By Rachel Etter-Phoya, Citizens for Justice
This post originally appeared on the Natural Resource Governance Institute blog on April 5, 2017
What royalties should companies pay? What can governments hope to earn in the future? Do the companies really need tax reductions?
Access to contracts signed between extractive companies and governments can help answer questions like these. In many countries, however, extractive sector contracts remain closely guarded secrets and access to them has often been highly restricted, even within government. This limits the potential not only for effective citizen oversight, but also oversight from government bodies responsible for regulating parts of the industry.
Seeking answers, a group of both expert and aspiring financial modelers met in October 2016 in a rather sleepy German town to begin the work of using public domain information to dig deeper into oil and mining projects in their countries. Berlin-based OpenOil has been championing the process to improve transparency in the sector.
Malawians have been advocating long and hard for governments and companies to publish mining and petroleum contracts so that they might better understand the terms by which the country’s non-renewable resources are extracted.
When Malawi joined the Extractive Industries Transparency Initiative (EITI) in 2015, civil society in Malawi made sure that contract transparency was in the first work plan. Although officials at the Ministry of Natural Resources, Energy and Mining said that hard copies of the agreements were publicly accessible at the Department of Mines offices in 2015, it was still hard for most people to access them.
Six months later, the Malawi EITI Secretariat made two mining contracts available. These contracts were released on ResourceContracts.org. In doing so, Malawi became one of the majority of EITI implementing countries that publish contracts.
Building a financial model
Grain Malunga, a former minister responsible for mining in Malawi, and I used the 2007 mining development agreement for Kayelekera uranium mine, found on ResourceContracts, to build a financial model of Malawi’s largest mine, which contributed about 3 percent to the country’s 2013 GDP. The mine is operated by Paladin Energy.
ResourceContracts documents are annotated by legal experts, meaning we had access to contextualized information about key obligations, including fiscal provisions, which aided in building the financial model.
We examined possible future scenarios for government revenue and for the mine, which is on care and maintenance (meaning that production has stopped, but the site is being managed to allow for potential recommencing of operations at a later date) due to depressed uranium prices and high operating costs.
As we modeled the fiscal regime, we learned that the break-even price—which the owner would need to obtain to cover the costs of extraction—was more than double the price of uranium at that time. The government has generated USD 12 million to date from royalties, but lost out on a further USD 15 million due to reduction in royalty rates. This was a result of mining development agreement negotiations that gave the Malawian government a 15 percent free carry equity stake in Paladin Africa, part of the Paladin Energy group of companies and the holder of the group’s interest in Kayelekera. We concluded that a further royalty reduction would only marginally increase the break-even price.
Much speculation surrounds when or if the mine will resume operations. The model has improved public awareness of what factors need to change, such as price, production to resume. As part of the Malawi EITI multi-stakeholder group, I hope to use similar skills and tools to produce financial models for projects in the exploration phase. In doing so, Malawian civil society hopes to ensure that our expectations—regarding revenues as well as impacts on local communities—are grounded in reality.
The ResourceContracts platform is an online repository of oil, gas and mining contracts developed in partnership between the World Bank, NRGI and CCSI. The site enables civil society organizations, members of affected communities, government officials, researchers, and other stakeholders to search for contracts; view summaries of contracts’ key environmental, social, operational and fiscal provisions; and download full contracts as open data. The site was relaunched in 2015 with new features and contracts.
Rachel Etter-Phoya is an integrated expert on accountability, natural resource governance and public financial management at Citizens for Justice in Malawi.
By Quentin Parrinello, Publish What You Pay - France
This post originally appeared on PublishWhatYouPay.org on February 13, 2017
Data-driven stories outlined how the reporting voted in Parliament could have allowed companies such as Total to hide a large part of their activities
Public reporting requirements in France and the opportunity for a stronger transparency bill
Between 2012 and 2014, France was considered a champion of corporate transparency by its European peers. In 2013, the French Parliament passed a law setting a public country-by-country reporting (CBCR) for banks which likely influenced the vote for the EU Capital Requirements Directives (CRD) a few months later. Public CBCR is widely seen as an efficient way to monitor tax strategies of multinational companies, forcing them to disclose information on their operations (turnover, profits, taxes, subsidiaries, etc) on a country-by-country breakdown (including tax havens). In 2014, France was one of the first countries to transpose the EU Transparency and Accounting Directives, setting up public reporting for extractive companies, different from CBCR but equally useful, commonly known as Payment to Government reporting (PtG reporting).
However, despite promises from various government members and President Hollande himself, the extension of public CBCR to cover all large multinationals was never voted in Parliament. In mid-2016, in the aftermath of the Panama Papers, the French government introduced a new bill on transparency, the anti-corruption fight and the modernisation of economic life, commonly known as the “Sapin II bill”. Initially reluctant to establish a public CBCR, the government eventually backed down and introduced a watered down version of the measure.
An amendment watered down by exemptions
Although fairly technical, the concept of public CBCR has increasingly become a very public transparency issue. Whilst NGOs have demonstrate to the public opinion how public CBCR can increase monitoring and accountability of multinational companies, peakr, or industry, associations have regularly flagged CBCR as a threat to competitiveness. On the eve of the plenary vote, the newspaper 20 minutes published an article called “Tax Evasion: NGOs v Multinationals who will win over the Parliament?”
By introducing a watered down version of public CBCR, government claimed it was meeting everyone’s expectations halfway. But our data-stories illustrate how the provision introduced by the government would have allowed large companies to hide a considerable part of their activities.
Data-driven stories: how the reporting would have allowed Total to hide a large part of its activities
The government’s exoneration included a safe harbour provision. Thanks to this, companies reporting less than a certain number of subsidiaries in a given country (two, three, four, etc., as set by decree) would have been exonerated from disaggregating their report at country level, on the basis that it could represent a threat to their competitiveness.
The Data Extractor created a data-driven story to build the evidence outlining how this exoneration would make the reporting essentially useless. Using data published by the company itself, we outlined that, using the lowest threshold possible (less than two subsidiaries), one of the largest French oil companies, Total, would have been exonerated to report in more than 30 countries, one third of the countries where the company operates.
How did we build the case study? We used a wide range of programs that we learnt through the Data Extractors program:
1. Scraping the list of Total Subsidiaries from their annual report: Scraping data allows to turn data in rigid format (PDF, HTML) into open data. For PDF data, Tabula is usually the most performing program, but does not work all the time. Free online alternatives exist, such as OCR tools. In our case, Tabula did not work and we had to resort to online OCR tools.
2. Cleaning the dataset: it’s often necessary with online scraping tools that are less efficient than Tabula. We used OpenRefine, which also allowed us to organise the datasets and add some filters to the 900 entries.
3. Visualising the dataset: we used Tableau, with support from Open Oil, to create an interactive map outlining which countries would be excluded from Total’s reporting.
Interestingly enough, most of the countries where Total would be exonerated from reporting are countries where Total has extractive assets, countries where transparency is needed the most.
Impact of the data-driven story
During the day of the vote, a large number of MPs used our policy note and our figures on Total to demonstrate how inefficient the provision put forward by the government would be. Our position outlined the inadequacy of a reporting that would exonerate the biggest company from disclosing 1/3 of its activities. The figure was also picked up in a number of newspapers. A group of MPs introduced an amendment to set up a full CBCR, without exemptions.
Unfortunately the amendment did not pass. Just before the vote, the government suspended the debates, called a few pro-government MPs and ask them to come back to the Parliament to eventually outvote the amendment by a couple of people (it was actually the second time they resorted to this tactic to counter a vote on public CBCR after December 2015).
Looking forward: lessons learnt and future opportunities
This data-driven case study shows how important it is to provide clear examples of law implementation of a fairly technical issue to our supporters, media, donors, but also, and primarily, MEPs. No one contested our figures that plainly illustrated the risks of granting exonerations. The advocacy carried out by civil society didn’t pay off as the amendment was rejected. Even worse, the French Constitutional Council declared the provision unconstitutional until its application at the EU level. Our advocacy work is now turning to the EU where debates on public CBCR are starting. The EU commission is supporting a version of public CBCR that is fairly similar to the one proposed by the French government.
For many us, whom have dedicated years to advocate for the laws that require the disclosure of payments in Canada, the time has come! Reports required to be disclosed in accordance with the Extractive Sector Transparency Measures Act (ESTMA) are piling up, and shortly (May 2017) we expect there to be hundreds and hundreds of disclosures covering countries from every continent. You can explore the reports here.
Reports by Canadian or Canadian-listed extractive companies stand out from their peers in a couple of ways: Firstly, most of the reports will be for mining companies; secondly, many of the companies are small, with just a few projects, and thirdly, Canada has strong project-level disclosure requirements for public mining companies, which means that there will a lot of complementary information available for each mining company/project.
One of the big questions is: what can I do with this data? Well, there are lots of possibilities. Once the reports have all been filed sometime next fall, we will be able to pull it all together into one dataset, so that we can identify trends and aggregate data. However, before this happens, there is an important opportunity to dig into individual company reports.
At Publish What Pay Canada’s retreat this year, this is exactly what we did. Participants attending the retreat were divided into groups and each group was given one of the mining projects below:
Every member of the group was provided with a folder complete with information on their assigned mining project. The information in the folders drew from 5 primary documents types: Investor presentations, mine project webpages, regulatory filings (technical reports, audited financials), and at times external sector specific information, such as EITI reports or data on uranium production and pricing from the World Nuclear Association. The latter was particularly important, because unlike gold, uranium is often sold on long-term contracts with negotiated prices, rather than using a global price.
Participants were asked to look for certain pieces of information, including:
But most importantly, they were asked to determine whether they could conduct a royalty audit. A royalty audit involves comparing the royalties paid with a calculated assumption of what should have been paid. To conduct a royalty audit, one needs access to project-level production, average annual sale price and the royalty rate. Further, the royalty must be production-based.
With one hour to dig deep into the information at hand, participants come up with some interesting results. Below we explore the results from two groups.
The group that analyzed Perseus Mining Company’s project, “Edikan Gold Mine” found that 10% of mining royalties in Ghana are transferred from the central government to local governments and local land-owning authorities. According to the ESTMA report, Perseus paid 17,890,000 Australian dollars /13,856,860.00 USD (given the exchange rate of 0.74425 provided in the ESTMA report) in royalties from July 1st 2015 – June 30th 2016. As a result, 1,789,000AUD/1,385,686.00 USD should have been transferred to local governments and authorities. The group concluded that it would be worthwhile to follow up to see whether the money was transferred and what it was used for.
The group also conducted an audit on the royalties paid by Perseus for the production at the Edikan mine. The royalty audit involved comparing the royalty payment of 13,856,860.00 USD with the royalty payment calculated by the group given annual production, average price, and the royalty rate. All data was found in Perseus annual report.
In this case the calculation relied upon gold sold versus gold produced, although the numbers are very similar. While the group stumbled at first, given the different currencies used in the annual report (USD) and the ESTMA report (AUD), the final royalty audit showed a discrepancy between the royalty payments reported and that revealed through the royalty audit we conducted. The royalty audit revealed a figure 4.5 million USD below that which was reported. It would be worth reaching out to Perseus to better understand why the royalty audit revealed a figure well below what Perseus Mining paid in royalties for the Edikan project in 2015/2016.
Annual gold sales of 153,957 ounces x average annual price 1,224.00 USD/ounce x Royalty rate 5% = 9,442,168.00 USD
The group looking at the Selinsing Mine in Malaysia was able to complete a royalty audit using available information. To conduct the audit the group first had to convert the royalty payment reported in the ESTMA report from Canadian into US dollars. Given that the ESTMA report did not outline the CAD/USD conversion, an average rate for 2016 of 0.75 USD to each 1 CAD was used, thus royalties of 1,150,000.00 CAD became 862,500 USD. Additionally, given that Monument Mining settled a gold forward sale contract in 2015/2016 for 5,000 ounces/gold at $519.00/USD, the group had to calculate and add two different figures for royalties, assuming that royalties were paid in 2015/2016 on the gold forward sale.
Gold Sales 18,150 ounces x 1,157.00 USD/ounce x royalty rate of 5% = 1,049,975.50 USD
Gold forward contract settled for 5,000.00 ounces/gold x 519.00 USD/ounce x royalty rate of 5% = 129,750.00 USD
Total Sum: 1,179725.50 USD
While the group noted that the royalty rate in the ESTMA report were roughly similar to the royalties revealed by the audit, with the exchange rate factored in, there appears to be a discrepancy of over 300,000 USD. Some of this difference may be due to the actual exchange rate, but it would still be worthwhile to question the company about this difference.
Another thing noted by the group was the highly variable corporate expenses charged by the company to the project, ranging from 19% of revenues in 2014 to 9.49% in 2015, to 16.5% of revenues in 2016. The group noted that it would be interesting to further understand why corporate expenses are so high.
Paladin Energy posed a challenge, as the royalty rate applied to the project in Namibia was not publicly disclosed. Research conducted after the group exercise shows that the Langer Heinrich mine may be subject to a 3% royalty rate, however, Paladin reported the project was subject to a 2% royalty in 2006.
Another important point noted in research conducted after the group activity, was that Paladin Energy reported 6,600,000.00 USD in royalties paid to the government of Namibia in their ESTMA report, a figure that is markedly different from that reported in its annual report of 4,982,697.00 USD in royalties to the Government of Namibia for FY 2016 (p.47). Both figures were cited as referring to financial year 2015/2016. This discrepancy merits further discussion with the company.
Given that the royalty rate applied to the project was unclear, the group sought to identify the royalty rate paid by Paladin given production and price. Luckily, Paladin had only one producing property in FY 2016, thus all figures in the annual report reflected production at the Langer Heinrich project. It can be noted that the royalty rate ranged from 2.7 to 3.65% depending on whether it was calculated using the Annual report or the ESTMA report. I will follow up with Paladin to try and understand the discrepancy between the ESTMA report and the annual report and can report back any findings.
Using royalty payment reported in Paladin’s Annual Report
In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/4,982,697.00 = 2.77 % royalty rate
Using royalty payment reported in ESTMA report
In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/6,600,000 = 3.65 % royalty rate
All the groups noted that the exercise was more challenging than anticipated. Moreover, to write up and verify the results took me considerable time, piling back through company reports and taking into account new information not available during the group exercise. That said, royalty auditing is empowering, arming civil society with critical questions which can be asked of governments and companies. Similar, a closer look at each project yielded other questions, which can form the basis of an informed conversation with companies and governments.
A change in government often brings significant shifts in policy. Major initiatives taken up by a previous administration can be slowed or reversed, and information that was once publicly available may be taken down or censored. The White House webpage provides some clear examples of this phenomenon. Following the inauguration this past January, press reported that the Trump Administration White House homepage underwent some changes, such as striking references to climate change and removing a spanish language option. Fortunately, if a user wants to view the content from the White House homepage of President Barack Obama, it is still possible to do so by navigating to https://obamawhitehouse.archives.gov.
Citizens can also use the Internet Archive “Wayback Machine” to access www.WhiteHouse.gov and see content for any given day going back several years. These archive solutions are helpful for viewing web content, but hosted files on these pages still have the potential to get lost. Documents that are hosted on pages can become inaccessible as other content is changed.
Since 2010 the Publish What You Pay coalition, academics, industry, investors and other actors submitted hundreds of comment letters to the Securities and Exchange Commission (SEC) to influence the agency’s Section 1504 rulemaking. Every single comment that has been submitted to the SEC is available on the regulatory agency’s website. The comments are available as pdf files on four separate comment records: 2010, 2010-2012, 2013-2015, and 2015-2016. Because of the current wave of government self-censorship, we wanted to make sure we could preserve the evidence in the Section 1504 record. This post will provide the steps to download all linked documents, such as pdf files, from a website. The SEC comment record will be used as an example, but the same steps can be used to download and preserve files hosted on any site.
As with other data scraping and organizing processes, the steps described in this post could be carried out manually. For example, scraping data from a company pdf report can be done manually, with a user entering in data line by line into a spreadsheet, but that is a time-consuming process. As we described previously on Extract-A-Fact, there are tools to help speed up data scraping. To automate the downloading of all linked files on a website, we will use the Google Chrome extension, Chrono Download Manager - see the tutorial below.
Step 1 - Install the Chrome extension
Navigate to the Chrome web store page for the Chrono Download Manager and click the ‘Add to Chrome’ button in the upper right. A notice will pop up and you can safely click ‘Add extension’ to confirm installation. When the installation completes you should find a new icon in the upper right corner of your Chrome browser.
Step 2 - Download linked files
Before proceeding, we recommend you set a dedicated folder for downloads. Navigate to chrome://settings in your Chrome browser and set a specific downloads folder. See the image below for an example.
Next, navigate to the page with the files you intend to download. In this case we will use the most recent 1504 comment record. Once on the page, click the Chrono Download Manager icon in the upper right. Select the ‘Document’ tab in the window that pops up.
The ‘Document’ window presents a list of all the links on the page that are interpreted as documents. In this case, we are only concerned with downloading the pdf files. To narrow the selection, click the ‘pdf’ check box as shown below.
Once you’ve selected all the relevant documents you can click ‘Start all’ in the lower right of the window to download the files into the folder you selected in the Chrome browser settings.
*Optional Step 3 - Categorize the downloaded files
If you follow the steps above you will be able to successfully download all of the files from a webpage, which will simply be listed by their filename (e.g. s72515-1.pdf). To help organize the files, you can have Chrono Download Manager automatically attach the descriptive text corresponding to each file. Click the first document highlighted in green (see image above), scroll down to the last pdf and press shift+left mouse button on the last highlighted pdf. With all of the pdf files checkmarked and selected, click the ‘Task Properties’ tab as shown below.
Click the text box next to ‘Naming Mask’ and select ‘*text*.*ext*’ then click ‘Start All’ to download all of the files. You’ll find that the downloaded files will now appear in the folder with a descriptive title (e.g. Jana L. Morgan, Director, Publish What You Pay – United States) rather than the numbered file name.
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