Concepts & Topics

Good Financial Governance and Extractives

Gemstones from artisanal mines, Madagascar

Several UN conferences on development financing (Monterrey 2002, Doha 2008, Addis Ababa 2015) have highlighted the importance of domestic resource mobilisation for sustainable development. Helping developing countries to shape their tax systems is especially important against the backdrop of the Sustainable Development Goals (SDGs) adopted in 2015.  With support from the extractive sector, resource-rich developing countries have the opportunity to generate significant income, mobilise domestic resources for the achievement of the SDGs, and thus reduce their dependence on development assistance. Against the backdrop of increasing global demand for minerals and energy resources, the extractive sector opens up opportunities for social, political and economic development in these countries. At the same time, the sector is extremely vulnerable to tax avoidance, tax evasion and corruption due to its complex structure. In many countries, considerable revenue from the sector is being lost due to illicit financial flows (IFFs). According to the United Nations Commission for Africa (UNECA), African countries are losing around USD 50 billion per year due to IFFs – money that could otherwise be used to achieve the SDGs. The African Development Bank believes that the extractive sector is responsible for the majority of these IFFs. Good financial governance (GFG) is especially important in this context. This applies not exclusively to correct administrative procedures for government income and expenditure, but also to compliance with the principles of transparency, accountability and the rule of law. The publication Treasure Hunt - How Good Financial Governance can support resource-endowed countries in achieving the SDGs offers an insight into the importance of good financial governance in the extractive sector. The Extractives and Development sector programme is involved in various initiatives to promote good financial governance in the extractive sector. We develop new approaches to curbing IFFs and preventing base erosion and profit shifting (BEPS) in the extractive sector, support the Extractive Industries Transparency Initiative (EITI) and offer our partners innovative training measures to strengthen capacities in the field of GFG.

EITI - Extractive Industries Transparency Initiative

Promoting transparency in the extractive sector, especially in the revenue flows from mining companies to state institutions, is an important aim of German development cooperation. This is why the German Government supports the international EITI, which works to achieve greater financial transparency and accountability in public revenues from the extractive sector. more

CONNEX Initiative

Revenues from the extractive sector may be a vital contribution to poverty reduction in developing countries. As a prerequisite for this, it is essential that contracts governing resource extraction are fair, maximising the contributions made by companies to national development while at the same time creating attractive conditions for investment. The CONNEX Support Unit and is responsible for the rapid and needs-oriented identification, assignment and supervision of highly qualified and experienced experts who support the direct preparation and execution of contract negotiations.  more

Tax Compliance in the Extractive Sector

Base erosion and profit shifting (BEPS) to countries with low tax rates by multinational resource enterprises is having a negative impact on domestic resource mobilisation in developing countries. The resulting loss of tax revenue is putting increasing pressure on public budgets and limiting the options available to these countries to finance their own development and the achievement of the SDGs. To strengthen the capacities of tax authorities, the Extractives and Development sector programme has developed the “Toolkit for Transfer pricing risk assessment for the African mining industry”.  more

Illicit Financial Flows

Combating illicit financial flows and formalising small-scale gold mining are important issues for German development cooperation and an objective of the Marshall Plan with Africa adopted by the German Development Cooperation. Formalising small-scale gold mining would not only lead to better compliance with sustainability standards and reduce criminal exploitation, but would also increase tax revenue in the respective countries. more

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