INFORMATION AND RECOMMENDATIONS OF THE INDEPENDENT ADMINISTRATOR

Information and recommendations from carrying out the pilot on payment reconciliation

The EITI Standard 2019 demands comprehensive publication of all material payment flows from the national extractive sector to government agencies. This information on payment flows must satisfy requirements in respect of reliability, understandability and public availability (cf. EITI requirements 4.1 and 4.9). In the first and second German EITI reports, the reliability of the published payment flows was, among other processes, ensured by the previous “standard procedure” of a direct reconciliation of the payment flows reported by the participating companies with the payments received by the government agencies (“payment reconciliation”). These did not produce any or any noteworthy differences between payments made and payments received between companies and government agencies.

In agreement with the international EITI secretariat, the third German EITI report was the first so start with the development of an alternative quality assurance procedure for the payment flows to the government agencies reported by the extractive industry (“pilot procedure” or “pilot”). This work has been continued by the Multi-Stakeholder Group (“MSG”) and the Independent Administrator since the fourth German EITI report and has been referred to as a systems-based approach to distinguish it from the previous “standard procedure”.

The pilot procedure is a change of system because it replaces the test of details for payment flows from participating companies with a multi-level system-based approach of obtaining information and analysing the processes and controls relevant for EITI, in particular on the part of government agencies. The aim is to put the MSG in a position where they can provide a well-founded assessment of whether or not there are risks to indicate that payment flows to government agencies related to raw minerals are not being properly processed during the respective reporting period. Depending on  the result of this risk assessment, the process used for assessing the participating companies’ reported payments will then be carried out. Where risks are identified to indicate that (payment) processes or controls relevant for EITI are not entirely correct, further investigations of the payment flows concerned will initially be carried out and, ultimately, a return to payment reconciliation will also be considered. Where, however, no corresponding risks are identified, the actual assessment of payment flows is made on the basis of plausibility assessments.

On the basis of the information provided to the Independent Administrator by the MSG, the responses to questions and his own research, the Independent Administrator considers that the systems set up by government agencies for correct collection of payment flows relevant for D-EITI are suitable in combination with the positive results from the payment reconciliations already carried out to ensure reliable disclosure of the relevant payment flows. In the opinion of the Independent Administrator, the risk of breaches in the correct processing of the analysed payment flows for mine site and extraction royalties, corporate tax and trade tax continues to be minimal for the 2020 reporting period so that the subsequent analysis of the reported payments for mine site and extraction royalties and income taxes was based on analytical considerations.

With the implementation of the system-based procedure, the tasks of members of the MSG and of the Independent Administrator have changed, when compared to the previous standard procedure of payment reconciliation. The process of risk assessment by the MSG particularly requires a systematic survey and analysis of the existing processes and controls by government agencies. This is intended to ensure that the payment flows are correctly processed and accordingly requires the definition of responsibilities and recruiting of contacts as well as the provision of the necessary information on risk assessment. Here it still seems sensible to involve an Independent Administrator with appropriate experience in recording and assessing processes and controls.

Risk assessment is also based on the collection, transmission and analysis of information, which may be relevant for assessing whether payments are being correctly processed. Looking to the future, we recommend transferring the work of obtaining information and the risk assessment based on this to a “standard process”, i.e. continuous analysis of available information or an ongoing exchange of information between the information sources the MSG considers are relevant and the MSG. This also applies as appropriate to the sources of information the MSG considers are relevant. Furthermore, the MSG members are urged to consider critically information from their professional environment as regards possible relevance for the risk assessment and, where relevant, to make this available to all other MSG members.

With regard to the subsequent reporting year (2021), we recommend that the MSG assess the extent to which the retroactive adjustment of the mine site and extraction royalties made by the parliament of the State of Lower Saxony for the reporting year 2020 in spring 2021 may have had an impact on the quality assurance to find out whether the payments of the relevant payment flows in the reporting year 2021 have been correctly processed. It should be noted that up to now, neither within the framework of the previous “standard procedure” i.e. the direct comparison of the payment flows reported by the participating companies with the payments received by the government agencies – nor within the framework of the alternative, system-based approach, significant payment flows from the government agencies to the participating companies were to be assessed.

Furthermore, we recommend the MSG to deal with the content of the “Corporate Sustainability Reporting Directive – CSRD”(Directive (EU) 2022/2464), i.e. the directive on corporate sustainability reporting. In the future, sustainability-related disclosures will gain significantly in importance in corporate accounting and will be on an equal footing with the traditional financial information of companies.1 Within the framework of the so-called “double materiality analysis”, companies should report on the one hand on the environmental and social aspects affecting them and on the other hand on the effects of their activities on their environment. The contents of this reporting are defined within the framework of reporting standards. In February 2023, the European Financial Reporting Advisory Group (EFRAG), which is responsible for the development of reporting standards, published a working paper in preparation for a European Sustainability Reporting Standard (ESRS) entitled “Mining, Quarrying and Coal”. This first working paper on a sector-specific reporting standard makes explicit reference to the quality assurance mechanisms of the EITI and derives reporting obligations for companies in the extractive sector from this. We recommend that the MSG undertake a substantive assessment of whether this could have implications for D-EITI and the MSG’s activities. Against the background of the experience gained, the MSG should assess whether it might appear useful to participate in EFRAG’s upcoming Due Process in order to influence the content of the ESRS “Mining, Quarrying and Coal” in the sense of the D-EITI.
1 German Environment Agency. URL: https://www.umweltbundesamt.de/umweltberichterstattung-csr-richtlinie (Accessed on 5 March 2023)

Glossar

In Federal States in which legislation does not include an excavation law and the State-level Nature Conservation Law does not apply to the extraction of non-energetic, ground-based natural resources in the context of dry excavations, this type of natural resource extraction falls within the scope of the relevant state building regulations.

Legal limitations also exist: State building regulations apply to the excavation of solid rock (limestone, basalt, etc.), for example, in quarries with an area of up to 10 hectares (ha) in which no blasting is carried out. In the event that this area is exceeded, or if water bodies are formed after completion of the extraction operations, the German Federal Immission Control Act (BImSchG) and/or Water Resources Act (WHG) are applicable.
In Bavaria and North Rhine-Westphalia, the above-ground excavation of non-energetic, ground-based natural resources in the context of dry excavations is determined at state level by the existing excavation laws (AbgrG). For the excavation of solid rock (limestone, basalt, etc.) in quarries where blasting does not occur, the AbgrG applies to sites with an area of up to 10 ha. In the event that this area is exceeded, or if water bodies are formed after completion of the extraction operations, the German Federal Immission Control Act (BImSchG) and/or Water Resources Act (WHG) are applicable. In the other Federal States, this type of natural resources extraction is regulated by the respective state building regulations or by the state-level nature conservation laws.

In general, the AbgrG applies to those raw materials the excavation of which is not directly subject to mining law or the mining authorities. These raw materials include (in particular) gravel, sand, clay, loam, limestone, dolomite and other rocks, bog mud and clays. However, the jurisdiction between AbgrG and mining law can vary from case to case in the case of certain raw materials, such as quartz gravels. The requested authority must always verify its own jurisdiction in each case. The AbgrG also encompasses surface area usage and the subsequent rehabilitation of the area.
The German Federal Immission Control Act (BImSchG) is the most important and practice-relevant law in the field of environmental law. It constitutes the basis for the approval of industrial and commercial installations. In the natural resources extraction industry, quarrying companies must have approval to extract stones and earth. Every quarrying area of 10 hectares or more must undergo a full approval procedure, including public participation and UVP (environmental impact assessment). A more simplified approval procedure is used for quarrying areas of less than 10 hectares.

The sphere of responsibility for the legal immission control approval procedure is fully specified in the Immission Control Acts of the Federal States. The Federal States are tasked with the administrative enforcement of the approval procedure. Each individual state’s Environment Ministry – the highest local immission protection authority – usually bears the responsibility for this procedure. Subordinate authorities include regional councils, district authorities and lower-level administrative authorities. Administrative jurisdiction generally lies with the lower-level administrative authorities.
The GDP measures the value of goods and services produced domestically (creation of value) within a given period (quarter, year). The Federal Office of Statistics calculates the GDP as follows: production value minus intermediate consumption = the gross value added; plus taxes on products and minus subsidies = GDP
The gross value added is calculated by deducting intermediate consumption from the production values, so it only includes the value added created during the production process. The gross value added is valued at manufacturing prices, i.e. without the taxes due (product taxes), but including the product subsidies received.

During the transition from gross value added (at manufacturing prices) to GDP, the net taxes (product taxes less product subsidies) are added globally to arrive at an assessment of the GDP at market prices’. Source: Destatis
The planning approval procedure under mining law is used for the approval procedure of a general operating plan for projects which require an environmental impact assessment (§§ 52(2a), in conjunction with 57 a of the BBergG).
There are different definitions and methodological approaches at the international as well as at the national level as to what subsidies are and how they are calculated. According to the definition of the German government’s subsidy report, this report considers federal subsidies for private companies and economic sectors (ie grants as cash payments and tax breaks as special tax exemptions) which are relevant to the budget. Subsidies at the federal level can be viewed via the subsidy reports of the federal states (see Appendix 5 of the German government subsidy report).
In compliance with § 68(1), Water Resources Act (WHG), the excavation of landowners’ natural resources such as gravel, sand, marl, clay, loam, peat and stone in wet extraction operations requires a planning approval procedure. The reason for this is that groundwater is exposed in wet extraction, resulting in above-ground water. The planning approval procedure is implemented by lower-level water authorities.

The procedural steps of the planning approval procedure are governed by the general provisions of §§ 72 to 78 of the Administrative Procedures Act (VerwVfG). Within the meaning of § 68(3), nos. 1 and 2 of the WHG, the plan may only be established or approved if an impairment of the common good is not to be expected and other requirements of the WHG as well as other public-law provisions are fulfilled.