EU transparency rules

The Financial Times ran a hard-hitting editorial last week on proposed disclosure rules for natural resources firms.

The editorial rightly highlights the merits of enhanced transparency in the extractive sector; but regrettably falls into the trap of framing industry concerns (and associated lobbying) as an attempt to “water down” European and US efforts to root out graft in resource rich nations.

In this context, it is important to recognise that there is clear recognition within the extractive industries that the disclosure of payments to governments is a potentially powerful driver of good governance. Indeed, many leading firms already provide a public reconciliation of payments to host governments under the highly-credible Extractive Industries Transparency Initiative. New legislative frameworks in the EU and US have the potential to strengthen this agenda still further; the key, however, is to ensure that any prospective rules pass the test of workable legislation.

Is “project-by-project” workable?

The central issue in this respect is the proposal to mandate disclosures on a “project-by-project” basis. Here, it for commentators to assert that most payments to states are already calculated in this way: requiring companies to report payments on a project basis would in fact necessitate artificial allocations of tax payments incurred at country level. Furthermore, companies and regulators have struggled for over a year to alight on a definition of “project” that could be meaningfully applied across extractive sectors and different investment regimes. The European Commission’s decision to propose a less-than-uniform definition—based on the lowest level of management reporting—reflects this difficulty.

Accordingly, we think that there is a risk that any legislation mandating project-by-project reporting will leave project loosely defined, or not defined at all. This could give rise to inconsistent reporting, which would prejudice rather than enhance transparency in the targeted sectors—unlike reporting payments by country, which would not suffer from the same definitional issues.

In our view, further thought also needs to be given to how project-by-project disclosures might affect the competitive position of western firms in global markets. The issue here is not, as the FT editorial implies, whether companies are able to bribe foreign officials; but rather whether the types of disclosures envisaged by the draft legislation might provide competitors with valuable commercial data on which to base their own offers to governments.

To be frank: this is an issue that both policy makers and leader writers would be well advised to consider before advocating an untested and potentially damaging approach to corporate disclosure.