Almost exactly two years ago, the EU adopted a law that required European oil, gas, mining and logging companies to publish the payments they make to governments in countries where they extract natural resources. The idea was to empower citizens in poor countries with the information needed to hold their governments accountable for spending those revenues on development. This week, the European Parliament is due to vote on measures calling on the EU to expand similar transparency measures to all sectors. This is clearly the way forward. Looking back shows why.
Put simply: it works
Knowing how much companies are paying to governments in taxes allows citizens in poor countries to hold their governments accountable for the receipt of those funds and for using them towards public services like healthcare and education. That way, there is less scope for corruption, and development is funded from the country’s own resources instead of depending on aid. This is the theory – but does it really work?
The answer is a resounding yes. The data resulting from the EU law is not yet available. However, the principle of “publish what you pay” is not new – for over ten years a voluntary initiative called the Extractive Industries Transparency Initiative (EITI) has been chipping away at revenues transparency in the extractive industries.
This has led to some incredible gains which prove that indeed, something as straightforward as making public a set of numbers can lead to more funding for the fight against poverty.
Take for example Liberia, whose first EITI report identified discrepancies around withheld income tax payments of over $100,000 by mining company AmLib, whose subsequent internal investigation revealed corporate fraud. Once this was established, the company immediately paid what it owed to Liberia’s Social Development Fund, which finances the country’s Poverty Reduction Strategy.
Or take Peru, where transparency of mining revenues in two regions, Piura and Arequipa, was used to improve budget forecasting. This led to an increase in spending on health and education (US$150 to $182 million and $53 to $73 million) in the two regions in 2011.
This is it. No need to look further: the simple principle of transparency led to more funds being available for hospitals and schools, nurses and teachers. Not aid from donors, not a social responsibility programme by a mining company, but the government’s very own revenues going to where they should be going. Thanks to public scrutiny enabled by transparency.
This is the future of development: more and more of it ought to be funded with domestic revenues, and less and less with aid. But not all governments are as willing to allow their citizens to see what’s going on. That is why the mandatory disclosure requirements like the ones the EU passed are so important: they force transparency even in countries where governments have a vested interest in corporate secrecy.
Tried and tested; now do more of it
So if it works, why stop here? Why limit a policy with potential positive impacts on poor countries to a sector as narrow as natural resource extraction? Former finance minister of Nigeria Ngozi Okonjo-Iweala stated that in 2008 revenue transparency generated an improved credit rating for Nigeria and led to sizeable increases in foreign direct investment of around $6 billion a year in the oil sector and $3 billion a year in the non-oil sector.
Just think of the possibilities if we could catalyse this kind of return in other sectors of the economy. After all, sectors like construction and telecoms aren’t necessarily immune to corruption either. Policymakers should be scaling up the transparency approach and passing more laws that can help combat corruption, tax evasion and money laundering.
It is already happening. Two years ago, the EU passed an obligation for big banks to publicly report information such as their taxes and pre-tax profits or losses on a country-by-country basis. The Parliament is due to vote this week on such reporting to be made public by large European multinationals across all sectors. This would allow citizens to follow the money and ensure that taxes due are paid.
However, the Commission appears to be dragging its heels. Its biggest announcements of the past year were an impact assessment and a public consultation on the topic. With much of the ground already covered, it shouldn’t be hard for the Commission to swiftly expand these rules to require all companies to operate transparently from now on.
It can be done; it has been done. Why wait around? Next week, world leaders will descend on Addis Ababa, Ethiopia, to decide on how to finance the fight against extreme poverty going forward. It is the perfect opportunity for the EU to commit to passing a law requiring large European multinationals to publish where they declare profits and where they pay taxes. We, for one, can’t wait to be able to report more resources being unlocked, free of budgetary effort, for communities in the development countries.