Newcastle University Business School

Lifting the Resource Curse

Lifting the Resource Curse

Natural resources can power homes and cars, provide essential ingredients for food and lift people out of poverty – but they have also led to claims of corruption and the misuse of money on a huge scale.

Newcastle University Business School is involved in ground-breaking research which explores the effectiveness of the recently implemented EU Transparency Directive.

The objective of this legislation is to provide civil society in resource-rich countries with transparent information needed to hold governments to account and explain how revenues generated from the extraction of natural resources are used.

Drawing on in-depth analysis concerning the development and implementation of the Directives, the research provides evidence-based policy recommendations that are useful for civil society and other interested stakeholders in their communications with government, regulators and standard setters, and in general campaign activity. It also aims to help these groups tackle the “resource curse”, where countries with an abundance of natural resources often suffer from low economic growth and high levels of citizen poverty.

Louise Crawford, Professor of Accounting at Newcastle University Business School, said: “This is a fascinating piece of accounting legislation, emerging from civil society campaigning against the resource curse, and requiring corporate entities to produce accounting information for use by user groups beyond traditional investors.

“Before this legislation, it was very difficult for policymakers, capital markets and civil society groups to fully appreciate the financial contribution made by extractive companies to individual country governments. This was problematic, particularly in countries that are rich in natural resources, but where their many citizens often suffer sustained poverty. For example, in complying with the Directives, Royal Dutch Shell plc discloses a contribution of over $22 billion in its 2017 report on payments to governments.

“Armed with this corporate transparency information, national governments can be held to account for the vast revenues they receive and asked to explain how these revenues have been used to alleviate poverty and enhance the well-being of their citizens.”

The roots of this research emerged in 2007 through studying the process by which Publish What You Pay (PWYP), a global alliance of more than 800 civil society groups, lobbied the International Accounting Standards Board to mandate country-by-country reporting (CbCR) in an international financial reporting standard, IFRS8. The move was designed to enhance transparency by requiring transnational companies to separate their annually reported financial information on a country-by-country basis, enabling capital market investors to assess corporate risks and civil society to understand the impact of such activities on national citizens affected by corporate activities.

Although PWYP was unsuccessful in its attempts to persuade the International Accounting Standards Board to adopt CbCR, they were subsequently successful in campaigning for CbCR to be mandated by the EU Accounting (and Transparency) Directive.

The Directives became effective across all 28 EU member states for reporting periods starting on or after 1 January, 2016. Notably, the UK implemented this legislation one year early under its Reports on Payments to Governments (RPGs) Regulations 2014. Equivalent legislation has been adopted in Canada and Norway, and significant progress has been made in Australia, South Africa, Switzerland and Ukraine towards developing similar accounting legislation.

Professor Crawford and other UK accounting academics – Eleni Chatzivgeri, University of Westminster; Martyn Gordon, Robert Gordon University; and Jim Haslam, University of Sheffield – were commissioned by PWYP to undertake a short, intensive EU-wide study to examine the implementation of the Directives across EU member states. The UK team coordinated the creation of a group of academics from across Europe to explore this legislation in European Union country-specific contexts. This group has been named the STAR Collective, acting to enhance Social wellbeing through Transparency and Accountability Research.

Building on the findings of earlier work in the UK context, 243 RPGs were found and analysed across 19 EU Member States and interviews undertaken with regulators, preparers and users of RPGs.

The research revealed RPGs were found useful by civil society groups in their attempts to hold national governments accountable for payments received. There was evidence of good reporting practice and support for the EU reporting requirements from in-scope companies. However, around a fifth of companies in 2016 did not fully comply with the obligation to identify the government body receiving payments and many Member States are not monitoring compliance. Across many EU countries, RPGs were difficult to access with no published list of in-scope companies required to prepare RPGs. These findings indicate that transparency information may not always be easily accessible, which threatens the law achieving its transparency and accountability objective. Additionally, some users expressed concern regarding RPG credibility when no form of assurance is mandated.

This UK and EU research has produced a number of recommendations to improve the efficacy of the law. These recommendations have been used by civil society organisations in their response to the UK government’s 2017 consultation over the law and are currently being used to inform responses to the European Commission’s 2018 consultation. Professor Crawford has presented the research at the European Commission and the European Parliament in relation to this consultation. She has also been invited by Transparency International-EU and PWYP Norway to high-level, round-table discussions between extractive company representatives, civil society organisations and regulators to explore how transparency reporting might be improved to meet its objective.

Prof Crawford said: “It has taken a long time and a lot of campaigning to achieve country-by-country reporting as reflected through reports on payments to government legislation. This represents a significant success for civil society and the first accounting standard to be mobilised through civil society action. This is an area of social science research, focused on understanding how accounting can facilitate equality, diversity and fairness across society, which is well worth researching.”

“Those that are currently in this position could do worse than seeking an alternative approach as outlined in our matrix.”

Our recommendations provide civil society groups with evidence that they can use in their campaigns for greater corporate reporting transparency.

Professor Louise Crawford

Professor of Accounting