This blog piece was first published in April 2011
By April 15, 2011, important financial reforms proposed by the US government will come into force.
Transnational corporations listed on the US Securities and Exchange Commission (SEC) have been scrambling to insert clauses that would allow them continue operations on the well-worn path of double ‘transparency’ standards. Observers hope there will be no serious changes in the SEC rule as proposed.
The reform requires that mining, oil and gas companies who trade their shares on the American stock exchange issue an annual report detailing the ‘type and total amount’ of payments they make to foreign governments. This order is seen as necessary if Barack Obama’s Executive Order of January 18, 2011 on improving ‘Regulation and Regulatory Review’ is to be complied with.
In separate letters written to the SEC by the American Petroleum Institute and the mining giant, Rio Tinto, these bodies laid out reasons why there should be clauses that offer escape hatches through which they can choose which laws to obey and which to break – the laws of the United States or the laws of the countries in which they operate.
This may sound rather quirky, even murky, but the fact is that there are countries in Africa where domestic laws classify revenues obtained from the extractive sector as ‘state secrets’.
On account of this, Rio Tinto argues,
We believe that there should be an exemption, if such reporting would violate, or may reasonably be deemed to violate, host country laws…The issuer should not be forced to choose between which law it will violate— the US or the host country laws.
The American Petroleum Institute (API), on the other hand, focuses at length on what they see as the ‘potential for competitive harm ‘of the reform.
Their argument is that disclosures would enable competitors who are not listed on the SEC to use such disclosed figures to undercut or outmanoeuvre them in bids. They also opine that disclosures may endanger the lives of workers in the sector as ‘energy companies have already experienced numerous incidents where facilities have been sabotaged, operations disrupted, or employees endangered by those who oppose the host country government or energy development.’
Interestingly, sector players do not have qualms with the Extractive Industries Transparency Initiative (EITI) that requires the private sector to disclose payments made to governments and for the governments to disclose payments received.
According to Rio Tinto, Because the EITI also encompasses disclosure by governments, of payments they receive from companies, we believe it is more effective than the proposed rules at improving governance and eliminating corruption in both the private and public sectors. Therefore, we urge the commission to follow the EITI principles to the fullest extent possible.’
The API in its reaction recommends, ‘that the commission require issuers to report payments based upon amount actually paid by the issuer to the government entity (as opposed to the issuer’s net share of the payment), consistent with the EITI practices.’
Furthermore, the API does not ‘believe it is necessary for the rules to specifically list other types of fees that would be subject to disclosure. We note that fees related to entry into, or retention of, licenses or concessions can be competitively sensitive information.’
Analysts see the requirement of the reform as not just a threat to the companies in the sector who are used to having smooth rides over corrupt waters in certain countries, it should also worry governments in Africa and elsewhere who are not open to disclosures of payments made in the sector. Fingers have been pointed at many resource-rich countries.
For example, according to the API, their members ‘can confirm to the commission that disclosure of revenue payments made to foreign governments or companies owned by foreign governments are prohibited for the following countries: Cameroon, China, Qatar, and Angola.’
In this context, we cannot escape noticing that some countries have sought to cover their paths by taking shelter under the EITI processes so readily applauded by the companies.
However, it is noteworthy that this quest is not necessarily a smooth sail for such countries. We have the example of Equatorial Guinea as well as Sao Tome and Principe who were expelled from the EITI process at a review meeting in March 2010. At that time, countries whose candidacies were questioned but not cancelled included: Nigeria, Sierra Leone, Congo Republic, and Democratic Republic of Congo.
Ethiopia’s harsh response to civil society and her refusal to allow international NGOs to work on advocacy in the country foreclosed her attempt to even gain candidacy status in the first place. And although Nigeria has since become EITI compliant, key areas of revenue opacities still remain to be resolved and corruption in the sector still moves at a galloping pace.
The extractive sector companies require levels of goodwill of host governments to operate in their countries, mainly because of the huge environmental and human rights abuses that accompany their actions.
Providing escape routes and bending the rules to suit their practices would entrench double standards and deepen the endangerment of the environment and peoples.