EC on the harmonisation of transparency requirements and Proposal for a Directive of the European Parliament and of the Council on the annual financial statements and the consolidated financial statements and related reports of certain types of undertakings - Main contents

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dossier	SEC(2011)1290 - Part I - EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT - accompanying the document: annual financial statements, consolidated ...
document	SEC(2011)1290
date	October 25, 2011

agreement on CBCR of payments to governments can be achieved.

The preferred policy option is therefore to require EU MNCs active in the extractive and logging of primary forest sectors to disclose payments to governments on a country- and project- basis. The policy would be to target MNCs listed on EU regulated stock markets and EU unlisted large companies active in the extractive and logging of primary forests sectors, to ensure a level playing field between these categories of companies.

The development of and support of an international initiative on CBCR remains crucial as EU action alone on CBCR will not result in a full picture of government receipts from the exploitation of natural resources being shown. In particular EU action alone will not capture the activities of the national oil companies which globally control the largest share of oil and gas reserves and production.

5. Analysis of main impacts of the preferred policy option 5.1.1. Increased transparency

In general terms, CBCR of payments to government on a country- and a project- basis by the extractive industry and loggers of primary forests should provide investors and civil society with significantly more information than today, on what is paid by EU MNCs to host governments in exchange for the right to exploit the relevant countries' natural resources. Publicising this information should have the effect of making governments more accountable. With a project approach, civil society local to a mine, oil field, forest etc. would know what government receives for exploiting such local resources.

5.1.2. Potential strengthening of the Extractive Industries Transparency Initiatives (EITI)

With increased levels of data on payments to host governments entering the public domain, there will be increased pressure on national governments from civil society to account for how the revenues derived from extractive and loggers of primary forest MNCs have been spent. Some governments may respond to such calls by implementing EITI locally. This would mean that potentially more countries would be within the scope of the initiative. Finally, a significant expansion of EITI reporting countries may capture non-EU state-owned companies, thus reducing any negative competitive effects for EU MNCs vis-à-vis the competitive situation with state owned companies.

5.1.3. Improved operating environment for the extractive industry and loggers of primary forests

More accountable governance in resource-rich countries would bring increased political stability which creates a more stable business environment for MNCs making significant investments locally.

5.1.4. Increased administrative costs

There will be increased administrative costs from the preferred policy option. The Commission Services estimated the following costs:

Table 3: Administrative costs of proposed policy

|| Estimated Number of companies || Year one cost (€ millions) || Subsequent years' costs (€ millions)

Listed extractive MNCs || 171 || 740 || 192

Unlisted large extractive MNCs || 419 || 397 || 103

Forestry (listed and unlisted large MNCs) || 26 || 8 || 2

Total || 616 || 1,145 || 297

These costs assume the information will be unaudited. A requirement to audit would be estimated to increase annual recurring costs by approximately €90 millions. Furthermore, the cost estimates are based on the assumption (made by the surveyed companies) that information would be disclosed only if it is material.

5.1.5. Competitive disadvantage

Whilst disclosing payments to government would not give direct insight into the levels of turnover, costs and profits that a MNC generates in a jurisdiction, there may be instances when confidential business data will be revealed or deduced from CBCR data. EU MNCs exploiting natural resources would also not be on a level playing field in terms of disclosure when compared with non-EU state owned companies and this may affect their ability to complete existing contracts and win new ones.

It is not possible to place a monetary value on the loss of competitive position. However, given that some extractive industry operators have voluntarily decided to disclose some country-by-country information and a majority of extractive industry respondents to the public consultation were in favour of disclosing CBCR of payments to governments as a means to improve government accountability it has been judged that the loss of competitive position from this policy would be limited. Furthermore, a number of factors affect the competitive position of EU MNCs in the extractive industry especially, namely the level of engineering know-how and technical efficiency.

The strengthening of the EITI would also militate against any possible short-term loss of competitive position, as it may lead to a more global application and enhanced reputation of compliant companies.

5.1.6. Public authorities

The revision should have no budgetary consequences for public authorities. .

5.1.7. International relations

Where an EU MNC would have to disclose payment information, the disclosure of which is prohibited by the domestic law of a foreign country, the relevant governments could perceive there to be a breach of their national sovereignty. This point is not clear-cut and industry and NGOs dispute the point.

5.1.8. Energy security

Where a country opposes reporting of payments to government, EU extractive operators may find it harder to operate locally which might have consequent effect on oil and gas resourcing. In practice, however, this has not been the case as some companies already disclose payments to governments on a country basis without impediments to their activities.

5.1.9. Social impacts

Within the EU there will be limited social impacts as EU governments publish national accounts which provide information on government revenues. However, in other parts of the world, citizens may have limited information on government revenues. The main social impacts would therefore be outside the EU.

6. Monitoring and evaluation

The Commission will monitor the implementation of the CBCR requirement in cooperation with the Member States. An evaluation of the effects of the preferred policy will be carried out to see to what extent the anticipated impacts (increased payments' transparency, strengthened EITI, improved business environment, increased administrative costs, and increased competitive pressure) materialise.

[1] 2009 EITI overview of country reports, http://eiti.org/files/Overview%20EITI%20Reports.pdf.

[2] Defined in Directive 2009/28/EC as "naturally regenerated forest of native species, where there are no clearly visible indications of human activities and the ecological processes are not significantly disturbed."