AFRICA RESOURCESINVESTMENT CONGRESSTransparency in the Extractive Industries: NewDisclosure Rules for Publicly Listed CompaniesGiulio Carini – Global WitnessIRONMONGERS’ HALL, CITY OF LONDON ● TUESDAY-WEDNESDAY, 14-15 JUN 2011www.ObjectiveCapitalConferences.com
Transparency in the Extractive Industries: New Disclosure Rules for Publicly Listed CompaniesJune 14, 2011www.globalwitness.orgwww.publishwhatyoupay.org global witness
Revenue Transparency Regulation in US, China and European Union •United States: Section 1504 of Dodd-Frank Wall Street Reform and Consumer Protection Act (Disclosure of Payments by Resource Extraction Issuers) • China: Hong Kong Stock Exchange new Chapter 18 Rules for Mineral Companies • European Union: Commitments to introduce transparency legislation for extractive companies in October 2011
Global Campaign for Revenue Transparency• Push for these new revenue transparency rules has largely come from Publish What You Pay coalition• Global Witness, a co-founder of Publish What You Pay: a global civilsociety coalition that campaigns for transparency in the •PAYMENT; •RECEIPT; and •MANAGEMENT of revenues from extractive industries• New Disclosure Rules in US and China as well as those soon to beimplemented in Europe involve transparency in the PAYMENT ofrevenues from oil, gas and mining industries
What Problems is Revenue Transparency Addressing?• Mismanagement and Misuse of Natural Resources: Oil, gas and mineral resources generate great wealth, but if poorly managed extractive revenues can also undermine economic growth and heighten corruption• The Resource Curse: many developing countries are rich in natural resources, but as a result of mismanagement and misuse of revenues received from these resources, these countries are • often mired in abject poverty and political instability• Lack of Transparency affects companies and investors as well: resulting poverty, instability and weakened rule of law are not only bad for local people, they can also damage company reputations and generate lower return for investors
Prime example of Resource Curse: Nigeria• Even though Nigeria is the world’s seventh-largest oil producer and Africa’s largest oil exporter, more than 50 percent of the population live on less than $1 a day.• Basic public services in Nigeria remain extremely poor, infrastructure is in bad shape and a country with huge energy reserves is subject to frequent power outages because of under-investment in its electricity grid.• Within Nigeria, this failure of development is widely blamed on misappropriation of public funds and assets by corrupt politicians. • The Transparency International Corruptions Perceptions Index from 2010 ranks Nigeria as 134 out of 178 countries in its corruption scale.• The systemic looting of public funds in Nigeria has provided fodder for a violent insurrection. This conflict has provided a mask for organised extortion and theft of oil on an industrial scale and led to frequent guerrilla attacks on oil companies. Shell claimed in July 2009 that Nigeria had lost a staggering US$47 billion which the company would otherwise have paid in revenues, because these armed attacks had forced Shell to cut back its oil production
What is the Ultimate Aim of Revenue Transparency?• Extractive companies should disclose what they pay (PAYMENT) and governments should disclose their receipts of such natural resource revenues (RECEIPT)• Governments should publish their budgets so that civil society knows how natural resource revenues are spent (MANAGEMENT)• As a result, members of civil society in resource-rich countries will be able to compare the two sets of data and hold their government accountable for the • management of this valuable source of income.• Investors can judge whether extractive companies payments are appropriate for the resources gained and whether the government and companies are participating in a fair deal• Protect companies from allegations of complicity with corrupt governmental practices.
International Initiative for Revenue Transparency of Payments and Receipts• Extractive Industry Transparency Initiative (EITI), voluntary initiative launched by Tony Blair in 2002 in response to Publish What You Pay• Involves multi-stakeholder group compromised of governments, private sector companies, investors and investor groups to promote the public reporting of extractive industry payments and • receipts• Both governments and private and public companies disclose payment data, which allow civil society to compare data• Problem with EITI: Voluntary approach and reliability of data
Mandatory Revenue Transparency of Company Payments: New Disclosure Rules• Change Stock Listing Rules: regulation requiring companies engaged in the commercial development of oil, natural gas, or minerals that are listed on different stock exchange globally to publish the payments they make to governments.• Mandatory initiative which covers publicly listed companies is complementary to EITI (push EITI process in other countries, reliability of company data in EITI)• Aim is two-fold: a) Provide civil society with accurate information to begin to hold their governments accountable for extractive revenues and b) provide • with information to better assess a company’s exposure to potentially investors unstable or corrupt governments• Such information can help civil society and investors judge whether extractive company payments are appropriate for the resources gained
Section 1504 of Dodd-Frank: Disclosure ofPayments by Resource Extraction Issuers in US• US Dodd-Frank Wall Street Reform and Consumer Protection Act: US federal statute signed by President Barack Obama on July 21, 2011 as a response to the financial crisis• Section 1504 of Dodd-Frank: a resource extraction issuer must disclose an annual report relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the US Federal Government for the purpose of commercial development of oil, natural gas or minerals on a country- • by-country and project-by-project basis• Rules have not yet come into effect. Final rules are expected on August, 2011 and will come into effect approximately a year later
Who Needs to Disclose Under Section 1504?• A RESOURCE EXTRACTION ISSUER: • A) Required to file an annual report with the Securities and Exchange Commission (10-K, 20-F, 40-F) • B) Engaged in the commercial development of oil, natural gas or minerals -includes activities of exploration, extraction, processing, export and other significant actions relating to oil, natural gas, or minerals or the acquisition of a license for any such activity • -not intended to capture activities that are ancillary or preparatory to such commercial development such as: a manufacturer of a product used in the commercial development of oil, natural gas, or minerals; or transportation activitiesThe US Securities and Exchange Commission estimates that approximately 1101 companies will be covered.
What Types of Payments Need to be Disclosed Under Section 1504• Payments means a payment that is • made to further the commercial development of oil, natural gas or minerals; and • not a de minimis payment (lacking significance or importance);• It includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits• Payments made to foreign governments or the US Federal Government •• Payment on a country by country basis as well as on a project by project basis • Dispute as to the definition of project by project, which will be resolved once final rules are out in August, 2011.
What are the Costs for Companies as a Result of Section 1504?• Costs include costs related to tracking and collecting information about different types of payments across projects, governments, countries, subsidiaries and other controlled entities.• These tracking and collecting costs would vary depending upon how an issuer would need to modify its existing systems to track, collect, and report the proposed payment information.
Hong Kong Stock Exchange: new Chapter 18 Rules for Mineral Companies• Disclosure Rule in effect on 3 June 2010 (no retrospective effect)• Newly applicant mineral companies will have to disclose payments made to host country governments.• Similar to Dodd-Frank as it cover payments in respect of tax, royalties and other significant payments• Differs from Section 1504 Dodd-Frank as it only covers payments on a country by • country basis and not on a project by project basis• Under Chapter 18 Rules, a Mineral Company must include not only in its annual report but also in its interim (half-yearly) reports details of its exploration, development and mining production activities and a summary of expenditure incurred on these activities during the period under review.
Who Needs to Disclose under Chapter 18 of Hong Kong Listing Rules?• Mineral Companies • Mineral companies are those whose major activity (25 per cent or more of assets, revenue or operating expenses) is the exploration for and/or extraction of natural resources. • Natural resources include various minerals, petroleum, and natural gas• Listed issuers that complete a major acquisition of natural resource assets will also be classified as mineral companies.
Are Mandatory Transparency Rules Coming for Companies Trading in EU stock Exchanges? • European Union has made a commitment to enact similar payment disclosure requirements •Most recently, President of the European Commission, José Manuel Barroso said :“The European Commission will table legislative proposals in October, which includes the obligation for companies to publish information about their activities. We do this in support of the Extractive Industries Transparency Initiative, which helps Africans increase their fiscal resources available to deliver public goods and services for their citizens.”
What’s the Next Step for Revenue Transparency?• Stock listing requirements to oblige extractive companies todisclose the payments they make to governments are only afirst step in checking corruption and mismanagement ofnatural resources•More is needed such as: •Expand EITI to cover more countries •Budget transparency: full disclosure of all relevant fiscal information in a timely and systemic manner to ensure that civil society knows how and where the funds from natural resources are spent