Show Me the Money(A)

It’s a disturbing paradox that many of the countries that are richest in oil, gas, and mineral resources have some of the poorest populations in the world. The World Bank has found that 12 of the world’s 25 most mineral-dependent states and 6 of the world’s most oil-dependent states qualify as “highly indebted poor countries” which have some of the world’s worst human development indicators. According to the human rights watchdog group Global Witness, among the population of the 50 developing countries with important oil, gas, and mineral resources, more than 2 of 5 people live on less than $2 a day.
Government corruption plays a significant role in explaining this paradox. In oil-rich Angola, royalty fees paid by oil company giants like ChevronTexaco comprise 90 percent of the national budget. Yet because the Angolan government keeps information about oil receipts confidential, experts estimate that more than $1 billion of state money is unaccounted for every year. Meanwhile, the United Nations spends $200 million on relief efforts in Angola each year. Global Witness found that all the oil revenue payments to the country of Equatorial Guinea ($135 million a year) appear to be directly deposited into secret offshore accounts, a clear sign that those revenues are benefiting a few corrupt leaders and not the citizens of the country. Similar concerns about corruption and diversion of government resources plague many other countries where U.S. and multinational oil and mining companies operate, including Kazakhstan, Nigeria, and Venezuela.
Many experts believe that one way to attack this problem is to require public disclosure of the taxes, fees, royalties, signing bonuses and other payments that oil, gas, and mining companies make to governments. Payments to the U.S. government are a matter of public record, but many developing countries do not require, or currently even prohibit, such disclosure. Disclosure would make it harder for corrupt leaders to divert payments for their own benefit and could increase pressure on them to ensure that their citizens actually benefit from the extraction of these nations’ natural wealth.
George Soros and Global Witness have created a campaign called Publish What You Pay that has gained the support of over 110 non-governmental organizations from around the world to promote this agenda. The British government developed an Extractive Industries Transparency Initiative to encourage global companies and governments to be transparent about their payments to governments. And now institutional investors, including Trillium Asset Management are beginning to call for greater disclosure as well.
Ten major British, Dutch and German institutional investors, representing over $600 billion in assets under management, recently developed the “Investors’ Statement on Transparency in the Extractives Sector.” The statement calls on oil and mining companies to support efforts to improve standards of transparency in making payments to governments. Trillium Asset Management is among the first U.S. investment firms to sign on and we’ll be communicating our support for the statement with key companies in our holdings. Oil and water don’t mix, but secrecy and corruption do.
A copy of the statement appears below.
INVESTORS’ STATEMENT ON TRANSPARENCY IN THE EXTRACTIVES SECTOR
As institutional investors with exposure to companies operating around the world, we believe it is in the interest of the companies in which we invest to operate in a business environment that is characterised by stability, transparency and respect for the rule of law. These factors are essential to securing economic prosperity and social cohesion, which, in turn, enable the companies in which we invest to prosper. However, they are frequently undermined by poor standards of governance and transparency, which can give rise to corrupt operating environments.
We are concerned that extractive companies are particularly exposed to the risks posed by operating in these environments. Companies that make legitimate, but undisclosed, payments to governments may be accused of contributing to the conditions under which corruption can thrive. This is a significant business risk, making companies vulnerable to accusations of complicity in corrupt behaviour, impairing their local and global “license to operate”, rendering them vulnerable to local conflict and insecurity, and possibly compromising their long-term commercial prospects in these markets.
We believe that improved transparency about both payment and revenue flows is an important contributor to good governance by host governments, although its effectiveness will depend on the success of wider initiatives to combat corruption and the misuse of revenues.
We recognize that the root of the governance problem often lies in underdeveloped local capacity in many host countries. However, in the light of the G8 discussions on corruption and increased international attempts to create transparency about revenue flows, we believe that the corporate sector has an important opportunity to support government and multilateral institutions by taking action to protect its own long-term interests.
We acknowledge that the corporate sector cannot single-handedly reform long-standing business practices such as lack of transparency over payments to government, nor can individual companies act alone without compromising their immediate commercial interests. However, we believe that reform will give the extractive companies in which we invest an opportunity to be seen as contributors to, and not just beneficiaries of, economic development and reconstruction.
We therefore encourage the development of mechanisms to promote payments transparency that respect the following principles:
-Confidentiality: to ensure that existing contractual agreements and commercially sensitive information are respected;-Universality: to ensure that improved disclosure standards apply to all parties. This includes joint ventures, state-owned extractive companies and their host governments;- Comprehensiveness: ensuring that all relevant payments and revenues paid to governments are captured, and- Comparability: to enable data for different countries to be compared easily.
We commend the Extractive Industries Transparency Initiative (EITI) process led by the UK Government for seeking to develop an effective system of disclosure regarding payments in the mining, oil and gas sectors, which is supported by home and host governments, commercial and national companies, and other stakeholders.
Within the framework of the G8 discussions on payments transparency and the EITI, we are calling on the companies in which we invest to:
– Support the principles of payments disclosure developed by the EITI process;- Work proactively with host country governments and other stakeholders, including other companies, to develop and implement payments transparency agreements within those countries that sign the principles;- Become, or continue to be, active participants in the process to promote take-up of payments transparency agreements by host country governments that are not yet signatories to the principles.
We believe that the EITI principles may be relevant to other sectors, and welcome appropriate initiatives with similar objectives.
As institutional investors representing over $600 billion, we actively support the development of international mechanisms to address payments transparency, and encourage other investors to join us in this statement.