By the Publish What You Pay coalition
The historic vote by the U.S. Securities and Exchange Commission on 22nd August to adopt final rules on the oil and mining “sunshine provision” of the 2010 Dodd-Frank Act heralded a new era in the global fight against corruption, fraud and waste. Section 1504, or the Cardin-Lugar Amendment, requires oil, gas and mining companies to publish how much they pay governments on an annual basis. The vote is a landmark in the decade-long campaign of the Publish What You Pay civil society coalition, which works to ensure that citizens of resource-rich countries can get reliable data about the payments made for their natural resources.
The vote culminates a historic two years for the transparency movement, with the G8’s endorsement of the mandatory payment reporting approach in May 2011, and the EU release of a draft legislative proposal to roughly mirror US law late in October 2011. It also culminates 2 years of furious industry lobbying of the SEC and US Congress. Even now, with SEC final rules published, the American Petroleum Institute continues to oppose progress by reshuffling its meagre array of erroneous and hollow arguments, for eager media outlets that continue to print and re-print these unverified claims. They claim that foreign laws and existing contracts prohibit disclosure, that transparency would decrease the safety of workers, that the implementation costs would be too great, and that the competitive disadvantage created by these rules would be decisive in deal-making. Many of the same companies used these claims in Europe, furiously lobbying legislators in 2012 to weaken the draft legislation before the upcoming European Parliament vote in September.
As transparency advocates, we carefully consider counter-arguments to our positions but have found little evidence for the claims made by industry. But don’t take our word for it. If industry arguments were legally defensible, the SEC would have adopted them, since it is obvious that no regulator would deliberately attract the wrath of that industry. But the SEC did not find many of the industry’s core arguments convincing.
For example, the agency did not allow exemptions in cases of conflict with foreign laws or contracts. It found instead that adopting foreign law exemptions would amount to a tyrant’s veto, since in these cases such an allowance would “[encourage] countries to adopt laws, or interpret existing laws, specifically prohibiting the disclosure required under the final rules.” In the case of prohibitions in contracts, it found that “contracts typically allow for disclosure to be made when required by law for reporting purposes,” that they “believe this issue can be more appropriately addressed through the contract negotiation process,” and that providing such an exemption would “encourage a change in practice or an increase in the use of confidentiality provisions to circumvent the disclosure required.”
A current resurrection by the API is its claim that the SEC rules undermine US competitiveness - an argument that the SEC considered at length. The SEC determined that any competitive impact was in no way significant enough to undermine the whole purpose of the act; in fact the SEC’s economic analysis discredited some of the more outlandish claims about competitiveness citing companies’ failure to provide supporting data or analysis to justify them.
Disclosure does not weigh heavily on competition, either with state-owned companies or with unlisted private competitors. Business success is not premised on secrecy, but on a host of other factors. Some of the most profitable companies already disclose payments to governments in multiple countries of operation.
Concurring, and echoing former BP boss Lord Browne, the Financial Times leader last Thursday identified little evidence “for the fear that Chinese or Russian state-owned companies would benefit from knowledge of US competitors’ payments” in view of the fact that “payment structures are well known in the industry”.
These rules have not been sprung on anyone. In the six years of legislative development of the law, including 3 pieces of underlying legislation and multiple hearings, as well as outreach by PWYP to companies directly in Houston, oil companies declined multiple opportunities to help craft the language of these requirements. They also declined to help craft two versions of the underlying House and Senate Congressional legislation. The API later cried foul, claiming that they were not consulted on the law's requirements prior to its passing.
Now the API continues to comment in the US media and characterise the rule setting in a vacuum – wilfully ignoring upcoming EU laws which will demand similar reporting standards from would-be US competitors, including Russia’s Gazprom. And while the API today holds up the EITI as the gold standard, it conveniently forgets that it fought tooth and nail against the EITI in the past. By contrast, PWYP, which co-founded the EITI, remains supportive but is realistic about its limitations as a voluntary initiative.
Other competitors cited by the API, such as the state-owned China National Petroleum Corporation, already partner with “big oil” to benefit from the technical and logistical competitive advantage held by the US and European majors even when operating inside their own territories. Royal Dutch Shell recently announced a partnership with CNPC on shale gas and refinery projects in China. In any case, Petrochina (the principal holding company of CNPC) and the Chinese National Offshore Oil Company are only partially state-owned – both have publicly listed shares in the US and will therefore fall under Section 1504.
In the exceptional circumstances where companies not listed in the US or EU win contracts, they do so for reasons other than being able to hide payments – such as offering more competitive deals funded by Chinese state-subsidised capital.
As the FT editorial stated, “Transparency only removes the competitive advantage provided by the ability to bribe; one that US-listed companies should not in any case deploy.” European law-makers should now follow-through by re-considering the proposed EU threshold for reporting payments and pass Directives which include meaningful project-level disclosure and do not allow exemptions.
Rather than aspiring to a race to the bottom in which payments remain obscure and business can be conducted “as usual” in some of the world’s poorest and most corrupt countries, the API and big oil should now join the movement for better business practices worldwide, with which we will all be better off in the long run. To quote leading economist Paul Collier, “The SEC ruling makes it more likely the current global boom in commodities will help poor countries escape poverty.”
Executives have the opportunity to join with the growing global coalition of community groups, investors, politicians, international NGOs, bishops and celebrities to help rid the oil industry of these practices once and for all. The oil companies should dump their sound-bites about rules “giving away the formula for Coca-Cola” and instead take a form of Pepsi challenge. Perhaps they will be surprised to find that, instead of the secrecy that aids corruption, they actually prefer the taste of good governance.