Canada: Lots Of Winners In Proposed Revenue Transparency

Last Updated: July 30 2014
Article by Graham Erion

By now, most Canadian mining and oil & gas companies have heard of the federal government's intention to introduce legislation this fall mandating public disclosure of what companies pay to host countries and aboriginal groups to develop resource projects. Canada's efforts in resource transparency, which will apply to fiscal years ending after June 30 of next year, follow similar rules in the United States first introduced in the Dodd-Frank Act, and an amendment last year to the European Union's Transparency Directive. Thus far in Canada the focus around revenue transparency has been on the details, such as how to cover private companies, where this disclosure will be housed, and the consequences for non-compliance. While these issues will get worked out in the legislative process, the focus of this article is the larger picture of how this information, the most significant change to resource disclosure in over a decade, will fundamentally change resource development around the world, and what this will mean for companies, investors and governments.

For companies, revenue transparency represents an unprecedented opportunity for competitive intelligence on what their peers are paying in taxes, royalties, fees, permits, licences, and any related payments to develop resource projects, which will be reported on a project-level basis. This type of detailed information will allow companies to much more accurately forecast long-term project costs when deciding to make the type of large investments in a region necessary for resource development. More importantly, companies will have a more deeply informed basis to negotiate payment obligations in concession agreements, joint-venture projects and similar agreements that give rise to public payment obligations. Competitive analysis on resource transparency will likely become a key due diligence precursor to resource project negotiations, and companies may come to be seen as negligent if they do not review this information in advance of finalizing any resource contracts. This could result in a downward pressure on payment obligations or, at the very least, a normalization of rates charged for resource development, as outliers will be more easily identified and more likely to be renegotiated towards the median in the future.

For investors, revenue transparency will become a key part of their informational mix when evaluating the profitability of projects for resource companies and, by extension, the companies themselves. Just like companies, investors will be able to see what competitors are paying, and they may punish or reward any outliers. This could also have an effect on corporate governance if shareholders start to consider director's or senior management's record on payment obligations in their annual votes (which they will have an opportunity to review, given that annual payment reports will likely be published in conjunction with the annual report and information circular.)

Yet the biggest game-changer for revenue transparency will be with host countries themselves, as was always the central intention of efforts in this area that began over a decade ago with the Extractive Industries Transparency Initiative (EITI). Given the resource curse of many autocratic countries rich in resources but poor in social development, many development experts and Western governments have come to believe that greater transparency around resource development cash flows will create more local accountability structures and community benefits from resource extraction. While the EITI approached this from a purely voluntary and countrywide perspective, the new mandatory and project-level disclosure approach to revenue transparency will make this information more widespread and useful to local communities. These communities are then expected to push local governments to be more accountable for public funds generated from resource development and, in many cases, may push public actors to extract higher payments for such developments. Just as investors and companies themselves can compare what they are paying to their competitors, so too can local communities compare what their local governments or aboriginal bands are getting paid against nearby communities. This could result in upward pressure on payment obligations, especially in more democratic jurisdictions.

As revenue transparency creates new and competing pressures on what payment obligations will be required for developing commercial mining and oil & gas projects, the role of counsel in drafting and negotiating resource contracts will be heightened. Lawyers may have to come up with new structures or methods to satisfy disparate stakeholders all while knowing whatever compromise is reached will be publicly disclosed in the near future. Confidentiality clauses will also need to be amended and will not serve as a shield to this disclosure, as the Canadian government has already indicated. Thus, counsel to mining and oil & gas clients would be well served to pay close attention to the development of resource transparency in Canada, not just for ensuring their clients comply with the new rules but in anticipation of all the ways this information will change the landscape upon which resource contracts are negotiated.

Originally published by The Lawyers Weekly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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