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Part I: The Full Economic Costs and Benefits of Transparency in Extractive Industries

February 15, 2012

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

In July of last year President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act–also known as the “financial overhaul bill”—into law. Embedded into the Dodd-Frank Act was Section 1504, which required companies listed on the U.S. stock exchange to disclose payments to governments for oil, gas, and mining. Under these provisions, companies would provide this information in their SEC filings and it would be publicly available.

Unsurprisingly, the American Petroleum Industry (API), a U.S. trade association for the oil and gas industry, is pushing back. In a letter to the SEC, API claims Section 1504 defies Executive Order 13563, which Obama signed in 2011 to require federal agencies to “engage in a cost-benefit analysis…of proposed and existing regulations.” API argues the SEC has failed to conduct that compulsory cost-benefit analysis. They’re even threatening to sue.

But, yes, please. Let’s talk cost-benefit analysis.

Okay, first, what is Executive Order 13563? President Obama signed this Order with the intention of ensuring that the U.S. regulatory system protects “public health, welfare, safety and [the] environment while promoting economic growth, innovation, competitiveness and job creation.” It requires agencies to take into account, to the extent practicable, “the costs of cumulative regulations” and also to maximize “net benefits.”[1]

API claims the SEC did not consider the “significant costs” imposed by Section 1504, including the loss of “hundreds of millions of dollars in direct reporting and compliance costs,” and the potential loss of “tens of billions of dollars of existing, profitable capital investments,” which would to be placed at risk “should the final rules require public disclosure of information that is prohibited from disclosure by the laws of other countries.” API also claims the bill would place them at a “competitive disadvantage” with foreign firms, who are not subject to the disclosure requirements.

Alright. Let’s think about, at least theoretically, how this cost-benefit analysis would look. I’ll start with the costs.

Costs of Section 1504

API claims Section 1504 would impose hundreds of millions of dollars in reporting and compliance costs. No one is arguing Section 1504 won’t impose some compliance costs, notably in the form of tracking and collecting information. But the SEC has already estimated the cost of compliance with Section 1504 and it’s a far cry from “hundreds of millions.” In a report, the SEC estimates “the total annual compliance burden of the collection of information in hours and cost resulting from the proposed amendments.” The SEC estimates the new rules will increase costs for professional services by $11.85 million industry-wide. Given the industry’s current spending of $3.6 trillion on professional services, that’s a 0.03% increase in professional expenditures.

API claims Section 1504 would impose billions of dollars in lost profits if the rules require public disclosure of information that is prohibited in other countries. This is unlikely. As Revenue Watch has noted “research shows that national laws and contracts routinely allow for disclosure of information as required by securities regulation.” Earthrights International has shown that the industry has failed to correctly identify even one country hat prohibits such disclosures. Moreover, two gas companies–Petrobras, the Brazilian state-owned oil company, and Statoila, a Norwegian energy company—are already required to disclose payment information to their own governments. In a statement, Petrobas could not identify a single country that it operates in that prohibits disclosure of this information.

API claims firms listed on the U.S. stock exchange would suffer competitive disadvantage as a result of Section 1504. There is no way to know whether or not this cost would materialize, but luckily we have a nearly identical case study to examine that would give us a good indication. In June 2010, the Hong Kong Stock Exchange (HKEX) enacted nearly identical legislation to Section 1504—which required mineral companies to disclose payments made to host governments. Since the legislation was enacted, more than a dozen extractive companies have listed on the HKEX. If the legislation posed a debilitating competitive disadvantage, they wouldn’t have.

So there you have it. Those are the economic costs. But what about the economic benefits of Section 1504? Of course, API’s letter to the SEC failed to mention any. But there are many. We’ll get to them.

This post is the first part of a two-post series. The second post, on the economic benefits of Section 1504, will appear on Friday.

[1] White House Circular A-94 provides general guidance for conducting benefit-cost and cost-effectiveness analysis to public and private agencies. I’ll base my critique and underlying analytical structure on that guidance.


Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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