Reports on Payments to Governments Regulations 2014

Baroness Neville-Rolfe Excerpts

Tuesday 25th November 2014 Grand Committee

Moved by

[Baroness Neville-Rolfe]

That the Grand Committee do consider the Reports on Payments to Governments Regulations 2014.

Relevant document: 11th Report from the Joint Committee on Statutory Instruments

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)]

My Lords, I thank you for finding the time to consider these regulations. We tried for an earlier date, but the weight of business in the House meant that that was not possible.

I should first mention that we are introducing the regulations ahead of the next common commencement date in order to allow oil, gas and mining companies to align these reports with the calendar-year approach that they take to gathering information, making the work easier for them and avoiding reporting on a partial-year basis. The directive allows us the flexibility to implement prior to the transposition deadline.

The introduction of the regulations is important for the UK but also for the rest of the world. It is estimated that 1.6 billion people live in countries officially classified as rich in oil, gas or mineral deposits. Greater transparency will provide important information about the payments made: the income that a country gets from the extraction of natural resources. That may seem obvious, but that is not the case in every country around the world. This is a vital step in enabling citizens to hold their governments to account. Payments made to governments by companies active in the extractive industries have the potential dramatically to boost economic growth and to help resource-rich developing countries to pull themselves out of poverty.

The regulations demonstrate the UK’s commitment to transparency. We are taking the lead globally. The UK will be the first EU member state to introduce legislation to fully implement the requirement, although France is well on the way to doing so, Norway already has similar legislation in place, Canada is on track to implement a similar new law this year and we expect the USA to have rules in place next year.

Increased corporate transparency was a key feature of the UK’s presidency of the G8 in 2013. Following the discussions at Lough Erne, the official communique endorsed by our Prime Minister noted that the EU members of the G8 had committed to “quickly implement” the EU’s extractive reporting requirements. The UK is now delivering on that important commitment.

As noble Lords know, much of my career was in business. Transparency also makes good business sense: those who invest in companies must consider a wide range of issues and many investors will welcome additional information to enable them to make sound decisions. Increasing economic stability in countries where long-term investments are made is also good business.

The regulations before us are being considered following the agreement of the EU accounting directive. Chapter 10 of the directive deals with payments to governments by companies in the extractives industry. The UK took an active role in negotiating the detail of the new accounting directive. While recognising the importance of a strong and effective reporting requirement, we also recognised that the burdens imposed on industry by such a requirement needed to be proportionate. Industry and civil society representatives were closely involved throughout the negotiations for the directive. I am pleased to say that this close working relationship has continued as we developed the regulations that we are considering today.

I will now explain some of the detail of the regulations. As I have said, they implement part of the EU accounting directive and many of the requirements are fixed by that directive. Companies must report on payments made to all governments at all levels—national, regional and local—as well as to government agencies and state-owned companies. The report must detail information of the payments made on a project-by- project basis. During negotiations, we ensured that the definition of “project” was one that would reflect the ways in which industry manages and reports on its business activities.

The payments to be reported are listed within the regulations and include production entitlements, royalties, licence fees and payments for infrastructure improvements. The directive does not allow for any exemptions from reporting if a company is within scope. Companies are required only to report payments over the threshold of £86,000. The regulations also make clear, however, that one payment cannot be split to avoid the reporting requirements.

In many countries, payments to governments may not always be in cash; they may be in kind. Such payments are common and an in-kind payment could include improvements to infrastructure by building a new road, or perhaps a hospital. Such payments have to be included and, for the purpose of the report, a value must be attributed to any in-kind payment. To avoid doubt, the basis for the value given must also be set out. The directive requires all large companies and public interest companies active in the extractives sector to prepare reports. The transparency directive applies the same requirements to all companies listed on the main regulated stock markets in the European Union. This will ensure a level playing field, in that foreign listed companies also have to report even if they are not based in the EU. The Financial Conduct Authority, which is responsible, is currently considering rules to implement the requirements of the transparency directive.

Our consultation also considered the areas where the directive offered flexibility. These areas included the date of the first reporting period, the period allowed for the preparation and publication of reports and the reporting format. In line with the UK approach to improving transparency, companies will be required to prepare reports for financial years that begin from 1 January 2015—this January. The first reports will therefore be published in 2016.

The reports do not form part of the accounts but form a separate record of taxes paid directly to each level of government in each country around the world where they operate. The information will be set out project by project, so it will be possible to see the taxes paid directly to an individual country as a result of removing natural resources from the ground. The reports will have to be sent in two months after the deadline for filing company accounts—that is, 11 months after the end of the financial year, or six months for listed companies. This will allow sufficient time to compile the appropriate information without putting extra pressure on business at the time when accounts are due. We also want the reporting format to be as simple as possible. Companies House is working closely with industry on the format of the report. Requiring electronic reporting will facilitate the efficient receipt and sharing of data contained within the reports.

The Companies Act requires companies to report on a wide range of issues. In many cases, Companies House relies on public scrutiny of the register to ensure that company information is up to date. This is the approach that we are taking to achieve compliance for reporting payments to governments. We want to ensure that all companies are able to report in a simple and effective way.

If a company fails to prepare and publish a report or delivers a factually incorrect one, the registrar will write to ask why. There is no automatic penalty imposed as it may be that a company did not actually make relevant payments to governments in the year in question, or they may have been included in a parent’s consolidated report. The company will be given the opportunity to comply with the requirements, but if they fail to do so then the law sets out a penalty regime. The penalty regime for complying with the regulations has been carefully considered. The regime is consistent with that for similar reporting requirements in the Companies Act 2006. Failure to prepare and publish a report could result in either a fine or a prison sentence—so, a criminal penalty.

There is also provision for a review of the regulations. We will report within three years on whether they are efficiently achieving the intended objectives. This report will also enable us to feed into the European Commission’s own review of the directive, which is scheduled to be completed by July 2018.

Industry recognises the importance of reporting payments made to governments. Those who responded to our consultation clearly stated that transparency was an important tool in improving governance as well as fighting against poverty. Many companies already collect this information and make it available on their websites, and they find that investors welcome it. The Reports on Payments to Governments Regulations are an important step in improving global standards in transparency reporting in extractive industries, and I commend them to the Committee.

[Lord Young of Norwood Green (Lab)]

My Lords, I welcome the report from the Minister on what I agree is an interesting and important introduction of new legislation, and I welcome the speed with which the Government have operated.

Most of the questions that I started to write down have been answered by the Minister. I was interested in what the penalties would be, and we got some additional information on that. In the conclusion of her contribution, the Minister referred to a three-year report. I wondered whether any interim information would be published about how companies are beginning to comply.

The other thought that crossed my mind—this is not an attempt to launch an impossible question—is how this legislation, as it seems to me it did when I checked, complies with the UN Ruggie principles. I was hoping that the Bill team were not going to look puzzled; given that these are principles that they ask businesses to enact in relation to human rights and corporate governance, I would have thought that they would have met with them. I ask that as a matter of interest because the Ruggie principles are important.

We are willing to introduce this legislation. The Minister is right that it will make a difference as the sums of money involved around the world are enormous. Hopefully, it will make a difference in giving further information to investors before they make up their mind about the ethical nature of the company that they are about to invest in. Apart from awaiting answers to those questions, I am happy to support this statutory instrument.

[Baroness Neville-Rolfe]

My Lords, I thank the noble Lord for his welcome—I welcome the welcome. There seems to be fair measure of agreement on the way that we have implemented this measure, including the penalty regime and the ultimate sanction of criminal penalties. I very much agree with his point about investment—that having ethical information is increasingly important for investment and the identification of, if you like, political risk.

Obviously, I very much welcome the point made by the noble Lord about the Ruggie principles, in which I certainly took an interest in my former life. But I am afraid that he has managed to ask us a question which we cannot answer. Therefore, I will write to him. My guess is the answer will be a resounding yes. There are very few things that I have introduced that seem to be closer to those principles. I will confirm that.

On interim information, we will start to see information published from 2016 at Companies House. We are not planning a formal review until 2017 but, given the interest in transparency and development, civil society certainly will be looking to see what is happening in this important area, and we will begin to get information coming through. I think that the effect in the countries of the information being available online should help to encourage regimes to use the money being given to them, either in taxes or in kind—as I have said, that is important—and will help citizens in developing countries to hold the politicians to account. That is another benefit.

The regulations mark a step change in transparency reporting. They were agreed during our presidency of the G8 and it is always good to see progress during these important leadership opportunities. It is also good to see the UK at the forefront of this change. Once payments to governments are available, citizens will be bringing governments to account to a greater extent. The fact that this is not just a UK initiative but an EU directive with changes also taking place around the world is very encouraging. I urge the Committee to support the regulations and I beg to move.

Motion agreed.