It's Not About Cost: API's Attack on Transparency

Photo credit: L.C.Nøttaasen on Flickr

On October 10, the American Petroleum Institute (API) and other business groups filed a lawsuit to throw out Section 1504 of the Dodd-Frank Act – U.S. law since 2010 – which requires oil, gas and mining companies listed on U.S. stock exchanges to publish the payments they make to governments, wherever they operate and for each project.

In their suit, these groups representing oil industry interests make the outrageous claim that disclosing this information (which some companies already make public) violates companies’ free speech rights under the First Amendment, a hail-mary tactic aimed at overturning Section 1504 altogether. They also launch a general challenge to the final rules issued in August by the Securities and Exchange Commission (SEC) to implement the law, a challenge focused heavily on allegations about the financial cost of transparency.

The lawsuit's cost charge is two-fold, questioning SEC’s assessment of both the implementation and competitiveness costs associated with publishing information about payments to governments. It cites to industry claims that complying with Section 1504 will compel companies to disclose commercially sensitive information; put U.S.-listed companies at a competitive disadvantage; and force them to violate foreign laws and investment contracts prohibiting disclosure. These are old arguments, which have been extensively addressed by the law’s supporters in comments submitted to SEC during its two-year rulemaking process, and thoroughly refuted here and here.

Yet from a broader perspective, API’s entrenched approach on this issue is troubling: not only has cost arguably become a “red herring” for some companies unwilling to support meaningful transparency, but API’s exaggerated emphasis on cost ignores the benefits that improved disclosure brings, including for industry.

In remarks about the lawsuit, API’s president argues that – in direct contradiction to Section 1504’s clear requirements for detailed, public disclosure – SEC’s final rules could have allowed companies “to report their payments confidentially” to the SEC, which could have also decided to release only aggregate payment information by country. This way, according to API, the SEC could have reduced competition risks and other costs to companies and still “achieved the goal of increased transparency” – a goal API asserts is “more effectively” furthered through the Extractive Industry Transparency Initiative (EITI).

Leaving aside the irony of API’s suggestion that transparency aims are best achieved through confidential reporting, aggregate, country-level disclosures are clearly not what Congress intended to result from Section 1504. Neither are EITI-implementing countries in agreement that aggregate reporting is sufficient.

The vast majority of EITI reports issued to date disaggregate payment information at least by company. And Indonesia, Zambia, Mali, Burkina-Faso and Timor-Leste have all incorporated, either explicitly or implicitly, information about individual projects into EITI reporting. In Indonesia, individual revenue streams will be disclosed in the first EITI report for each individual oil and gas production unit. And at the international level, EITI is in the midst of a Strategy Review process that will consider making disaggregated reporting one of the mandatory requirements all EITI-implementing countries must adopt.

As for the benefits of enhanced disclosure under Section 1504, co-authored by Senators Ben Cardin (D-MD) and Richard Lugar (R-IN), Senator Lugar explained on the Senate floor before Dodd-Frank’s passage:

"Transparency empowers citizens, investors, regulators, and other watchdogs and is a necessary ingredient of good governance for countries and companies alike. Adoption of the Cardin-Lugar amendment would bring a major step in favor of increased transparency at home and abroad. Its passage would empower investors to have a more complete view of the value of their holdings. It would bring more information to global commodity markets, which would benefit price stability. More importantly, it would help empower citizens to hold their governments to account for the decisions made by their governments in the management of valuable oil, gas, and mineral resources and revenues."

This last point betrays the fact that despite a decade of international progress on transparency, in many resource-rich countries, citizens still cannot access adequate information on what resources they own; which companies are exploiting them; and where revenues go.

Without this data, it is impossible for citizens and local communities to ensure that public resources are used for public good, rather than lost to mismanagement and corruption. On the other hand, as RWI President Daniel Kaufmann has reported, “In the long run, with increased transparency, accountability and improved governance,” evidence shows that “citizens could see up to a 300 percent development dividend from improved governance.”

Greater transparency can also lead to more open, stable operating environments for companies – an advance that would favor the ability of companies to compete and prosper on the basis of superior technology and access to capital, and reward efficiency over cronyism and corruption. As Senator Lugar noted in response to API's lawsuit, ignoring the need for transparency "is a losing proposition for the United States and company shareholders."

Indeed industry is not monolithic, and some companies are already proving the value of disclosure, by embracing transparency voluntarily without adverse competitive effects.

Newmont Mining discloses its payments to governments as a matter of course, and has called the effects of Section 1504’s requirements ‘de minimis’ to its business model. First Quantum Minerals, listed in the UK and Canada, has testified to a UK Development Committee hearing that it supports Section 1504, similar legislation in development in Europe, and “any such measures that increased transparency and supported sound investment in fragile states.” In Canada, the two largest mining trade associations, the Mining Association of Canada and the Prospectors and Developers Association of Canada, have pledged to help develop a framework for the mandatory disclosure of company payments to governments, at the country and project level, by June 2013.

This support for disclosure from the mining sector, in addition to the move of mandatory reporting requirements across the globe, makes clear just how out of step the oil industry lawsuit in the U.S. against Section 1504 really is.