By Rahul Basu, Research Director, Goa Foundation. This post originally appeared on Intergenerational Foundation on July 8, 2019.
The principle of intergenerational equity is, at its heart, quite simple. We must ensure that future generations inherit at least as much as we did. Only after that do we have a right to consume the fruits of our inheritance. Any loss is a loss to the people and all future generations.
If we implement this rule successfully, our children will be at least as well off as we are. If we leave a bequest as well, they will be better off than us, improving their evolutionary fitness. It is natural to want our children to be richer than us.
Without intergenerational equity (IE), humans are doomed. Everyone will want to consume their inheritance, leaving the next generation poorer. Any group/society that adopts this path will be ruined in no time, like an addict selling the family silver.
Many fields incorporate the IE principle
The IE principle has deep roots in our civilization, but unfortunately it has been obscured over time.
Consider inheritance law: the idea is that inheritors of property are simply custodians for future generations (especially if the inheritance involves entailment, which constrains the present heir from consuming the inheritance by recognizing the rights of subsequent heirs). But in most cultures, there is the rich good-for-nothing heir who lives by selling off the family silver, unfairly impoverishing his future generations.
Consider endowment funds, where the capital is conserved and only the income used. The deepest rationale for accounting is the idea of stewardship, the idea that capital must first be conserved. In fact, accounting and economics define income as the residual after we ensure that the capital is held constant.
Environmental economics has the sustainable yield principle – we can only consume that amount which doesn’t endanger the capital.
IE and the Public Trust Doctrine
In most countries, natural resources – including forests, streams, beaches, oceans, the atmosphere and minerals – are owned by the state as a trustee on behalf of the people and especially future generations. This is the Public Trust Doctrine (PTD), often derived from natural law and considered more fundamental than the Constitution. For the trustees, the foremost obligation is to ensure the corpus of the trust is kept whole. And there is a duty to treat all the beneficiaries equally.
In a remarkable judgment (Pennsylvania Environmental Defense Foundation, 2017), the Supreme Court of Pennsylvania interpreted the section on rights to natural resources and ruled that the state must deal with natural resources as a trustee, not as a proprietor, and therefore must put the proceeds from extracting oil and gas towards restoring the environment instead of general government expenditure.
IE and PTD applied to inherited mineral wealth
The consumption of mineral wealth is a prominent example where we have failed to implement intergenerational equity. Consider the UK. From the 1700s till today, the UK has consumed a large part of its coal and North Sea oil and gas inheritances. Yet the IMF estimates that the UK government has a negative net worth (i.e. the value of its liabilities in excess of its assets) of 125% of GDP. How will the future generations of the UK see this profligacy?
The extraction of oil, gas and minerals is effectively the sale of these assets, with royalties and other proceeds being the consideration paid in exchange for the mineral wealth extracted. Unfortunately, governments all over the world treat the proceeds from selling their mineral wealth as revenue or income, a crucial error.
As this hides the real transaction – a sale of inherited wealth – it results in governments selling minerals at prices significantly lower than what they are worth. This is driven by lobbying, political contributions and corruption. For example, official statistics indicate that Australia lost 82% of the value of its minerals extracted over the decade 2000-10.
And what is received by the government is treated as a windfall and happily spent, leaving neither the minerals nor their value for future generations to inherit.
Worse still, we pollute our world with carbon, fertilizers, pesticides and plastic, thereby damaging other inheritances.
The pioneering work of the Goa Foundation
The Goa Foundation, an environmental non-profit organisation (full disclosure: I am Research Director) has developed a general framework to implement intergenerational equity. The Future We Need is a global movement whose work is based on the practical work of the Goa Foundation; it asks for natural resources (starting first with minerals, including oil and gas) to be viewed as a shared inheritance that we hold as custodians for future generations. The Goenchi Mati Movement is advocating these principles for all mining in Goa.
We recognize that we have inherited minerals because all our ancestors left them underground. If we follow their example and leave the minerals in the ground, our children will inherit the minerals like we did. We will have done our duty.
If we do decide to extract, IE calls for first identifying critical assets, such special mineral deposits or eco-sensitive areas where extraction would not be permitted. Following that, if extraction is permitted, then a moderate pace of extraction is required to ensure that the impacts are not excessive, and minerals and the work of extracting them are available to future generations.
Finally, since extraction is the sale of our inherited wealth, we must ensure
(a) zero waste and zero loss when selling our minerals
(b) that, like Norway, we save the entire proceeds, ideally in a future generations’ fund, also as part of the public trust
(c) that we distribute the real income only as a citizen’s dividend, equally to all as owners
(d) that we protect the corpus of the fund indefinitely.
India’s National Mineral Policy 2019 takes some initial steps towards implementing IE in this fashion. And India’s Supreme Court has ordered the creation of a Goa Iron Ore Permanent Fund as well as caps on extraction of iron ore on grounds of intergenerational equity, a global judicial precedent.
Some other approaches to IE
There are a number of interesting approaches being tried.
PM Theresa May writes in the foreword to the UK’s 25 year Environmental Plan: “Our natural environment is our most precious inheritance. … We hold our natural environment in trust for the next generation. By implementing the measures in this ambitious plan, ours can become the first generation to leave that environment in a better state than we found it and pass on to the next generation a natural environment protected and enhanced for the future.”
The plan by the UK’s Natural Capital Committee has a goal of leaving the environment for our future generations in a better condition than today. Physical offsets is a key mechanism used – forests, if they must be cut down, would best be offset by new forests. And the goal is to increase the area covered by forests.
The Future Generations Commissioner for Wales, created under the Well-being for Future Generations Act, is another notable implementation of the intergenerational equity principle.
The US-based organisation Our Children’s Trust argues that the Earth’s atmosphere is part of the public trust, and rising carbon levels have created a responsibility on governments to act to reduce carbon levels in order to leave for future generations an atmosphere with carbon levels that do not create climate change impacts.
The intergenerational equity principle deals not just with fairness between living generations, but looks forward to many many future generations that also have a right to what we have inherited.
We are now reaching the conclusion that the intergenerational equity principle must be a foundational principle of our civilization and economy. If it isn’t, we will simply consume our natural capital, leaving a wasted planet for future generations, cheating them of their rightful inheritance.
Let us be the generation that changes the course of history, not the generation that consumed the planet.
The Goa Foundation, an environmental NGO in India, has had a remarkable impact. Their clear perspective on intergenerational equity, and practical path to implementation, have scored major wins in Goa and India, especially on mineral policy (a permanent fund and caps), and helped to bring about groundbreaking interpretations of the Constitution to protect and conserve the natural resources nationally. Rahul Basu, Research Director of the Goa Foundation, explains how this approach can be rolled out more widely for the benefit of future generations.
By Alexandra Gillies, Natural Resource Governance Institute
This post originally appeared on resourcegovernance.org on June 10, 2019.
According to a BBC investigation broadcast last week, a recent oil deal in Senegal was festooned with red flags that signaled the potential for controversy and possible corruption. The Senegalese government went ahead with the deal despite the warning signs, and prominent U.S. and U.K. oil companies later joined in as well. As a result, a businessman dogged by ethics questions will walk away with hundreds of millions—and possibly even billions—of dollars in return for having done very little, and the country’s oil sector is left steeped in controversy. What can we learn from this unfortunate turn of events?
In 2011, the Senegalese government awarded the rights to explore two offshore oil blocks to a company called PetroTim. When a new Senegalese government came into power in 2012, it allowed PetroTim to retain rights to the blocks. In 2014, PetroTim transferred the rights to Timis Corporation which is owned by the controversial businessman Frank Timis. That same year, the American oil company Kosmos acquired 60 percent of the blocks from Timis and began exploring for oil and gas. Kosmos found major natural gas reserves, and BP then joined the partnership. Finally, as reported by the BBC, BP bought out Timis Corporation in 2017 for $250 million and a share of the gas field’s future royalties.
The deals should not have proceeded in this way. In 2017, my colleagues and I examined dozens of corruption cases connected to the award of oil, gas and mining licenses around the world. Looking at these scandals and mishaps, we asked what warning signs might have alerted authorities or outside observers that something suspicious was afoot? We found 12 common red flags that, when observed, should prompt additional scrutiny and concern.
According to the BBC investigation, the award of the licenses to PetroTim, the transfer to Timis Corporation and subsequent events exhibited at least a whopping seven of our red flags, and possibly two more:
Given the glaring warning signs, it is important to ask: Why did the Senegalese government choose PetroTim to begin with? Why did it then let Timis Corporation acquire the rights? And, why did Kosmos and BP choose to partner with the Timis Corporation? It’s because of these two decisions that Frank Timis will walk away from his Senegal oil sector adventure with his pockets full.
Considering these questions may hold a couple lessons.
First, the challenge here appears to be one of low standards rather than inadequate due diligence. Most of the red flags were observable well before the BBC’s investigation. Savvy and experienced companies such as Kosmos and BP surely saw them, and the government of Senegal likely did too. The government award process failed to weed out PetroTim as a suboptimal candidate. The later decisions by Kosmos and BP to move ahead with the deals suggest that they found their legal risks to be acceptably low, such as with respect to the U.S. Foreign Corrupt Practices Act or the U.K. Anti-Bribery Act. Indeed, Kosmos has been open about the identity of its new partner as part of the company’s strong commitment to transparency. So, it’s not that the parties’ due diligence systems failed to uncover the red flags; it’s more likely that they noted and assessed the risks and decided they were worth taking.
Outcomes like this one generate controversy and create conducive conditions for corruption. To avoid them, companies should apply higher standards for the kinds of partners and deals that they take on. This is a different takeaway than the one often drawn from controversies such as this one. For example, many FCPA settlement agreements involve companies promising to adopt ever more elaborate due diligence protocols. Even if these new and improved systems do expose more dirt, they won’t prevent future problems if executives approve the deal anyway.
Second, once an asset becomes “tainted” by controversy or suspected corruption, the options for getting it back on track are limited and unsatisfying. If the unqualified Timis Corporation retained full control over the license, the gas fields would have sat dormant and produced no returns for the country. If the government sought to revoke his license, years of disputes and arbitration would have followed. So instead, the two international companies partnered with Timis and eventually paid off his company in order fully claim the gas fields. The Timis Corporation had a legal claim to the licenses, so it negotiated a healthy payday for itself before agreeing to exit. But that payday has generated a scandal and inflicted reputational harm on all parties—and the harms could continue since BP will pay Timis a share of the field’s royalties for many years to come. While it’s good that capable companies now manage the assets, it should not have taken such a problematic set of transactions to reach that outcome.
The problem of tainted assets can be avoided altogether if governments award licenses to qualified and appropriate parties to begin with. The spread of beneficial ownership reporting, contract disclosure and other forms of transparency may help encourage this behavior. However, in cases where it is too late, we need a method for handling tainted assets that doesn’t stoke scandal and that protects the public interest of the country in question.
The Senegal situation is not the most dramatic or disturbing example of these challenges. In Nigeria, in the late 1990s, the petroleum minister allocated the oil block OPL 245 to a company called Malabu which he himself partly owned. Shell and Eni later sought to acquire the rights to the block. But what to do about Malabu? In 2011, Shell and Eni paid $1.3 billion into a Nigerian government account for the block. Multiple accounts conclude that more than $1 billion of the payment ended up paying off Malabu’s owners, government officials and other private parties. Leaked emails indicate that Shell and Eni personnel negotiated directly with Malabu’s owners to arrive at the deal. Again, weak company due diligence was not the problem as OPL 245’s history was well known to all parties. Rather, the companies knew the risks and chose to engage with Malabu anyway. In this case, the gamble may not have paid off. Italian prosecutors indicted the two companies and several top executives on corruption charges, and their trial is ongoing. They deny wrongdoing. Other cases, including from Liberia and the DRC, further illustrate the problems that arise when international companies engage with high-risk, problematic actors in order to access extractive sector opportunities.
The BBC’s investigation of the Senegal case sounds the alarm once again. Unless governments and companies adopt stronger standards for the kind of deal they’ll undertake and we tackle the challenge of tainted assets, the natural resource wealth of developing countries will continue ending up in the wrong pockets.
Alexandra Gillies is an advisor at the Natural Resource Governance Institute. She is the author of the upcoming book Crude Intentions: How Oil Corruption Contaminates the World. Follow her on Twitter @acgillies.
By Laurel Pegorsch, Associate Advisor on Climate Change at Oxfam America, and Daniel Mule, Senior Policy Advisor on Tax and Extractive Industries at Oxfam America
From climate change denialism to human rights violations, oil, gas, and mining companies are often in the headlines for the wrong reasons. Just as shocking, however, are the lengths to which they go to avoid paying taxes.
In recent years, extractive companies have expanded their reach. Mining companies have pursued investments in lithium and cobalt to improve energy storage while interest in natural gas as a transition fuel has drawn attention to Tanzanian and Mozambican natural gas deposits.
But as new investments in energy and minerals for renewable technologies bring these corporations to frontiers like East and Central Africa, it’s important to understand how their practices deprive governments in cash-poor, resource-rich countries of the ability to strengthen schools, repair roads, and build health clinics.
So how do they do it? And what should be done about it?
One way multinational corporations reduce their tax bills is by profit-shifting. A company does this by allocating more profits to its corporate subsidiaries in lower-tax countries to reduce its overall tax liability.
The IMF estimates that profit-shifting may deprive some countries of $200 billion annually. In the Democratic Republic of the Congo (DRC), Swiss mining conglomerate Glencore has allegedly avoided tax payments by inflating costs paid to its entities based elsewhere. And that matters because although the DRC is one of the most mineral-rich countries on the planet, almost 65 percent of its citizens live below the poverty line.
This behavior is pernicious in the oil, gas, and mining sectors. Multinational corporations manage most mining and petroleum projects and often conduct transactions with parties in the same corporate group. To make matters worse, extractive companies play an outsized role in lower-income countries, which have also become increasingly dependent on extractive revenues.
So when a multinational corporation, for example, manipulates the “transfer price” charged for goods or services provided by one subsidiary to another, it can shift profits from a higher-tax country to a lower-tax one. This practice usually disfavors the country where the resource is being exploited—and in many cases, governments have neither the capacity nor the legal or institutional framework to effectively audit what may be going on.
A PR crisis or legal battle in waiting?
If you think profit-shifting sounds like smart business practice, think again. In fact, companies expose themselves to reputational, operational, and legal risks when they shift profits to reduce their tax burden.
Unjust tax practices caused public outrage and humiliation for over 300 oil and mining companies in 2014 when the Luxembourg Leaks exposed their shady tax practices. Scandals continued in 2016 and 2017 when the Panama Papers and Paradise Papers revealed how individuals and companies avoided paying their fair share.
In the end, it just doesn’t pay off. These public relations crises cost companies on average an estimated $200 million per firm in market capitalization, not to mention long-term damage from negative publicity. Inequitable tax breaks also can threaten companies’ relationships with local residents and their governments, increase the prospects for the renegotiation of contracts, and jeopardize future company investments.
Responsible tax practices are gaining momentum
Pressure is now mounting for oil, gas, and mining companies to renounce aggressive tax planning and support tax transparency. Tax setups that seem too good to be true often are because governments and their citizens often come back to demand a better deal.
Examples of progress already exist. Anglo American has publicly renounced their use of tax havens and plans to phase them out. Private sector initiatives like the B Team’s Responsible Tax Principles have won initial support from companies like Shell, Repsol, and BHP as well as multinational mining companies including Rio Tinto. However, despite some corporate leadership, leading industry associations like the International Council on Mining and Metals and IPIECA have remained remarkably silent on commitments to responsible tax practices.
To help corporations become responsible citizens on tax and maintain their competitive edge, mining and oil companies should proactively improve their tax practice in line with Oxfam’s Getting to Good: Towards responsible corporate tax behavior.
Companies should take a number of steps, including:
Download our Examining the Crude Details report about government auditing to combat tax avoidance to learn more.
UK financial regulator confirms oil, gas and mining companies must name government entities receiving their payments
Some oil, gas and mining companies reporting their payments to governments under UK law have omitted important elements, including the identify of government entities receiving payments. Publish What You Pay UK and NRGI have raised concerns around the omissions, and the UK authorities are taking action. This new blog post is available from PWYP in English and French, from NRGI and on GOXI.
By Miles Litvinoff, PWYP UK, and Joe Williams, NRGI
April 25, 2019
In 2016 UK-incorporated and London Stock Exchange (LSE)-traded oil, gas and mining companies began to publicly disclose their payments to governments annually under the European Union Accounting and Transparency Directives and UK national law. The regulations require companies to file reports that are disaggregated and granular, providing data both on each country where the company operates and on each individual project giving rise to payments. UK-incorporated companies report via the UK registrar Companies House extractives service and LSE companies via the designated National Storage Mechanism (NSM) of the UK Financial Conduct Authority (FCA), the UK financial regulator. Roughly 90 UK-reporting companies are now entering their fourth annual round of public payments to governments disclosures.
The UK and all other EU countries, Canada and Norway have all implemented laws requiring extractive companies to report their payments to governments. This has been a major breakthrough in the fight against corruption and fiscal mismanagement in the world’s oil, gas and mining industries. But some companies reporting in the UK have omitted important elements. In 2018 PWYP UK complained to the UK authorities regarding 20 or so companies that had failed to identify projects in their disclosures or failed to name each individual government entity they had paid. PWYP UK also notified officials about companies that failed to report to the NSM in the required XML (open and machine-readable data) format as well as in “human-readable” PDF or HTML, or that were at least two months overdue with their reports.
The UK government and its G7 partners recognised in their 2013 Open Data Charter that publication of extractives data in open and machine-readable formats is important to help “increase awareness about how countries’ natural resources are used [and] how extractives revenues are spent”. Unlike the NSM, the Companies House extractives service only accepts payment reports in XML, so the issue of companies not using the required format does not arise there.
NRGI and PWYP UK have also engaged with a number of reporting companies individually, pointing out that UK and EU law requires both the naming of individual projects giving rise to payments and the identification of each government entity that receives a payment.
The FCA takes action
Earlier this year, the FCA took action. The February 2019 Primary Market Bulletin, which the FCA publishes to inform LSE-traded companies of important regulatory issues, clarified that oil, gas and mining companies reporting payments to governments must under Chapter 10 of the Accounting Directive identify each separate government entity receiving payments: “[A] government is defined as ‘any national, regional or local authority of a Member State or of a third country. It includes a department, agency or undertaking controlled by that authority’,” the FCA stated. “Some issuers … have only provided the payments made by country[,] which is not detailed enough to comply with … the Accounting Directive. The policy intention is that stakeholders should be able to assess to which precise government entity a payment has been made.”
As we have consistently argued, it is not enough for companies to provide only the recipient country’s name or only generic indications of government level such as “national”, “regional/local” or “municipal”. The EU Directives and UK regulations require companies to report the amounts paid to “each government”, including to state-owned enterprises. The rationale for this is clear: If citizens of producing countries are to hold their governments to account effectively, they need – and have a right – to know which specific government body receives payments, rather than having to guess or to seek the information elsewhere.
Consistency in transparency
Ensuring that companies identify each recipient government entity is fully consistent with the Extractive Industries Transparency Initiative (EITI) 2016 Standard, which requires that payment data “is presented by individual company, government entity and revenue stream”, as well as “at project level” (requirement 4.7, emphasis added). Similarly under equivalent Canadian legislation, the Extractive Sector Transparency Measures Act (ESTMA), “Payments must always be reported for a single Payee and not grouped together at the level of government. For example, each payment to a municipal government Payee must be reported separately in the ESTMA report from payments to other municipal government Payees” (Canadian government guidance).
PWYP, NRGI and our civil society allies are increasingly using extractive payments data to raise public awareness and improve public oversight of the sector – for example, here and here. It is therefore important for companies to fully recognise that disaggregating and naming each recipient government entity, including state-owned enterprises, is the reporting requirement under both mandatory disclosure laws and the EITI Standard. This will help provide citizens with the information they need to hold their governments to account.
We have highlighted this point in our written submissions to the European Commission “fitness check” on company reporting, which includes in its scope chapter 10 of the EU Accounting Directive. And we have alerted individual extractive companies and the two leading industry bodies, the International Association of Oil & Gas Producers (IOGP) and the International Council on Mining and Metals (ICMM), to the UK FCA’s recent ruling.
Open/machine-readable and human-readable data
The FCA also reminded LSE-traded extractive companies of their obligation to report their payments to governments via the official online NSM platform and to do so in both open/machine-readable XML format and in “human readable” PDF or HTML. We will continue to engage with companies and the FCA where these requirements are not met. And once again we have emphasised the need for open data reporting for extractive payment disclosures – and for a central EU-wide online data repository – in our engagement with the EC’s “fitness check”.
We encourage civil society colleagues and other accountability actors to access the wealth of mandatory reporting data available via NRGI’s platform www.resourceprojects.org, as well as via Canada’s ESTMA index page and the UK’s Companies House and NSM platforms (see also PWYP UK’s short user’s guide here). Highly recommended too is Global Witness’s handbook on using and analysing extractive companies’ revenue disclosures, Finding the Missing Millions.
The more that civil society and other oversight actors use data to hold governments and extractive companies to account, the more effective we can be in tackling the resource curse.
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