Making public the payments made by extractive companies could be a major step in tackling corruption in resource-rich countries like the Democratic Republic of Congo, ranked at the bottom of the UN Human Development Index, says the campaign group Global Witness.
Financial transparency allows people in resource-rich countries to see in detail how much money is being generated by their natural resources, and therefore ensure it is used for their benefit.
The Hong Kong Stock Exchange set an important global precedent in 2010 when it required extractive companies to include in their listing documents details of the payments they make to governments. Since then however, the exchange’s leadership position has been eclipsed by the EU and the US who have brought in laws obliging companies to report payments on the basis of individual projects.
The European Union's Accounting and Transparency Directives, voted into law in June, obliges EU-listed and large EU-headquartered oil, gas, mining and logging firms to publish details of all financial payments of €100,000 and above, made to governments around the world including taxes, royalties and license fees, on a project-by-project basis.
Taken together with a similar law introduced in the US in July 2010, these mandatory reporting standards cover around 70% of the value of the global listed extractive industries, ushering in a new era of transparency in the global extractives sector. This new wave of new transparency obligations looks set to expand into other jurisdictions. For example, Canada – home to over 2,000 extractive companies operating in more than 100 countries worldwide – has publicly committed to enacting similar requirements.
These laws are significant for several major Chinese companies, such as PetroChina, Sinopec and Aluminium Corporation of China, who will now be required to comply as a condition of their listing on European and US stock exchanges. In addition, European and US-listed companies operating domestically in China will be obliged to publish what they pay to the Chinese government.
Global Witness and other organisations promoting enhanced transparency measures believe that, in addition to the development gains for host countries and their populations, investors and companies alike will benefit.
Currently, investors do not have access to the sufficiently detailed, reliable and comparable data regarding host government payments to account for the distinct material social, political and regulatory risks confronted by extractive industry companies. Instead they need to be able to assess the risks of their investments: where, in what amount, and on what terms are their investments being spent in what are often very high-risk operating environments in impoverished countries with unstable governments.
Research published by Global Witness and SynTao in January 2013 found that a significant proportion of Chinese and international respondents surveyed believe that increased disclosure of payment information would improve the global reputation of Chinese oil and mining companies and help investors better analyse company risks. Current levels of payment disclosure by major Shanghai-listed extractive companies were found to be limited and in a format which makes it difficult for investors to compare companies.
Improved disclosure requirements help protect companies acting within the law from being undercut by less scrupulous firms, and can reduce companies’ costs of doing business through eliminating the ‘bribery premium’ in contracts.
Companies’ ‘social license to operate’ is strengthened with improved transparency as it shows host populations the financial benefits to local budgets, which in turn reduces the likelihood of resentment, protest and conflict. This benefit should not be underestimated, as local unrest can be costly; a 2011 study calculated that delays in production could cost a major mining project US$20 million per week.
China Business Leaders Forum Program Director, Cao Jun, in discussion with chinadialogue, has said that Chinese businesses are usually in a weak position when investing overseas, with the law often being their ‘saving grace’ under the situation of bribe solicitation.“Disclosure of payment to governments means that the governments must also reveal the direction of funds to stakeholders, which will undoubtedly create pressure for them to use the funds wisely. If no information from official sources is made public, it will become increasingly difficult for either the overseas supervisory bodies or the investors to form an impartial assessment on a company’s actual operations – one of the obstacles Chinese businesses will come across when seeking overseas acquisition opportunities.”
Professor Li of the Foreign Economic and Trade University also states that, on the road to information transparency, China still needs to find a process of improving awareness. “News publication does not necessarily have an impact on companies, what’s more important is a company’s ‘habitual thinking’. I believe that if information is not publicised, there can be greater flexibility, yet I also fear that privately paid activities will possibly give rise to public doubt, in turn affecting competitiveness.”
The transparency laws aren’t a silver bullet, says Lizzie Parsons, China specialist at Global Witness, but they are a major step in the right direction. "The introduction of progressive transparency policies by stock exchanges in Hong Kong and the mainland, in parallel with disclosure of payments by listed extractives firms, would go a long way in ensuring it becomes harder for corruption to take place in host countries and bring benefit to investors, companies and communities alike."
Feng Anqi, an intern at chinadialogue's Beijing office, contributed additional reporting to this article