Objective Capital's Africa Resources Investment Congress 2011 Ironmongers' Hall, City of London 14-15 June 2011 Day 1: Africa Resources Speaker: Giulio Carini, Global WItness

1. AFRICA RESOURCES
INVESTMENT CONGRESS
Transparency in the Extractive Industries: New
Disclosure Rules for Publicly Listed Companies
Giulio Carini – Global Witness
IRONMONGERS’ HALL, CITY OF LONDON ● TUESDAY-WEDNESDAY, 14-15 JUN 2011
www.ObjectiveCapitalConferences.com

2. Transparency in the Extractive
Industries: New Disclosure Rules
for Publicly Listed Companies
June 14, 2011
www.globalwitness.org
www.publishwhatyoupay.org
global witness

3. Revenue Transparency Regulation in US,
China and European Union
•United States: Section 1504 of Dodd-Frank Wall Street
Reform and Consumer Protection Act (Disclosure
of Payments by Resource Extraction Issuers)
• China: Hong Kong Stock Exchange new
Chapter 18 Rules for Mineral Companies
• European Union: Commitments to introduce
transparency legislation for extractive companies in
October 2011

4. Global Campaign for Revenue
Transparency
• Push for these new revenue transparency rules has largely
come from Publish What You Pay coalition
• Global Witness, a co-founder of Publish What You Pay: a global civil
society coalition that campaigns for transparency in the
•PAYMENT;
•RECEIPT; and
•MANAGEMENT of revenues from extractive industries
• New Disclosure Rules in US and China as well as those soon to be
implemented in Europe involve transparency in the PAYMENT of
revenues from oil, gas and mining industries

5. What Problems is Revenue
Transparency Addressing?
• Mismanagement and Misuse of Natural Resources: Oil, gas and
mineral resources generate great wealth, but if poorly managed
extractive revenues can also undermine economic growth and
heighten corruption
• The Resource Curse: many developing countries are rich in
natural resources, but as a result of mismanagement and misuse
of revenues received from these resources, these countries are
•
often mired in abject poverty and political instability
• Lack of Transparency affects companies and investors as
well: resulting poverty, instability and weakened rule of law
are not only bad for local people, they can also damage
company reputations and generate lower return for investors

6. Prime example of Resource Curse:
Nigeria
• Even though Nigeria is the world’s seventh-largest oil producer and Africa’s largest oil
exporter, more than 50 percent of the population live on less than $1 a day.
• Basic public services in Nigeria remain extremely poor, infrastructure is in bad shape
and a country with huge energy reserves is subject to frequent power outages
because of under-investment in its electricity grid.
• Within Nigeria, this failure of development is widely blamed on misappropriation of
public funds and assets by corrupt politicians.
• The Transparency International Corruptions Perceptions Index from 2010 ranks
Nigeria as 134 out of 178 countries in its corruption scale.
• The systemic looting of public funds in Nigeria has provided fodder for a violent
insurrection. This conflict has provided a mask for organised extortion and theft of oil
on an industrial scale and led to frequent guerrilla attacks on oil companies. Shell
claimed in July 2009 that Nigeria had lost a staggering US$47 billion which the
company would otherwise have paid in revenues, because these armed attacks had
forced Shell to cut back its oil production

7. What is the Ultimate Aim of
Revenue Transparency?
• Extractive companies should disclose what they pay (PAYMENT) and
governments should disclose their receipts of such natural resource revenues
(RECEIPT)
• Governments should publish their budgets so that civil society knows how natural
resource revenues are spent (MANAGEMENT)
• As a result, members of civil society in resource-rich countries will be able to
compare the two sets of data and hold their government accountable for the
•
management of this valuable source of income.
• Investors can judge whether extractive companies payments are appropriate for
the resources gained and whether the government and companies are participating
in a fair deal
• Protect companies from allegations of complicity with corrupt governmental
practices.

8. International Initiative for
Revenue Transparency of
Payments and Receipts
• Extractive Industry Transparency Initiative (EITI), voluntary
initiative launched by Tony Blair in 2002 in response to Publish
What You Pay
• Involves multi-stakeholder group compromised of governments,
private sector companies, investors and investor groups to
promote the public reporting of extractive industry payments and
•
receipts
• Both governments and private and public companies disclose
payment data, which allow civil society to compare data
• Problem with EITI: Voluntary approach and reliability of data

9. Mandatory Revenue Transparency of
Company Payments: New Disclosure Rules
• Change Stock Listing Rules: regulation requiring companies engaged in the
commercial development of oil, natural gas, or minerals that are listed on different
stock exchange globally to publish the payments they make to governments.
• Mandatory initiative which covers publicly listed companies is complementary to
EITI (push EITI process in other countries, reliability of company data in EITI)
• Aim is two-fold: a) Provide civil society with accurate information to begin to
hold their governments accountable for extractive revenues and b) provide
• with information to better assess a company’s exposure to potentially
investors
unstable or corrupt governments
• Such information can help civil society and investors judge whether extractive
company payments are appropriate for the resources gained

10. Section 1504 of Dodd-Frank: Disclosure of
Payments by Resource Extraction Issuers in
US
• US Dodd-Frank Wall Street Reform and Consumer Protection Act: US federal
statute signed by President Barack Obama on July 21, 2011 as a response to the
financial crisis
• Section 1504 of Dodd-Frank: a resource extraction issuer must disclose an annual
report relating to any payment made by the resource extraction issuer, a subsidiary
of the resource extraction issuer, or an entity under the control of the resource
extraction issuer to a foreign government or the US Federal Government for the
purpose of commercial development of oil, natural gas or minerals on a country-
•
by-country and project-by-project basis
• Rules have not yet come into effect. Final rules are expected on August, 2011 and
will come into effect approximately a year later

11. Who Needs to Disclose Under Section 1504?
• A RESOURCE EXTRACTION ISSUER:
• A) Required to file an annual report with the Securities and Exchange
Commission (10-K, 20-F, 40-F)
• B) Engaged in the commercial development of oil, natural gas or minerals
-includes activities of exploration, extraction, processing, export and
other significant actions relating to oil, natural gas, or minerals or the
acquisition of a license for any such activity
• -not intended to capture activities that are ancillary or preparatory to
such commercial development such as: a manufacturer of a product used
in the commercial development of oil, natural gas, or minerals; or
transportation activities
The US Securities and Exchange Commission estimates that approximately 1101
companies will be covered.

12. What Types of Payments Need to be
Disclosed Under Section 1504
• Payments means a payment that is
• made to further the commercial development of oil, natural gas or minerals; and
• not a de minimis payment (lacking significance or importance);
• It includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and
other material benefits
• Payments made to foreign governments or the US Federal Government
•
• Payment on a country by country basis as well as on a project by project basis
• Dispute as to the definition of project by project, which will be resolved once final rules
are out in August, 2011.

13. What are the Costs for Companies as a
Result of Section 1504?
• Costs include costs related to tracking and collecting information about
different types of payments across projects, governments, countries,
subsidiaries and other controlled entities.
• These tracking and collecting costs would vary depending upon how an
issuer would need to modify its existing systems to track, collect, and
report the proposed payment information.

14. Hong Kong Stock Exchange: new Chapter 18
Rules for Mineral Companies
• Disclosure Rule in effect on 3 June 2010 (no retrospective effect)
• Newly applicant mineral companies will have to disclose payments made to host
country governments.
• Similar to Dodd-Frank as it cover payments in respect of tax, royalties and other
significant payments
• Differs from Section 1504 Dodd-Frank as it only covers payments on a country by
•
country basis and not on a project by project basis
• Under Chapter 18 Rules, a Mineral Company must include not only in its annual
report but also in its interim (half-yearly) reports details of its exploration,
development and mining production activities and a summary of expenditure
incurred on these activities during the period under review.

15. Who Needs to Disclose under Chapter 18 of
Hong Kong Listing Rules?
• Mineral Companies
• Mineral companies are those whose major activity (25 per cent
or more of assets, revenue or operating expenses) is the
exploration for and/or extraction of natural resources.
• Natural resources include various minerals, petroleum, and
natural gas
• Listed issuers that complete a major acquisition of natural
resource assets will also be classified as mineral companies.

16. Are Mandatory Transparency Rules Coming
for Companies Trading in EU stock
Exchanges?
• European Union has made a commitment to enact similar
payment disclosure requirements
•Most recently, President of the European Commission, José
Manuel Barroso said :“The European Commission will table
legislative proposals in October, which includes the obligation
for companies to publish information about their activities.
We do this in support of the Extractive Industries
Transparency Initiative, which helps Africans increase their
fiscal resources available to deliver public goods and services
for their citizens.”

17. What’s the Next Step for Revenue
Transparency?
• Stock listing requirements to oblige extractive companies to
disclose the payments they make to governments are only a
first step in checking corruption and mismanagement of
natural resources
•More is needed such as:
•Expand EITI to cover more countries
•Budget transparency: full disclosure of all relevant fiscal
information in a timely and systemic manner to ensure that
civil society knows how and where the funds from natural
resources are spent