Monday, April 28, 2008

Oil companies and corruption

A new FT editorial asks:

Bribery and corruption are not just morally indefensible but bad for your business. That is the message Transparency International, the anti-graft campaigner, is determined business will internalise and, perforce, implement. But is it true?

Before the early 1990s, when Transparency International was set up, the answer was, often enough, "no." Bribery, it was reasoned, oils the wheels of business, allowing deals to get done. It is a measure of how far the world has come in seeing through this nonsense that the standard answer to this question today is "yes." (As an aside, TJN has had major beefs with Transparency International: our critique is available here. In essence, we want the global infrastructure of corruption - the banks, tax havens, laws, lawyers, accountants and so on that facilitate the $1-1.6 trillion annual cross-border flows of money, to be considered as part of the corruption equation. We want to overturn today's mentality, equivalent to the pre-1990s nonsense - and highlighted in a recent survey of tax havens by The Economist magazine - that tax havens oil the wheels of international business.)

In the new report focused on by the FT, Transparency International looks at 42 of the world's biggest international and national oil and gas companies operating in 21 countries, based on the transparency of their reporting, particularly on payments made to governments for resource extraction rights. The fact that ExxonMobil is the world's most profitable private oil company and yet is ranked in the worst of three categories on transparency will make uncomfortable reading for those who oppose secrecy and are contemplating the question in today's FT editorial.

Two main points spring from this. The first is that extractive industries like oil and gas constitute a special case. As a recent book explains:

Extracting oil is different from “normal” businesses like tourism or making electric razors. Nobody would destabilize or attack a country to capture its tourist revenues; this would be like using hand grenades to catch the goose that lays golden eggs. Oilfields are not like golden egg-laying geese but are instead are like the golden eggs themselves, buried underground; it may be feasible to blast them out with explosives—even if you damage them you will still get most of what you want. With oil, your profits depend less on political stability or a healthy business environment, and depend more on geology, extraction technology, and world oil prices.

Under this analysis, oil and gas companies do not mind so much about operating in an environment of appalling corruption and mismanagement, so there is less incentive for them to be transparent, and more incentive to be secretive so as to gain favour from corrupt leaders sitting on oil reserves. This promotes the kind of "bad competition" (such as the race-to-the-bottom competition between countries on tax and regulation - see more here) that drives poverty and boosts corruption around the world. This is not to say that non-oil companies are clean, just that the balance of incentives for them is generally healthier: In more "normal" industries and countries, the forces of "good competition" between companies on transparency are stronger, because a healthy business environment (of which transparency is a key part) is more important for them when they look for places to invest. All in all, the answer to the FT's question is more likely to be "no" in sectors like oil and gas than in other, more "normal" sectors.

A second key point about this report is illustrated by the case of BP in Angola. On February 6, 2001, the company's group managing director Richard Olver, in a letter to the transparency campaigners Global Witness, promised greater transparency in its reporting on its Angola operations. The response from Angolan state oil company was fast and utterly furious. BP sheepishly backed down; ExxonMobil's then CEO Lee Raymond subsequently sneered in an FT interview that BP had "got itself into trouble" for being too transparent in Angola.

The lesson from this episode is clear: because of this powerful "bad competition" between companies to pander to secretive oil-rich rulers (and others), if individual oil firms stick their necks out and are more transparent unilaterally, they risk losing out.

Because unilateral action is so difficult, global action that targets all oil companies must be the answer. The problem cannot be tackled without regulatory and other mechanisms, on a global basis. Country-by-country reporting - allowing citizens or governments to unpick company results so that they can find out what the companies are up to in their territories - must be a centrepiece of any move to clean up the world. Such recommendations have already been made by the Publish What You Pay (PWYP) coalition (their original recommendations were set up with help from TJN's Richard Murphy.)

More recently, there have been signs of movement on one key part of the equation: the arcane-sounding but vitally influential International Accounting Standards Board (IASB - click here and here for essential background, and here for a recent update.)

PWYP and others are restricting the scope of their analyses to the extractive industries like oil, gas or minerals. But why on earth stop there? Why not aim for all listed companies, and not just those from the extractive sector, but for all sectors?

The current financial crisis was caused, in large part, by a lack of transparency in international finance. Country-by-country reporting would have transformed the equation. It may have prevented the earlier Enron affair. It would transform the fight against crime around the world. It would enable developing countries to understand the tax-dodging tricks that multinational companies play, and receive the proper taxes they are owed, reducing their need for foreign aid. It would produce generally better governance, everywhere. And it would be achieved with very little cost. In short, country-by-country reporting would change the world for the better. Join us.

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