China’s Economic Reckoning
The Price of Failed Reforms
In September 2011, President Barack Obama announced that the United States would be implementing the Extractive Industries Transparency Initiative (EITI), a global effort to clean up the oil, gas, and mining sectors. The goal was to bring transparency and accountability to industries in which mismanagement and corruption too often undermine development, increase poverty, and fuel conflict. Until the U.S. announcement, only developing countries (and Norway) had actually adopted the EITI transparency standard, even though it had been launched by former British Prime Minister Tony Blair and was largely financed and overseen by developed countries. Global transparency advocates hailed the United States for taking the lead. And soon after, other developed countries, such as Australia, France, Germany, Italy, Mexico, and the United Kingdom joined the United States in announcing their implementation of EITI. In doing so, they made a clear statement: it was important for all countries to participate in the effort to increase transparency in these industries.
Now, the Trump administration is threatening to upend all the progress that has been made to date. It announced on November 2 of last year that the United States would halt its domestic implementation of EITI (known as USEITI). Although the United States will continue its role in setting the global EITI rules, it has refused to adopt the same standards it encourages others to maintain. This means that it is not only undermining its global leadership on this issue, but also depriving Americans of an important transparency tool, one that enables them to hold their government accountable for collecting revenues related to the development of the nation’s resources.
GOOD FOR THE WORLD, GOOD FOR AMERICAN TAXPAYERS
In committing to USEITI, the Obama administration made clear that it was doing so not simply because it might be good for the rest of the world, but also because it was good for the American people. As it noted in a 2011 report, honoring USEITI would “ensure that taxpayers are receiving every dollar due for extraction of our natural resources.” Over the past decade, the U.S. Department of the Interior has collected on average about $10 billion in revenues per year from oil, gas, and mineral extraction on federal lands and water, making this sector one of the largest sources of non-tax federal government revenue. And this is in addition to what the Department of the Treasury collects in federal corporate income taxes on the companies developing these resources and to what state governments collect from the development of the resources on their lands.
Accordingly, one of USEITI’s central objectives was revenue transparency: enabling the government to account for and confirm the funds that it was owed. Announced only months after the disastrous Deepwater Horizon oil spill, which exposed deep mismanagement at the Department of the Interior, the commitment to implement USEITI signaled that the administration took seriously the need to reestablish public trust in the U.S. government’s management of national resources. Even extractive industry representatives participating in EITI noted, in November 2013, that they wanted to see greater clarity and responsibility over revenue collection.
However, although the Obama administration had begun implementing USEITI, progress was stalled by companies that refused to disclose their tax payments, as required under EITI.. Had USEITI been fully implemented, however, it could have played an important role in helping citizens understand certain implications of the major U.S. tax overhaul late last year. Limited public information about tax payments by U.S. companies in the extractives sector, including reporting through USEITI, suggests that the industry is paying a rate far lower than the typical corporate rate of 35 percent. It has been reported that the new Republican tax law will deliver even more favorable treatment to the upstream oil and gas sector by allowing them to deduct certain expenses. It’s thus important to raise the question: would that outcome have been different if members of Congress and their constituents had had access to better information about what companies were (or weren’t) already paying in federal taxes?
Granted, EITI and related transparency initiatives have their shortcomings and critics. EITI has been criticized for being too narrowly focused on revenue transparency without offering the necessary contextual information to make the data useful, such as production levels or contractual terms. (This is a charge that the EITI Board has worked to address in recent versions of the EITI Standard.) It has also been criticized for failing to clearly show that its fairly burdensome set of requirements for governments and companies actually results in a reduction in corruption and mismanagement.
In addition, U.S. companies continue to object to Section 1504 of the Dodd-Frank Act, which complements USEITI by requiring oil, gas, and mining companies listed on U.S. stock exchanges to report payments they make to both the U.S. federal and foreign governments for the development of these resources. Specifically, U.S. companies have voiced concerns about the possible disclosure of sensitive information to commercial competitors and other governments and about losing bids in certain countries to companies that are not required by their home jurisdictions to make such disclosures.
To date, these concerns have not matched the experience of businesses in other countries implementing similar disclosure rules. Moreover, more than 50 countries have now implemented EITI, including the majority of resource-rich developing countries, having calculated that the benefits of EITI outweigh its challenges.
MITIGATING THE COSTS OF WITHDRAWAL
Although it’s unlikely that the United States will rejoin EITI anytime soon, there are some steps that federal agencies, Congress, and even state and tribal governments can take to mitigate the costs of withdrawal.
The Department of the Interior should maintain and continue to update its groundbreaking data portal, which was developed as part of the USEITI process and is now used as a model for other countries implementing EITI. It provides a wealth of useful public information about the U.S. oil, gas, and mining industries, including an interactive state resources map and detailed overviews of revenues collected from each type of mineral. But the risk of having this portal removed is real: for example, the Trump administration has taken down crucial information before, including climate change material from the EPA website. Fortunately, Interior has indicated that it plans to maintain the portal at this time.
At the same time, the DOI should continue holding multi-stakeholder discussions about how the U.S. government manages its natural resources. One of the underappreciated benefits of USEITI was the opportunity to build direct dialogue between U.S. domestic NGOs working on natural resource issues and extractives sector companies—groups that are typically accustomed to meeting in more contentious settings. The USEITI Multi-Stakeholder Group, a mandatory component of EITI, was formed as one of more than 1,000 current Federal Advisory Committees whose purpose is to allow the government to hear from citizens and experts on a wide variety of issues. Continuing this committee in some form would be a welcome sign that the administration intends to maintain its engagement with all stakeholders on natural resource management.
There is much that the State Department can do, too, to demonstrate its continued commitment to transparency and accountability in this sector and dispel any perception that Secretary Rex Tillerson’s old loyalties to longtime employer ExxonMobil—which participated in USEITI but refused to disclose its taxes as required—precipitated the Trump administration’s pull back from EITI.
To fight this notion, the State Department should devote the necessary human and financial resources toward the implementation of EITI and accountable resource management globally. Like most bureaus at State, the Bureau of Energy Resources, which oversees U.S. engagement in EITI, currently has yet to fill the important role of Assistant Secretary. It recently downgraded U.S. participation on the international EITI Board and its proposed budget cuts threaten initiatives that support good governance of extractive industries in developing countries.
Congress, meanwhile, must protect Dodd-Frank Section 1504. In February 2017, Congress controversially repealed the Securities and Exchange Commission’s rule implementing Section 1504, and there are now efforts underway to repeal the law entirely, along with its companion rule on conflict minerals, known as Dodd-Frank Section 1502. Although Section 1504 is no substitute for EITI, its implementation would bring welcome transparency around oil, gas, and mining company payments not only to foreign countries but also to the United States. Given that Canada and the European Union have already adopted equivalent legislation, the repeal of section 1504 would not only walk back years of progress on this issue, but also put the United States behind the curve once again.
Additionally, Congress should mandate disclosures of all beneficial owners of U.S. companies, so they cannot be used to avoid or evade taxes. The obscuring of beneficial ownership contributes to corruption by allowing public officials to use such companies to direct payments and contracts, such as oil, gas and mineral leases, to entities that they in effect own or control. The United States is one of the easiest places in the world to set up shell companies, but there is now bipartisan legislation before Congress to make this more difficult. Several countries, including the United Kingdom, have already mandated this disclosure. It’s time for the United States to join them.
State and tribal governments can also lend their support to EITI by adopting its principles. A substantial portion of government revenue from the extractive industries within the United States is collected by state and tribal governments because of the resources located on their lands. Four major resource-producing states—Alaska, Colorado, Montana, and Wyoming—had voluntarily opted to participate in some aspects of the EITI process. A number of tribal representatives also chose to sit in on the multi-stakeholder meetings while they considered implementing the initiative in their jurisdictions. Although there is no mechanism for subnational governments to formally join the international EITI initiative, subnational governments can now join the global Open Government Partnership, and this multi-stakeholder dialogue could continue at the state and tribal levels.
Above all, Americans must resist the argument that EITI and other natural resource transparency initiatives help only poor people in poor countries run by corrupt governments. These are powerful tools that hold the U.S. government and companies accountable and ensure that U.S. citizens receive what is owed them from their nation’s resource bounty.