Regulating Financial Transparency: Recent Developments

About a year ago, I wrote about trends in transparent financial disclosure, including the Extractive Industries Transparency Initiative (EITI) and emerging legislation (ARI, December 2012). At the time, I forecast increasing regulatory requirements for such disclosures. This prediction was based on research which showed declining public trust in government and business, and on progressive corporate concern for earning and maintaining a social licence to operate. Almost 12 months on, do the forecasts hold?

In short, yes. And European countries are leading the way.

In a surprise video announcement to the sixth global EITI conference in Sydney in May, British Prime Minister David Cameron announced a joint commitment with France to implement the EITI. In his brief statement, Cameron emphasised Britain’s dedication to transparency, especially as a priority area in Britain’s current Presidency of the G8. “Nowhere is transparency more important than in the extractives industries,” he said.

Countries implementing EITI. Source: Publish What you Pay

Noting that the EITI was established to forestall deals which undermine the rights and livelihoods of people in developing countries, Cameron emphasised the importance of developed countries’ participation in the Initiative. “We cannot call on other countries to live up to these high standards if we are not prepared to do so ourselves,” he said to the Conference’s 1,200 delegates.

To date, the majority of EITI signatories are developing nations, including a wide swathe of African countries. Many of these countries are deeply experienced with the mining industry, but faltering governments, conflict and corruption undermine the benefits which may be achieved through resources wealth. According to Prime Minister Cameron, initiatives like EITI also allow developed countries to "…lift the veil of secrecy that too often lets corrupt corporations and officials in some countries run rings around the law”.

Certain African nations which have implemented the EITI reported to the conference about their good progress in anti-corruption. In Zambia, for example, the EITI is seen as a vital means of civil society involvement in an industry central to the country’s economy. Speaking to the EITI Conference delegates, Dr Sixtus Mulenga, CEO of Tranter Zambia, said, “EITI has brought financial democracy [to Zambia].” Nigerian Minister of Mines and Steel Development Musa Sada echoed this notion, noting that EITI benefits governments by strengthening auditing processes and providing governments with a comprehensive understanding of their mining governance needs.

The positive stories from EITI are impressive. And they represent what EITI Chair Clare Short called a critical shift in dialogue between developed and developing nations. “It is no longer a case of the North telling the South what to do”, she said to the Conference plenary. Clearly, the EITI has fostered advancements in corporate disclosures. But are these improvements sufficient to achieve foundational goals?      

Is voluntary transparency enough?

For over a decade, the EITI has provided the global touchstone for critical conversations about disclosure of resources companies' payments to governments, the revenues received by those governments, and the benefits which may or may not flow to the societies from which resources are extracted.

Today, 39 countries are signatory to the EITI. Twenty-three of those are fully compliant.

Yet much of the discussion at May’s global EITI gathering focused on questioning whether voluntary transparency is enough.

The EITI holds considerable legitimacy and has achieved widespread industry acceptance. But increasing debate and impatience from some nations that transparency reporting has not necessarily translated to “social good” were evident at the May Conference. An independent, 2011 evaluation of the Initiative found that “little impact at societal level can be discerned”.

This is a severe and significant critique. But it does not mean that the EITI should be shelved, or that there is no potential to transform the practices of both extractives companies and governments.

Instead, certain governments are taking the view that appropriate and efficient regulation will help to bridge gaps between the EITI’s intentions and its effectiveness. For Britain, much of the impetus to regulate financial transparency stems from growing concerns about opaque tax and business systems in Africa. British Deputy Prime Minister Nick Clegg summed up his government’s intent to “rewrite the script on Africa”. Speaking recently to the Africa Jubilee Business Forum, he said, “Africa is being transformed: once perceived by the outside world as merely a continent in distress; now looked to as a continent of opportunity."

G8 commitments to regulating financial transparency

Shortly after the EITI Conference, Britain announced plans to introduce new laws which will make EITI standards a legal requirement, cementing further commitments to financial transparency in mining and extractive industries. Much of June’s Northern Ireland G8 Summit concentrated on extractive industries’ transparency. At the Summit’s close, Prime Minister Cameron noted three priorities for the remainder of the UK’s 12-month G8 Presidency: “advancing trade, ensuring tax compliance and promoting greater transparency”.

David Cameron talks transparency at the G8 Summit.

During the Summit, Italy committed to EITI implementation and Germany, like Australia’s current endeavour, agreed to an EITI Pilot. The G8 also announced partnerships to improve resources governance in developing countries. Burkina Faso, Colombia, Ghana, Guinea, Mongolia, Myanmar, Peru and Tanzania are all expected to benefit from these fast-tracked partnerships which will assist their governments to build capacity for improved tax system management.

Across the Atlantic, Canada announced in early June that it will establish regulations to improve the openness of payments made to local, state and national governments. The reach of this plan is considerable. The Toronto Stock Exchange (TSX) hosts the world’s greatest concentration of mining companies at 57 per cent.   And it is a move which will be felt far beyond the northern nation’s borders. Nearly 50 per cent of TSX-listed companies operate outside of Canada, many in the developing countries which are the focus of transparency initiatives. Canadian commitment to regulated transparency measures is also significant when one considers the TSX is second only to the London Stock Exchange as a source of finance for the global mining industry. Canada’s changes are expected within the next two years.

The need for accessible reporting

Commitments to regulating financial transparency are important and reflect governments’ progressive acknowledgement of the value of strong governance and robust disclosures. But such regulation must be carefully considered, efficient and appropriate to be effective. This includes any reporting requirements associated with financial transparency legislation.

Certain critiques of the EITI emphasise that the reports which result from the process are difficult to engage with and understand. This is particularly troublesome for the communities such reports are intended to help.

Speaking at the EITI Conference, Open Society Foundation Fellow Diarmid O’Sullivan noted that early attention to the EITI focused on the veracity and technical quality of data collected, not on communication or dissemination. He stressed the importance of good reporting to the effectiveness of financial transparency.

In Zambia, such data is demystified through thoughtful reporting at the local level. The government now sponsors billboards in local communities which are host to mining operations. Such billboard reports tell local community members how much money the local government has received from mining operations and show the distributions of where the money has been spent in the community.

The G8 also recognises the importance of the reporting end of transparency initiatives. It is pushing for ‘open data’, which it defines as “[putting information in the public domain; [to] drive innovation and economic growth, provide a basis for better policies and decisions, and increase accountability of governments to their citizens”.

Such focus is positive, and governments, companies and communities must work in concert to develop reporting which is robust, meaningful and accessible.

Australian pilot makes progress

Meanwhile, Australia is nearing completion of its 12-month EITI pilot, with a report expected late in 2013/early 2014. Speaking at the EITI Conference opening plenary, Resources Minister Gary Gray noted that the importance of investment transparency “cannot be underestimated” and that it “equals a social licence to operate”.

Next steps for Australia’s pilot include developing means to reconcile differences between cash and accrual accounting by different entities and furthering methods for data capture using FY2012-13 data. The pilot’s multistakeholder working group is also focused on drafting a ‘governance framework’ which will support system-wide analysis and examine the ways in which transparency principles are already exercised in existing revenue collection.

Recent European decisions seem to suggest that the future of financial transparency lies in regulation. It is only through implementation, however, that the true reach and effectiveness of such measures will become known.

This article originally appeared in the September 2013 edition of Australian Resources and Investment Magazine.