1. Investors need to be able to assess the risks of their investments. Investors need to know where, in what amount, and on what terms their money is being spent in what are often very high-risk operating environments. These environments are often poor developing countries that may be politically unstable, rife with corruption and have a history of civil conflict fuelled, in part, by natural resources. Secrecy of payments carries real bottom line risks for investors. As F&C Asset Management has stated, “Investors have a strong interest in ensuring that the oil, gas and mining companies in which they invest have access to resources and can operate in a stable and predictable business climate, especially at a time when the most attractive reserves are often in politically unstable regions.”
2. SEC regulations will capture a larger portion of the international extractive industries corporations than any other single mechanism, thereby setting a global standard for transparency and promoting a level playing field. Investor support for the voluntary Extractive Industries Transparency Initiative (EITI) has been important and welcome, but the ESTT/EITD Acts will go much farther and much faster in setting a global regulatory framework for payment disclosure.
3. Investors should know how much money is being invested “up front” in oil, gas and mining projects. For example, oil companies often pay very large “signature bonuses” to secure the rights for an oil field, long before the first drop of oil is produced. Such payments are in addition to the capital investment required. In Angola, $500 million is not unusual for a signature bonus and single fields can cost over $2 billion to develop. Such costs take years for companies to recoup through their production sharing arrangements with host companies. For this reason, it is in the interest of investors to know the amount and timing of payments in high-risk operating environments.
4. Risks of nationalization and expropriation – In countries where there is a history of mismanagement of extractive industry revenues, new governments, whether through coups or populist electoral strategies, may come to power on platforms of nationalization or expropriation of foreign assets. Where revenue payments are disclosed, there is a better chance that natural resource wealth will be better managed for the benefit of all, thereby reducing risks of nationalization or expropriation.
5. Reputational risk for companies could affect investors – Investors could be affected by holding an extractive industry company in a portfolio that could be target of campaigning. Companies need to protect themselves from false or unfair accusations and blame-shifting by host governments that can tarnish their reputations with the investor community and the general public. Disclosure of payments is one way to address reputational risk.
6. Reduced demand for corporate philanthropy – When disclosure of payments leads to better management of government resources, companies will receive fewer demands from host communities for social services and may see less need for corporate philanthropic projects in developing country contexts. Shell and Exxon spent $64 million combined on community development projects in Nigeria in 2001. Payment transparency is a low cost way to reduce the amount of such programs.
7. Increased economic growth and new markets – Properly managed resource-rich economies feature higher and broader-based economic growth. This would increase the stability of developing countries and create new markets for investors and companies, including in the non-natural resource sectors.
