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13/05/20141

Joint Accountability Conference EAAPAC & SADCOPAC

12th – 15th May, 2014 Lusaka, Zambia

THEME: ENHANCE PUBLIC ACCOUNTABILITY AND TRANSPARENCY IN THE MANAGEMENT OF NATURAL RESOURCES

Topic: Audit of extractive Industry contracts – Role of SAIs in ensuring

transparency and accountability in extractive industry

Presented by: Ludovick S. L UtouhController and Auditor General of the United Republic Of Tanzania

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Presentation Outline 1. Introduction 2. Prerequisites for effective audit in extractive

industry3. Audit of Minerals4. The level of extractive industry in Tanzania5. Roles of SAI Tanzania in auditing Extractive

Industries6. Challenges and way forward in auditing

Extractive Industries7. Conclusion

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1. INTRODUCTION• Extractive industry involves the exploitation of non-

renewable natural resources. Tanzania is among the endowed countries with minerals, oil and natural gas deposits and it is still expected that additional deposits will be discovered in the future.

• Natural resources are fundamental potential sources of revenue for many developing countries including Tanzania. Therefore, it is my view that effective management and monitoring of natural resources are essential for the transformation of any country’s economy.

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1. Introduction …

• For extractive industry to become the key driver of a country’s economy, the following questions need to be taken into consideration:(i) Are we comfortable on the revenue

received from the available natural resources?

(ii) Is there reliable information showing the natural resource reserves of our country?

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In dealing with the issue of extractive industry the following key Questions need to be answered

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Key Questions need to be answered …

(iii) Does the Government and its responsible officers fulfill their roles adequately in managing and monitoring the country’s natural resources?

(iv) Are citizens well informed of the revenues collected and its

expenditures?;• The Supreme Audit Institutions (SAI), as

auditors of Governments and other stakeholders are looking for answers on these key questions.5

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2. PREREQUISITES FOR EFFECTIVE AUDIT IN EXTRACTIVE INDUSTRIES

Prerequisites Explanations1. Legal Framework

• There should be a legal framework which provides for the mandate of the SAI to audit extractive industries in the country.

For the SAI to effectively discharge its audit responsibilities and be seen to be adding value in the audit of extractive industry needs to make sure that the following issues are taken into consideration:

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Prerequisites for effective audit in extractive industries …

Prerequisites Explanations

2. Capacity • The SAI needs to make sure it invests on knowledge, technology, manpower, standards and guidelines to enable the SAI’s staff to effectively carry out the mandated role.

3. Local content • To conduct an independent assessment for the implementation of production sharing agreements (PSAs) provisions on local content including procurement, employment, sub contracting, employment, training and transfer of technology.

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3. AUDIT OF MINERALS

In Tanzania, extractive industry is regulated by various legislations. Among these legislations includes the following:

(i) The Petroleum Act, 2008

(ii) The Mining Act, 2010

(iii)The Income Tax Act, 2004

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3. Audit of Minerals …

Apart from the above legislations, there are various controls established in extractive industries. Among these controls is the establishment of Tanzania Minerals Audit Agency (TMAA) in 2009.

The main roles of TMAA includes the following:

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3. Audit of Minerals …

Roles of TMAA

(i)To monitor and audit quality and quantity of minerals produced and exported by large, medium and small scale miners; to determine the revenues generated to facilitate collection of payable royalty;

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3. Audit of Minerals …

Roles of TMAA ….

(ii) To audit capital investment and operating expenditure of the large and medium scale mines for the purpose of gathering taxable information and providing the same to the Tanzania Revenue Authority (TRA) and other relevant authorities;

(iii) To monitor and audit environmental management, environmental budget and expenditure for progressive rehabilitation and mine closure;

• TMAA has a mandate to perform more functions other than the mentioned above.

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3. Audit of Minerals …

The Role of CAG in auditing TMAA

• In Tanzania, the CAG is mandated to audit operations of TMAA to ensure that they are in accordance with the laws, regulations and standards.

• Also, the CAG is responsible for reviewing TMAA reports and ascertain the level of reliance that can be placed on and report the same to the public.

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3. Audit of Minerals …

The Role of CAG in auditing TMAA …

• Currently, there is a plan to formalize the process by signing of a Memorandum of Understanding (MoU) between TMAA and CAG Office to share the information of TMAA in CAG’s reports through participatory audit.

• This will enhance accountability and transparency on the extractive industry in the country as the TMAA’s findings and recommendations will get their way to Parliament and hence the Public Accounts Committee.

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4. THE LEVEL OF EXTRACTIVE INDUSTRY IN TANZANIA

• Large scale extraction is relatively new in Tanzania. So far the industry has not yet contributed enough to the GDP as well as improvement of the standard of living, particularly those in local communities since the sector was liberalized in the early 1990s. There is much to be done before the industry can be expected to contribute more to the national economy which will include effective auditing of the sector.

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4. The level of extractive industry in Tanzania ...

• However, the sector’s contribution to the GDP is currently growing. The sectoral growth of this sector in 2012 was 7.8% compared to the growth rate of 2.8% in 2011. Its contribution to the national economy was 3.5% in 2012 compared to 3.3% in 2011, using 2012 prices.

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4. The level of extractive industry in Tanzania ...

• Early 2000s the gradual mounting of public and parliamentary pressure regarding transparency and returns from the extractive industry led to the formulation of a Mining Policy in 2009 and the new Mining Act of 2010.

• In 2009 Tanzania joined the Extractive Industries Transparency Initiative (EITI) to enhance transparency of revenue from extractive industries.

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4. The level of extractive industry in Tanzania ...

• On 12th December, 2012 the EITI Board declared Tanzania to be Compliant with the EITI Rules and standards.

• Some of the standards includes: Effective oversight by the multi-

stakeholder group (MSG)

Timely publication of EITI reports

Inclusion of contextual information about extractive industries

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4. The level of extractive industry in Tanzania ...

• Currently, a total of 3 reconciliation reports have been produced from the financial year 2008-09 to 2010-11. The main issues pointed out in the TEITI reports include:Discrepancies between revenue reported by

extractive companies and the ones reported by the government.

Contribution of extractive industry to the economy, production data, revenue allocation and sustainability of revenue, etc.

• The CAG is also involved in investigating and resolving the discrepancies reported in TEITI reconciliation reports.

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4. The level of extractive industry in Tanzania ...

Contribution of extractive industries to the country’s Economy

• The extractive industry is one of the fastest growing sectors in Tanzania after the discovery of: •Oil •Gas and •uranium reserves.

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4. The level of extractive industry in Tanzania ...

Contribution of extractive industries to the country’s Economy …

•Extractive industry like other sectors such as Agriculture contributes much to our export industry and employment opportunities.

Mineral Sector contributes to exports by 41.9% compared to Agriculture which contributes 16.7%.

In the Employment sector, the Mineral sector absorbs less than 0.9% of the labour force, while the Agriculture sector absorbs 67.9%.

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5. ROLES OF SAI - TANZANIA IN AUDITING EXTRACTIVE INDUSTRY CONTRACTS

• As any other SAIs, our office has a critical role to fulfill in ensuring that revenues are collected and used in accordance with rules and regulations and environmental issues are taken into account by the Extractive Industries.

• CAG as an eye of the public is responsible for auditing all public sectors including those involved directly in monitoring of contracts and collection of revenue from extractive industries.

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5. Roles of SAI Tanzania …cont

• Advising the Government on the improvement of Tax Laws and regulations which provides loophole for tax evasion and unbeneficial tax exemptions granted to the extractive industry as in Tanzania, where tax exemptions stood at 10% of the total budget as at 30 June 2013.

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5. Roles of SAI Tanzania …cont

• Reviewing and verifying implementation status of the PACs directives issued to the government regarding extractive industry.

• Investigate and provide assurance on the discrepancies arising from TEITI reconciliation reports regarding receipt and payment figures reported by tax payers and the Government after the request from the TEITI Multi-Stakeholder group.

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6. THE CHALLENGES IN AUDITING EXTRACTIVE INDUSTRIES

• Since, extractive industry is an emerging sector in Africa, it poses a great challenge to auditors on evaluating related controls and general operations to provide reasonable assurance on the effectiveness of the resources extracted against the revenue received by the Government.

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6. The challenges in auditing Extractive industries …

• Limited human resource capacity: SAIs do not have enough staff that are competent and fully dedicated in auditing extractive industry.

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6. The challenges in auditing Extractive industries …

• Laws and regulations of the Country: Although the CAG can audit the gas sector within his/her constitutional mandate, there is still a challenge of access to records kept by private companies (Investors) as there is no specific legal mandate over their operations.

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7. THE WAY FORWARD

• The Office of the Controller and Auditor General has undergone various steps to curb the noted challenges.

• Empowerment of human resources through capacity building, whereby the office has started training auditors through AFROSAI-E who will specialize in auditing the extractive industry.

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7. The way forward Cont……

• Extend our audit scope in financial, compliance and performance audit specifically in extractive industry

• Liaison and work as a task force between CAG office and Government stakeholders including TMAA and TEITI to enhance transparency and accountability in the extraction of natural resources.

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7. The way forward Cont……

• Finally, the CAG is currently doing a special audit on tax exemption for the year 2013/2014 to identify abuse of tax exemption, unbeneficial tax exemption and benefit realization of tax exemptions to the Public. The extractive industry being among the beneficiaries of the enjoyed tax exemptions in the country will be fully involved.

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8. CONCLUSION• Let me conclude by saying that, enhancing

transparency and accountability is inevitable in our countries in ensuring effective management and monitoring of extractive industry for the betterment of the citizen of the concerned countries.

• We therefore need to work with all the relevant bodies to ensure that collectively we strengthen our institutions into better management of the resources leading to benefits being realized from extractive industry.

 

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END OF PRESENTATION

Thank you for

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