Copyright© ©GIZ/Michael Duff
Good Governance Good Financial Governance and Extractives
The third UN Conference on Financing for Development in Addis Ababa in 2015 (External link) confirmed the importance of domestic resource mobilization for the realisation of the Sustainable Development Goals (SDGs). The financial potential of the extractive sector offers resource-rich developing countries an opportunity to become less dependent on development assistance. The rising global demand for mineral and energy resources opens up further possibilities for enhanced domestic resource mobilization in these countries.
Capitalizing on these developments, GFG is of central importance. The term refers both to due procedures in the management of government revenues and expenditures from the extractive sector and to compliance with principles of transparency, accountability and the rule of law. The GFG approach has been anchored in the strategy of the Federal Ministry for Economic Cooperation and Development (BMZ 2030). A comprehensive overview on the importance of GFG in the extractive sector is provided in the publication Treasure Hunt - How Good Financial Governance can support resource-endowed countries in achieving the SDGs.
Sector Programme Commitment
The Sector Programme “Extractives and Development” is involved in various initiatives to promote good financial governance in the extractive sector. It develops new approaches to strengthen tax authorities working with the extractive sector and to combat illicit financial flows (IFF) in line with the EU conflict minerals regulation (External link). Moreover, it supports the Extractive Industries Transparency Initiative (EITI) and offers partner countries and institutions innovative trainings to strengthen capacities in the field of GFG.
Tax avoidance and evasion
According to the OECD, developing countries are losing around 16 % of their tax revenue due to tax avoidance practices. In resource-rich countries, the majority of these lost revenues are generated by the extractive sector.
An effective tax framework – strengthened through tax policy reforms and rigorous tax audits – is a critical prerequisite to exploit the full tax potential of a country. In order to enhance domestic resource mobilization in partner countries, Germany supports the capacity building of tax authorities to identify tax risks and to investigate suspected cases of aggressive tax avoidance and tax evasion. Click here to find out more.
Combating Illicit Financial Flows (IFFs) is an important issue for German development cooperation. The gold sector serves a good example: The formalization of artisanal and small-scale mining for gold would contribute to better compliance with sustainability standards and reduced criminal exploitation, as well as to increased tax revenues for the countries concerned. The adoption of the EU Conflict Minerals Regulation (External link) has placed the topic prominently on the (global) agenda. Click here to find out more.
Illicit financial flows (IFF)
According to the United Nations Conference on Trade and Development (UNCTAD), African countries lose about 40 billion USD per year through illicit financial flows linked to extractive commodities.
According to the World Economic Forum, developing countries are losing around USD 1,26 trillion annually due to corruption, bribery, theft and tax evasion.
20 % of the investigated bribery cases by the OECD occurred in the extractive sector.
Corruption can occur along mineral supply chains, from bribery in the acquisition of licenses to the misappropriation of public funds. The resulting impacts are severe. Corruption not only reduces trust in public institutions, but also distorts competition, reduces government revenues and undermines development-oriented budget allocation. Corruption therefore portrays a cross-societal concern. Click here to find out more.