Keynote speech to the Seventh Annual Eurasian Pipelines Colloquium, “Geo-Eco Politics, Eurasian Energy, and (elusive) Transparency,” School of International and Public Affairs, Columbia University, 16 April 2012.

Thank you. I have been asked to make some remarks on the theme “Transparency in Azerbaijan: the EITI Experience”. For those of you who may not know, the EITI is the Extractive Industries Transparency Initiative, which seeks to increase transparency over payments by companies from the oil and mining industries to governments and to government-linked entities, as well as transparency over revenues by those host country governments. It was announced at the September 2002 World Summit on Sustainable Development in Johannesburg, by then-UK Prime Minister Tony Blair. Azerbaijan was one of the three principal pilots of the EITI approach, and the first country to subscribe to it and implement it. In December 2003, it was officially endorsed by the World Bank Group, which sought to increase pressure for structuring revenue transparency in some high-profile extractive industries projects of the time, including the Baku-Tbilisi-Ceyhan pipeline.

Before discussing Azerbaijan in particular, it is worthwhile to give brief background on how and why the EITI came to be; and the BTC pipeline provides a point of departure. Local NGOs in Azerbaijan were trying to address technical aspects of the project by evolving a single-issue strategy to scrutinize a few well-known environmental situations, in the attempt to promote general political debate. But that is not what brought their concerns to worldwide attention. Rather, this occurred only when international NGOs raised concerns to BP’s listed markets in London and New York. This chain of events is a particular example of the general phenomenon characterized by the fact that industry operates as a government contractor under any production-sharing agreement, and when the government is too tough to challenge, it is natural for internationally organized groups to evolve a strategy challenging the private companies as a way of getting the government to respond.

The result is that the international dimension of the project comes to supersede local issues, and the debate shifts from the domestic dynamics of relations between governments and NGOs to forums that engage intergovernmental organizations and international NGOs, which latter may not even be represented in the particular geographic locales where industry is undertaking the energy project. In this matter, the consistency of scrutiny is disconnected from the constituency of concern. This globalization of scrutiny is an important reason why industry engages with publics.

As I said, the EITI was announced in 2002 and endorsed by the World Bank in 2003. In May 2004, a coalition of NGOs for the EITI was established in Azerbaijan. By the end of 2007, the year that Azerbaijan was admitted as a Candidate Country to the EITI, annual reports hade been published in a more or less timely fashion for the years 2003 through 2006. In February 2009 the EITI Board designated Azerbaijan as a Compliant Country, and reports for the years through 2008 had been published. The following year 2010 saw official agreement on the formation of a multi-stakeholder group (industry, government, civil society); and the publication of the 2009 report; the 2010 report was published in 2011. Until then, the shortcomings noted by the local EITI coalition of NGOs in 2009 and 2010 were three: a failure to cover all revenue streams, failure to explain the role of state-owned enterprises, and the omission of the monetary value of in-kind receipts such as barrels of oil. The report for 2011 for the first time not only disaggregated the government’s receipts from extractive industries by individual commodity: originally oil and gas, but with silver and gold added to these since the 2009 report, but also treated the in-kind payments to the government. It turns out the value of the in-kind payments exceeded the level of monetary receipts.

Another criticism has been that Azerbaijan’s EITI reports do not provide company-by company data. The EITI’s minimum requirements do not oblige companies to do this, but about half of all EITI reports worldwide do include such information. While several years ago only a handful of these companies explicitly endorsed the increase in transparency and slightly over a third of them were resisting, the most recent reports from the EITI coalition in Azerbaijan say that most of the companies are ready to switch to individual reporting. However, the matter can be resolved only through consensus because all companies must agree to disaggregated reporting. At the same time the number of EITI-participating companies in Azerbaijan (remember, company participation is voluntary) has decreased from a high of 31 out of 31 to 26. What the EITI process does, on the basis of a voluntary reports, is to seek to reconcile two sets of numbers: on the one hand payments from companies to government, including taxes, royalties, dividends, and so forth; and, on the other hand, payment receipts reported by the government. Thus, it does not intervene in the awarding of contracts or the monitoring of operations, or the distribution of revenues or their utilization in sustainable projects, but only in the matter of the collection of of taxes and royalties.

The performance of Azerbaijan in EITI cannot really be assessed without taking into account the broader EITI contexts, including proposals for the reform of EITI itself. Following decision by EITI Board in 2010, a comprehensive evaluation of EITI was completed in 2011 by an Oslo-based research team. This review concluded that EITI has worked so far, rapidly expanded in its short life, and “built a credible international brand”. It concludes that real results on transparency and accountability are to be found where national EITI implementation have gone beyond the bare minimum set out in the organization’s Standard. EITI must itself form “strategic partnerships” in order to close the gap between EITI’s core consensus and its aspiration, this gap representing a “fundamental reputation risk” for the EITI. “Implementation of the Global Standard is not sufficient to achieve the EITI Principles, and the EITI is not a substitute for a broader reform agenda.” The two main recommendations are that “EITI should move towards a more open, broad-based and flexible performance certification scheme”, possible elements of which are set out in the review itself; and a more comprehensive results framework for tracking EITI performance at national and international levels should be developed. The period of comment for EITI stakeholders has closed, and formal discussion and decisions are due at an EITI meeting next month.

EITI started out as a technical activity, but has evolved into a network of interested stakeholders who want to see more than just technical outcomes. EITI has not been able to stimulate socioeconomic change, reduce corruption, or reform the national economy anywhere, including Azerbaijan. New proposals that will be discussed and decided next month in Sydney, Australia, include: disclosure of information about natural resource licenses and license holders; bidding processes for the allocation of EI contracts and the owners of companies holding or bidding for licenses; transparency of payments from the national government to regional or local level; social payments that are part of contracts; transactions between state owned companies and others; and disaggregated data by company and revenue stream but not project-level. A major focus for operational reform in EITI is the question of disaggregated reporting. I have already discussed some of this in the case of Azerbaijan. It bears mentioning that in addition to commodity and company disagregration, there are also revenue stream disaggregation and project disaggregation. The draft new EITI rules propose the latter two in addition to the former two.

In addition to disaggregating reporting, a March 2012 “dialogue” in Baku identified the need to improve the effectiveness of the multi-stakeholders’ group, to increase awareness of EITI, to analyze and establish its macro-economic effect, and to employ as a broader platform for social change the NGO network that has grown form 32 NGOs in 2004 to 160 today. The 2011 EITI comprehensive review and and the 2012 “dialogue” basically set out a road-map for the further and future activity of EITI in Azerbaijan. The next phase in EITI’s evolution is only about to begin, and there are many who argue that Azerbaijan’s own “brand” will suffer if, as the original “pioneer”, it does not continue to go beyond the strict formal EITI requirements and implement whatever new norms emerge from next month’s meeting, and going beyond these even further on a voluntary basis. For this, it would be necessary to address linkages between transparency and sustainability, continue to give close attention and scrutiny to implementation, and, very important, build the capacities of the local and sub-regional stakeholders to respond to the new demands that the next phase of evolution will impose upon them.

Strategic alliances among industry leaders are what has made it possible for the industry today to succeed in historically the most difficult of circumstances. Strategic alliances are a qualitatively new phenomenon that emerged from the need to reply to the incredibly complex engineering tasks that combine economic, political, and social elements in a manner impossible to disentangle. From a management standpoint, strategic alliances between firms allow profound knowledge of the market to be combined with the best technical practices. To form them is not a choice but a necessity for achieving an appropriate pace of development but they are extremely difficult to put together. They should not be confused with partnerships, which are of a limited duration and have specific objectives. Strategic alliances are more open-ended; participants in them must share goals, risk, control, and decision-making, through clearly defined processes. I draw your attention to the fact that this last sentence also describes, in the political realm, part of the relationship traditionally conceived in democratic theory between a civil society and its government. What is to be negotiated, with the participation of national and international publics and civil societies, is a framework of behaviors and issues that need to be addressed on a global scale. That need exists, because there is otherwise an intolerable risk that the independent influence mechanisms of the three parties — industry, government, and the national and international publics and civil societies — will jeopardize the realization of the project.

In conclusion, it is worth reflecting on the fact that the EITI is not intended to be and cannot be a panacea, and fortunately the constraints of time prevent me from assuming the obligation to reflect upon such themes as human nature. But here in New York, I would like to conclude upon a short tale concerning one of the eminent sons of the neighboring state of Connecticut, Senator Thomas (not Christopher) Dodd, the father of Christopher. If Thomas Dodd is remembered for anything by political junkies these days, it is for being in 1967 the first senator censured by the U.S. Senate since Joseph McCarthy 1954 and one of only six people censured by the Senate in the 20th century. So let me at least note in passing, that earlier in his career he was a Special Agent of the US Attorney General who worked primarily on criminal and civil liberties cases, including the prosecution of the Ku Klux Klan in the 1930s; and also Executive Trial Counsel for the Office of the US Chief of Counsel at the Nuremberg trials in 1945 in 1946, essentially the number-two prosecutor. But what I wish to conclude upon here is the question, What did Senator Thomas Dodd do to deserve being censured by the Senate? The answer is that he converted campaign funds to his personal accounts and spent the money: a few tens of thousands of dollars; and did this covertly, without transparency, hiding the fact. Now some of you may know that his censure did not stop the practice. Indeed, thanks to subsequent regulation and the increase of administrative oversight over the collection and disbursement of campaign funds, this procedure is now legal, reported with the utmost transparency in public documentation, and indeed an accepted and generally unremarked-upon practice in present-day American political life, and for sums much in excess of a few tens of thousands of dollars. Gratefully, the expiration of my time obviates the naming of names—you can find them in the public record anyway!—and I invite you to draw your own inferences from this cautionary tale about Thomas Dodd. So that I am not myself misinterpreted, I should finish my remarks by saying, that as a general guiding principle, I do prefer light to darkness.