, which analyzed the feasibility of EITI implementation in the country, there are some challenges that must be faced by EITI in Ecuador in the next three years.
Among the challenges identified by the World Bank are some aspects related to the current legislation in Ecuador, the prevailing opacity, especially in the mining industry, and the lack of clear transparency policies from state authorities.
In the diagnosis, the World Bank states that "despite the advances in the publication of information on the hydrocarbon sector, there are still gaps and asymmetries of information between extractive companies, the public sector and citizens that can be improved if corrected", so it recommends that "data on the administration of the extractive industries should be contextualized and consolidated in an accessible way, in an open, understandable and useful format for all the actors involved in the governance of the sector".
ACCORDING TO THE WORLD BANK, "OIL CONTRACTS ARE TECHNICALLY AVAILABLE ON THE MINISTRY'S WEB PAGES, BUT ARE OFTEN DIFFICULT TO ACCESS AND MUST BE SEARCHED AT NOTARIES".
The World Bank, based in Washington, D.C., conducted a study on the feasibility of EITI in Ecuador.
The Bank analyzed the two major sectors of the extractive industries. In the first place, the hydrocarbons sector. There, it said, "the information is of good quality, produced in a timely and reliable manner, but its disclosure could be improved. In general, the information on the hydrocarbons sector is of good quality, produced and disclosed in a timely and reliable manner" However, it would still be necessary to "improve its disclosure in a more accessible way to the public.
The Bank highlighted that after "the merger in 2018 of the Ministry of Hydrocarbons, Ministry of Mining, Ministry of Electricity and Renewable Energy and the Secretariat of Hydrocarbons into the current Ministry of Energy and Non-Renewable Natural Resources (MERNNR), the process of reorganization of information management has not been completed."
In this respect, it states that "the oil contracts are technically available on the Ministry's web pages, but they are often difficult to access and must be searched in Notaries".
Mining, between informality and opacity
The situation regarding information in mining, on the other hand, is marked by opacity and disorganization. "For mining, transparency is at an incipient stage. The list of areas that require improvement is very long. For example, the Mining Management System (SGM) of the Mining Regulation and Control Agency (ARCOM) does not allow producing reports and statistics in the format required by EITI, as the information is organized by concession and authorization, not by company," notes the World Bank.
In addition, "since January 2018 the mining registry has been temporarily closed. The registry system is vulnerable and, in a general way, the information is unreliable. In addition, there is no systematic information on artisanal mining" warns the Bank in its diagnosis, and adds that "on the other hand, the instructions for granting mining concessions do not provide for the publication of auctions and liquidation and/or request and offer of the mining sector or the list of participants and beneficiaries".
"The mining exploitation contracts signed by the State and the concessionaires are also not published on the MERNNR website. The secondary regulations of the mining governing body, regarding the granting of mining concessions, do not indicate the procedure for the publication of this information" explained the international organization.
The Bank made some recommendations to the Government to solve these shortcomings, among them, create a studies and statistics unit in ARCOM or in the Vice-Ministry of Mines; prepare a special report of ARCOM's Mining Management System to disseminate information from ARCOM's Mining Cadastre within the EITI framework; introduce a deadline for reforms to the instructions for granting mining titles, including the minimum parameters for disclosure and publication of information; establish a computerized traceability system for artisanal mining production; strengthen mining inspections; integrate declarations from traders/exporters and processing plants (mills) into the EITI process, among others.
"FOR MINING, TRANSPARENCY IS AT A VERY SUPERFICIAL LEVEL. THE LIST OF AREAS REQUIRING IMPROVEMENT IS VERY LONG," WARNS THE WORLD BANK.
But in addition to the shortcomings in the central State, the Bank identified those occurring in the interior of the country, especially in the decentralized autonomous governments (GADs) located in mining or oil areas. For example, it points to an information gap in "payments made directly by extractive companies to the GADs, involving payments by construction material companies and Municipal Patent payments (0.15% of total company assets paid to municipalities). Existing financial information on municipalities in the MEF should be explored to try to identify the revenues of the GADs from the extractive industries.
In addition to the lack of information and control, the Bank's report, which serves as the basis for the EITI standard in Ecuador, adds other types of problems, such as those related to the disclosure of information and the need to establish a legal basis to facilitate the process. The World Bank stated that "the most frequent obstacle is the confidentiality issues related to the disclosure of disaggregated information on companies' tax payments". Regarding legality, at least four aspects have been recommended: "legitimacy of the parties involved and working groups; that all companies in a country participate in the disclosure of data; access to information for auditors; and sustainable financing for the Initiative".
Regarding the legal framework, the Bank recommended "an amendment to the Organic Law on Transparency and Access to Public Information or its regulation to introduce specific EITI issues for the extractive industries", in addition to a "memorandum of understanding between the parties involved, which would be a document that describes the general principles of a voluntary agreement between the parties authorizing the disclosure of the information required by the EITI report, but does not constitute a legal contract". Finally, it does not rule out "an EITI law that would provide a legal basis for the initiative". It was stated in the report that in June 2019, the Ministry of Non-Renewable Resources recommended a reform to the Law on Transparency and Access to Information oriented to the EITI standard. The Bank said that legislation should also be passed to effectively know who are the "beneficial owners" or shareholders of extractive companies, which often respond to corporate networks that make it difficult to know who is the real owner of the shares. In this regard, he points out that "several countries have begun to establish registries, to request that this information be added to the commercial registries, or that it be sent to the authorities (for example, the case of Argentina, Brazil, Costa Rica and Uruguay). On the other hand, Colombia, Peru, Dominican Republic and Trinidad and Tobago are preparing the creation of beneficial ownership registries within the framework of EITI".
THE BANK SAID THAT LEGISLATION SHOULD ALSO BE PASSED TO EFFECTIVELY KNOW WHO THE "BENEFICIAL OWNERS" OR SHAREHOLDERS OF EXTRACTIVE COMPANIES ARE, AS THEY OFTEN RESPOND TO CORPORATE NETWORKS THAT MAKE IT DIFFICULT TO KNOW WHO THE REAL OWNER OF THE SHARES IS.
Therefore, in addition to the reforms that facilitate transparency, the World Bank recommended "modifying the hydrocarbons and mining laws to introduce the obligation to disclose beneficial ownership and create databases in the respective Control Agencies" as well as "modifying the Transparency Law or its regulations and introducing the obligation to disclose beneficial ownership", as well as considering the possibility of "drafting an organic law on beneficial ownership". On the other hand, the Superintendence of Companies should be in charge of the "disclosure of beneficial owners for key sectors of the economy".
EITI goals in Ecuador
After overcoming the problems, EITI in Ecuador should set goals. According to the Bank, "it should cover all revenues related to 100% of hydrocarbon production and transportation and 80% of mining production".
THE WORLD BANK CONSULTANCY ALSO MADE A TENTATIVE BUDGET, ACCORDING TO WHICH THE IMPLEMENTATION OF EITI IN ECUADOR COULD COST AT LEAST USD 250,000 PER YEAR AND WOULD TAKE NO LESS THAN THREE YEARS. IN COLOMBIA, THE PROCESS HAS COST UP TO USD 600,000 PER YEAR.
Regarding hydrocarbons, the goal would be to be able to make transparent "all payments made by all companies in the hydrocarbon sector (exploration, production and transportation) with a coverage of 100% of the sector's production and revenues" while in mining "the situation is imprecise since there is no information on payments disaggregated by company and ARCOM does not provide production data by company, only by concession. Based on information provided by concession, it is recommended that payments from companies with annual sales over US$ 1 million be considered relevant; this threshold covers 80% of official gold production, 100% of gold concentrate production and 81% of copper concentrate production, equivalent to 80% of the country's official mining production and 65% of total production if the estimate on illegal gold production is integrated".
The World Bank consultancy also made a tentative budget, according to which the implementation of EITI in Ecuador could cost at least USD 250,000 per year and would take no less than three years. In Colombia, the process has cost up to US$600,000 per year. The investment in government institutional strengthening alone could cost between US$ 5 to 10 million, the Bank estimated.
EITI Ecuador negotiates financing for first two years
Juan Carlos Dueñas has been the Technical Secretary of EITI Ecuador since this year.
Since January of this year, the EITI Ecuador initiative has had an executive secretary. He is Juan Carlos Dueñas, a Biotechnology engineer from the Polytechnic School of the Army with a specialization in Development Projects from the Andean University Simon Bolivar. Dueñas obtained a Master's Degree in Environmental Contamination and Toxicology from the University of Valencia, Spain.
According to his résumé, Dueñas has 10 years of experience in design, monitoring and evaluation of development projects; management of multidisciplinary technical teams (health, safety, environment, social management and communication) for management and analysis of socio-environmental information; and implementation of environmental management plans, community relations plans and social responsibility. He was selected among at least 30 applicants by Pricewaterhouse Coopers consulting firm.
Currently, the EITI initiative in Ecuador is operating thanks to the economic support of the Pan American Development Foundation (PADF) and a donation of at least 600 thousand dollars is expected from the World Bank for the full implementation of the standard in our country.
Dueñas, in an interview with this portal, informed that the multi-stakeholder group has held nine meetings so far to define how the standard will be implemented in our country. The technical secretariat is in charge of executing the group's decisions, and between January and May 2021, the design of tools to collect information, describe and analyze the rules of the game in the extractive sector, as well as determine the destination of resources, has begun. Currently, EITI Ecuador has started collecting information from public institutions that have competence in the extractive sector, in details such as the types of contracts signed by the companies, the requirements currently requested from the bidders, the details of the regularization processes, among other aspects.
Another decision taken by the multi-stakeholder group has to do with the timing of the information. It was decided to collect the information from 2010 to 2020, after a discussion in the group in which some significant events were identified, such as the approval of the 2008 Constitution, the approval in 2009 of the Mining Law, the renegotiation of oil contracts in 2011, among other milestones pointed out by Dueñas.
IT WAS DECIDED TO COLLECT INFORMATION FROM 2010 TO 2020, AND SOME SIGNIFICANT EVENTS WERE IDENTIFIED, SUCH AS THE APPROVAL OF THE 2008 CONSTITUTION, THE ENACTMENT IN 2009 OF THE MINING LAW, THE RENEGOTIATION OF OIL CONTRACTS IN 2011, AMONG OTHER MILESTONES POINTED OUT BY JUAN CARLOS DUEÑAS.
On the other hand, the technical secretariat and the multi-stakeholder group have been working to raise funds for the operation, especially from the World Bank, a global entity whose lines of action include the implementation of the EITI standard in countries with natural resources. The Bank is expected to provide a non-reimbursable fund of USD 600 thousand for two years of operation, which means that it will cost at least USD 300 thousand per year. Dueñas stresses that additional financing will be sought to improve access to information and develop computer networks.
Socialization actions have also been developed with companies and information will be sought from all oil companies and from small, medium and large mining companies. The value chain of the extractive sector has five links: the first refers to contracts and licenses, which includes oil blocks and mining titles, as well as environmental reports. The second link seeks exploration, production and export data. The third is the collection of revenues from both the State and the GADS. The fourth will seek to analyze the distribution of income, as well as the fulfillment of royalties. The fifth will analyze the social management of the companies. It will also promote the role of women in the extractive industry and company actions in gender equity.
According to Dueñas, the tenth meeting of the multi-stakeholder group, currently made up of 12 industries and three unions, seven public institutions and nine civil society organizations, will be held before the change of government. "They are going to have very tough discussions", anticipates Dueñas, who believes that the oil and mining sector in Ecuador will be made more transparent. With more information, civil society will have to generate the debate.
Dueñas estimates that by the second quarter of this year the EITI Ecuador page will be online with the first information obtained, which will refer to the legal frameworks and the fiscal regime. They are also analyzing how to present the available information on mining concessions and oil blocks. The multi-stakeholder group will organize groups of experts to develop the website. Feedback will also be sought from people living in the mining areas.
The technical secretary also believes that legal reforms will be necessary, in accordance with the World Bank's diagnosis, but notes that publicly traded companies publish information on shareholders and directors. EITI forms related to beneficial ownership information are being analyzed by the Ecuadorian chapter. PADF Ecuador's support for the hiring of a consultant for the work plan and financing of the initiative's early activities is noteworthy. The State is not currently contributing financial resources to the initiative.
The need for legal reforms
Mauricio Alarcón coordinates the civil society group at EITI.
Mauricio Alarcón, director of the Fundación Ciudadanía y Desarrollo, is part of the multi-stakeholder group and emphasizes that the work plan in the Ecuadorian case includes an initial stage that began in October 2020. The group has analyzed information matrices that include several informative aspects and for the moment is waiting for the transition and the change of government. A new Minister of Natural Resources will have to appoint the Vice-Minister of Mines. For the moment, notes Alarcón, the change of government has put the process on hold.
Alarcón maintains that a Fiscal Transparency bill was presented by the Citizen Participation corporation, which included some aspects related to EITI, however, the proposal did not prosper in the Legislative.
TOGETHER WITH THE OMBUDSMAN'S OFFICE, CITIZENSHIP AND DEVELOPMENT PRESENTED A BILL TO REPLACE THE CURRENT TRANSPARENCY LAW, WHICH ALSO INCORPORATES SOME CRITERIA THAT WOULD ALLOW THE FULL IMPLEMENTATION OF THE EITI STANDARD.
He also adds that he is in favor of a reform and update of the Law of Transparency and Access to Information, since situations such as the confidentiality agreed in the contracts for vaccines against the coronavirus have shown that similar obstacles could be evidenced in the extractive industry. He also warns that, with the current legal framework, someone could allege "violation of privacy" if the names of the final beneficiaries of companies related to mining and oil are published.
Together with the Ombudsman's Office, Citizenship and Development presented a project to replace the current Transparency Law, which also incorporates some criteria that would allow the full implementation of the EITI standard.
For the time being, like many other activities in the country, the EITI Ecuador initiative looks with expectation to the policies and decisions that, as of May 24, will be taken by the Government presided by Guillermo Lasso.
Translated by Manuel Novik