Fiscal Futures: Are National Oil Companies Champions or Obstacles for Energy Transition?

Fiscal Futures: Are National Oil Companies Champions or Obstacles for Energy Transition?

This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.

National oil companies (NOCs) collectively own at least $3 trillion of oil and gas assets on behalf of their citizens. That means they control about double the wealth of all multilateral development banks, and about as much as all U.S. billionaires. In spite of their importance, NOCs remain under-scrutinized.

The opacity of these companies has long posed fiscal governance risks to the people of oil-rich states, even during boom times. With the global imperative to transition away from fossil fuels, the need to shine a light on them grows even more important, for two reasons. First, governments are increasingly calling on NOCs to shepherd renewable energy investments, meaning that the companies’ governance may be critical to the prospects of in-country energy transition. Second, as global fossil fuel markets experience new volatility sparked by climate change, the long-term fiscal risks around large NOC expenditures on fossil fuel exploration and production are growing.

Massive fiscal players

Large shares of national wealth have accumulated in national oil companies. The Natural Resource Governance Institute’s new National Oil Company Database reveals that there are at least 19 NOCs with assets in excess of $50 billion. In some cases, two out of every 100 dollars of a country’s total wealth, including its natural and human resource wealth, is controlled by the NOC.

NOC assets as a percentage of national wealth in 2014. Source: National Oil Company Database

NOCs are also among the biggest collectors of fiscal revenue in many countries. The database shows there are at least 25 NOC-dependent countries, where the company, on its own, collects revenues equivalent to 20 percent or more of total government revenue. And while NOCs transfer a lot to their governments, they spend even more. At the height of the oil boom in 2013, the median NOC in our database paid 23 percent of its gross revenues to the state in taxes, royalties, dividends and other transfers. NOCs spend the rest.

NOCs as drivers of renewables?

Examining whether this money is well spent and how much lands in governments’ coffers has become ever more important as the rise of renewable energy offers both opportunities and challenges. Some NOCs have engaged their public relations machines. Saudi Aramco, the world’s largest oil producer, proclaims itself to be “a pioneer investor in renewable energy” and lies at the center of the commitment to diversify the kingdom’s energy matrix in the much-touted Vision 2030. Colombia’s Ecopetrol has announced investments in solar projects “aligned with the company’s goal of having a more diversified and cleaner energy matrix.” The Nigerian National Petroleum Corporation has a renewable energy division tasked with becoming a “leading player” driving toward a low-carbon economy.

Some of these NOCs could indeed be pioneers in their countries’ energy transition. In many places, NOCs employ the best-educated, most highly-skilled engineers, economists, and financial analysts in their countries. These companies often have better access to capital than other businesses, and bring experience managing complicated projects with highly sophisticated international partners. And they are already integrated into the complex set of systems and institutions that supply fuel and power. NOCs are regularly tasked by their governments with executing mission-critical tasks across the economy, so in one sense they may seem a natural fit to drive an expansion of wind, solar, and other renewable energies.

Credit: Flickr/chibijosh

But is it realistic to expect national oil companies earning billions of dollars from fossil fuels to transform into champions of renewable energy? Progress so far has disappointed analysts. For example, by early 2018 Saudi Arabia’s largest operating solar farm covered a single parking lot, powering a nearby office block, while major investments have been delayed. Bloomberg reports that “virtually no construction has begun.” Other news from Saudi Aramco may provide a partial explanation: in its efforts to woo bond investors, the oil giant released a trove of financial data that revealed it to be the most profitable company in the world, and underscored the dominant role it plays in the kingdom’s economy. And lest there be any confusion, these profits weren’t from wind farms.

NOCs sit at the epicenter of the political economy of fossil fuels, with all of its associated challenges. Selling oil and gas is the dominant mode by which these companies make money. NRGI’s NOC database, with information on more than 70 NOCs worldwide, illustrates this point: in 2015, the median NOC in our sample relied on oil and gas sales for 96 percent of its total revenues. The incentives of NOC leaders have always been oriented around maximizing value from fossil fuels, and their staff are trained to master the oil and gas industries.

Managers in NOCs, and their governments, are accustomed to high profit margins from exporting oil and gas. These profits are likely to be far more appealing for many NOCs than the tighter margins from selling wind and solar energy, and the complexities of selling electricity to domestic and regional markets with weak infrastructure, regulation, and customer bases. It may prove difficult to attract sustained attention (and capital) for renewable energy within a company used to the large margins of oil.

Abundant oil money is not only attractive but can also be corruptive. NOCs in many countries have been deeply implicated in – and in some cases have directed – scandalous activities that have diverted public resource into the hands of a well-connected elite. By empowering these companies to lead their countries’ renewable energy industries, some governments risk replicating some of the governance challenges of fossil fuels. And pivoting to new industries may require a nimble approach that has traditionally been difficult for most (though not all) NOCs.

Asset stranding risks and NOC spending

In the past, the logic behind large-scale expenditure by NOCs was straightforward for NOC managers: sacrifice some part of potential development spending by the government in order for NOCs to build skills, accumulate assets, and capture a bigger share of the country’s oil and gas revenues in the future.

But things may have changed. Investing in renewable energy projects may be a viable answer for some NOCs, but in other cases these ventures could be a waste of public money. Unless heavily scrutinized, NOCs may continue to do what they do best: consolidate large portions of national wealth in the oil industry. And as the world evolves, NOC spending on exploration and development of oil projects becomes ever riskier. Such a concentration of wealth has always alarmed economists who don’t like to see countries put all their eggs in the one basket. But the prospects of a declining fossil fuel industry make diversification even more important, lest oil-rich countries become “stranded nations” without a viable alternative to fossil fuel dependence. For oil-rich tropical developing countries, which sit at the forefront of the worst effects of climate change, the final effect could be a double-whammy of environmental and economic degradation.

In this context, we must look differently at the opportunity cost of investments by NOCs in new fossil fuel projects. It has never been certain that a dollar spent on oil by an NOC today would generate greater returns for a country than a dollar spent on a country’s ports, schools, and hospitals. Now, with the prospects of a declining fossil fuel industry, this uncertainty is even greater. Whether NOCs are planning on investing national wealth in the oil sector, or experimenting with renewable energy projects, public scrutiny is essential.

Unfortunately, NOCs are among the most difficult public institutions to scrutinize. Sixty-two percent of the NOCs researched in the 2017 Resource Governance Index exhibited “weak,” “poor,” or “failing” performance on public transparency. The National Oil Company Database reinforces these findings about the disclosure deficits of NOCs. For the most data-rich year in the database (2015), only 20 of the 71 NOCs we studied published sufficient information for us to be able to fill all ten of the database’s “key indicators.” Reporting on what NOCs are spending money on stands out as a particular weakness.

Policy implications

So, what can citizens and governments do? First, stronger rules and oversight on how these companies spend citizens’ money are essential. And given how large a share of public wealth NOCs hold and the risks that a possible energy transition pose to such wealth, governments should ground decisions about how much NOCs are allowed to spend and how much they must transfer to the treasury government in rigorous forecasting of the global energy market.

Second, to ensure these rules are followed, citizens and governments should ask for better reports from NOCs. Separating public relations from reality in NOC pronouncements about renewables investment requires consistent reporting on how these companies are investing what is, at the end of the day, public money.

Patrick Heller is an advisor at the Natural Resource Governance Institute and senior visiting fellow at the Center for Law, Energy & Environment, University of California – Berkeley. David Manley is a senior economic analyst at the Natural Resource Governance Institute. For additional insights into NOCs, see another of the authors’ blogs at

Further Reading

Fiscal Futures: Bolsonaro is Leading Brazil to the Abyss

Fiscal Futures: Bolsonaro is Leading Brazil to the Abyss

This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.

Brazil recently had significant success in implementing measures to fight hunger and poverty and to improve the population’s overall living conditions. These measures were enabled by growing public investments in health, education, social welfare, agrarian development, and the labor market, among others. The GDP share of federal spending on social programs, for example, grew from 13.4% in 2005 to 15.7% in 2015. During those 10 years, there was intense participation by social organizations and movements in the drafting of public policy guidelines and objectives that took place in councils, commissions, conferences, consultations, and public hearings, as well as other mechanisms.

Expanding the coverage of public policies combined with the intensification of social participation contributed to a more than 60% drop in extreme poverty from 2004-2014. During that decade, income inequality fell by 10%, with the Gini Index moving from 0.570 to 0.515. The fall in inequality would have been even greater in recent years, but for Brazil’s extremely regressive tax system.

Things have drastically changed since 2015, when victories in redistribution quickly began to “melt into air” with the adoption of severe austerity measures to reverse the public deficit. The government also took initiatives to privatize public goods and services, deregulate the labor market, and boost fiscal incentives. One of the most drastic federal cost-cutting measures was the 2016 adoption of a constitutional amendment that froze public spending, in real terms, for 20 years. And additional budget cuts at the state and municipal levels undermined public services even further.

Protesto #EleNão - the largest women's demonstration in Brazilian history
Protesto #EleNão – the largest women’s demonstration in Brazilian history, September 2018. Credit: EVARISTO SA/AFP/Getty Images

By spending less, the government and the National Congress made living conditions more precarious for millions of Brazilians. As a result, we have seen greater rates of unemployment, infant mortality, poverty, inequalities, homicides, and deforestation, among other social and environmental woes. The decline in public safety for millions of Brazilians, along with profound shortcomings felt by people in terms of representation, leadership, and the overall legitimacy of the political system, exacerbated their irritation and anti-system feelings to the point of electing a far-right government in 2018.

These same concerns have now intensified, as the first measures announced by the Bolsonaro government – inaugurated in January 2019 – have radicalized those austerity measures, torn apart important institutions that defend the rights of indigenous peoples, blacks, women, the environment, the climate, and others, intensified privatizations, and cut off dialogue with organized civil society by shutting down the national policy councils and other participatory mechanisms. We have the strong sensation that Brazil is becoming a Yellow Thule – one of the four scenarios of the Fiscal Futures Project. In this environment – from democratic backsliding to rising poverty and inequality – gains made in fiscal transparency and accountability are under severe threat.

To try to change the current power relations in benefit of the 99% we must face the fragmentation of our struggles and the hierarchy of our agendas. A popular development perspective needs to bring together class, socioenvironmental, and identity movements that put people at the center. For that purpose, it is fundamental that we spend more energy acting within the society than disputing the State in order to build a genuine popular pact in which the State is effectively at the service of its citizens.

In the transparency and accountability field, as civil society organizations we will act in support of alternative strategies to address public deficits with less of a burden on the poor, making those who have more pay proportionately more through progressive tax reforms, increasing taxes on higher incomes, wealth, profits, and dividends. Tax exemptions, which amount to 4% of the Brazilian GDP and bring few clear benefits, must also be urgently revised. Other pressing problems we must fight include tax evasion, tax avoidance, illicit financial flows, and corruption – all of which drain billions of reais from the treasury every year.

Our immediate task is to resist. Spaces for dialogue with the Executive have all but disappeared, and we need to protect ourselves against the growing criminalization of our organizations and actions. To that end, we will adopt different strategies. We will work with politicians who are more progressive and willing to fight for fiscal transparency and accountability to avoid backslides in human rights and democracy. We will be part of litigation activities to protect human rights. We will participate in campaigns and networks that fight for improvements in fiscal transparency and accountability at the international, national, and local levels. We will intensify our capacity building work on budgets and human rights and share tools with social movements to help them fight for their rights.

To bring Brazil back to its path towards more justice and equitable development in the long term, we need to rebuild the idea of democracy that has been eroded in recent times. We are already working with progressive politicians, sensitive bureaucrats (including the executive and judiciary branches), other NGOs, the unions, and the traditional social movements like rural, urban, and women among others. We will also work with the more recent social movements – LGBTI+, traditional communities, indigenous people, youth, black communities, black women’s movements, and movements for the democratization of communication – to revisit our concepts, methods, and practices since they’ve proven to be insufficient to deal with the current reality.

One of our biggest challenges is communication. In order to grow and get other players involved in our struggle for fiscal accountability and for the progressive realization of human rights, we need to innovate in our use of information and communication technologies to promote our causes while avoiding the big companies like Google, Facebook, etc. An important first step would be to call together activists, researchers, developers, designers, statisticians, and others at hackathons and jamborees to conceive our own social networks, built and run by us, based on our values. We can create wide-ranging collaborative digital tools (a mix of apps, sites, platforms, chats, virtual working groups, interactive capacity building, etc.) for public participation on fiscal justice policies.

Times are challenging in Brazil. Uncertainty and fear are prevailing, and injustice and violence are growing. The general feeling is that we are making strides towards the abyss. For our fights to improve fiscal transparency and accountability to make sense, we need to connect them to the progressive realization of human rights and to democracy in its different dimensions – representative, participatory, and direct – more than ever.

Nathalie Beghin is Head of Policy and Carmela Zigoni is a Policy Advisor at the Institute for Socioeconomic Studies (Inesc), a Brazilian public-purpose, non-partisan, democratic and pluralist non-profit organization working to strengthen civil society and enhance social participation in public policy-making. The authors would like to thank Warren Krafchik and Paolo de Renzio from IBP for their precious comments.

Further Reading

Fiscal Futures: Do Artificial Intelligence and Big Data Present Opportunities or Challenges to Fiscal Accountability?

Fiscal Futures: Do Artificial Intelligence and Big Data Present Opportunities or Challenges to Fiscal Accountability?

This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.

My answer to the question asked in the title of this post – do artificial intelligence and big data present opportunities or challenges to fiscal accountability – is both. Depending on the time of day, the weather, the news, etc., I find myself oscillating somewhere between two extremes:

  1. A justified concern that we are witnessing a second enclosure movement, where vast digital arcologies like Google and Facebook are creating walled gardens stocked with roving predatory apps in which you are the product. Here’s a compelling version of that vision.
  2. Hoping for a ‘Digital Enlightenment’ where the values of the original Enlightenment – tolerance, openness, and rationality – win out.

Participants in the Fiscal Futures project imagined four scenarios of what public finance would look like in the year 2040. The fun of the exercise wasn’t in extrapolating extremes, but in deciding what could have tipped us in that direction and what the warning signals were. This post presents some of the key challenges and opportunities we saw and discussed in terms of artificial intelligence, big data, and digitization in general – and what we should be doing about them.

Challenge 1: Information rights in the digital age

An immediate red flag for our fiscal future was the massive and sustained collective failure of the imagination in setting a vision that would govern the stewardship and use of data. This point has been made repeatedly by Martin Tisné from Luminate, who argues that we are stuck in a counterproductive silo of thinking about ownership.

Instead, we should be thinking about a framework of rights, and thinking more about whose rights we are safeguarding (or violating) in the way we manage data. Although Martin’s ideas speak most obviously to topics like privacy, they have implications for any data that could be in the public interest and data that satisfies the impulse to “be in control” of one’s life. In public procurement, for example, myths of commercial confidentiality and a transparency ‘gap’ in contracted-out government services constrain access to critical information that is in the public interest, like fire defects in a public-private hospital. The public may not own the data, but they should probably have a right to it.

Public information needs to be embedded in a new data and information architecture that is not about who owns it, but who is entrusted with it by the public, and what accountability measures are in place to protect its appropriate use.

Challenge 2: Data architecture that facilitates transparency

One key element of our fiscal future, especially with the rise of artificial intelligence (AI) and machine learning, is how we design an architecture of transparency that will enable and support the outcomes we want to encourage in society. And, equally important, the culture changes it could lead to.

At the Open Contracting Partnership, we work on transforming public contracts – a US $9.5 trillion market that is vital to delivering critical goods and services. We aren’t just after transparency for its own sake: we want public contracting systems that are 10 times better – 10 times more efficient, fair, responsive, and accountable – than before.

Transparency is currently seen by many as a compliance-based chore. Governments shuffle paperwork to satisfy legal mandates and I am constantly surprised about how little procurement data is used to measure or improve frontline services. Data that improve public accountability should be routinely used and consumed by the government to manage transactions and improve internal efficiency. Designing for government data use is a key channel for creating feedback loops that improve data quality for all users. This is what Americans call ‘eating your own dogfood’. As data volumes increase, analysis should prove ever more useful for internal purposes (with machines to help process).

When the UK’s second biggest contractor Carillion imploded, there was a scramble up and down the country to assess exposure. However, only 33 out of an estimated 450 of Carrillion’s contracts were in the UK’s official contracts portal. Because the portal was regarded as a dumb pipe for the public to use, there was little attempt to improve its data quality or usefulness. However, had these efforts been made, perhaps alarm bells would have been raised much earlier.

Applications like the UK’s contracting portal should be designed for government use and then leveraged through open data to feed other use cases. These portals should become platforms, clearly shaped around tangible performance goals. This is where open data and taking an open-by-design approach can add so much value: one of the reasons for the success of Ukraine’s procurement revolution was that Ukrainian civil society organizations helped design business intelligence, red flag tools, and a complaints mechanism in the government’s Prozorro procurement system. The architecture was designed to plug into each user’s specific role, including meeting the government’s transactional and auditing needs. The system also enabled a wider ecosystem of users, including a citizens: half of the issues flagged by citizens currently get fixed. The data are granular, specific, and support targeted policy interventions.

AI may promise a quick fix to deep insights into data, but IBM’s Watson will not provide the right answers if there are no clues as to the problem or if driven by the wrong assumptions, and if there is no culture of asking questions to begin with.

Challenge 3: Moving from paper to data to digital services

The future of fiscal governance will also involve rethinking topics like procurement, budgeting, and building user-centered digital services as opposed to putting paper-based processes online.

It’s not about technology, but what we want the technology to do. Procurement is a great example, as it connects many of the government’s fiscal tasks: from the budget to the contract, to the spending, to the registration of all parties. Why does a vendor have to fill out personal and business information multiple times if it already exists in a parallel database? Why can’t citizens follow a procurement process from the problem it wants solved — often initiating in lofty campaign promises — to the solution and service contracted?

Warren Smith, Director of the UK’s Digital Marketplace, has been thinking hard about how to support this shift. As he said at the International Open Data Conference 2018 in Buenos Aires, “User-centered design should be the norm. This requires first understanding what the problems are that you’re trying to solve, for whom, and who needs to be engaged. Fundamentally, open contracting is about how procurement data can help solve people’s felt needs.”

Designing for use also involves deconstructing the black box of political will and thinking much harder about the incentives of different actors to engage with transparency and accountability interventions. As Mushtaq Khan from SOAS — who is running a huge new anti-corruption evidence program — put it: if you can’t say who will do what with your intervention (and why it is in their interest), you don’t have an anti-corruption strategy.

So, our positive fiscal future sees a change in culture toward openness, engagement, and results. This change process will involve sustained, repeated interaction. Think of open contracting, budgets, extractives, etc. as a long (and winding) journey rather than a single destination. Over time, the more that users are engaged in designing these processes, and the more that government responds to that engagement, the deeper insight and reform will go. It will take political leadership and changed incentives to embed data, monitoring, and feedback into our fiscal future and to shift the equilibrium of interests so ordinary people and businesses win. But, when they do, they will have a stake in defending the progress.

Impact-focused transparency and accountability interventions will involve engaging new allies, such as public information regulators who are mandated by governments to steward data and information in a big data age. And there will be new challenges, such as the bias coded into artificial intelligence and machine learning applications.

Thinking this way about fiscal governance will identify use cases for AI as opposed to just thinking about how AI will change fiscal governance. Are we enabling a shift from interacting with government that is slow, confusing, and frustrating to one that is fast, simple, and [relatively] empathetic? It’s not about the interface, but the interaction. It’s not about the process itself, but its beneficiaries. It’s not about mining big data for problems, but identifying what data is needed to generate solutions.

We are still a long way from asking the right questions for AI and machine learning to make the best use of the data that is becoming available. It means thinking through the problems first and involving the right people in that process. How can we improve the quality of the meals we provide as a city in schools and prisons and support local business, for instance? How can we provide more affordable health care for citizens?

Of course, the pace of change as the machines take over will be a challenge for many fiscal governance experts. To borrow (brazenly) from Matt Levine, one can imagine a conversation at The Open Contracting Partnership (OCP) in 2022 that goes something like this:

OCP Director: Awesome. We have a new machine learning algorithm that can evaluate all our OCDS user interventions to maximize our impact.
Frontline advocate: Great, that will be very useful to me.
OCP Director: You mean you will be very useful to it.
Advocate: What?
OCP Director: It’s your boss now.
Megatron 3000: Greetings.
Advocate: What?
OCP Director: Don’t worry, it’s my boss now too.
Megatron 3000: Thank you. Please have one million use case mappings, technical architecture reports, and user-centred design consultation plans for me to evaluate on my desk by close of business today…

Fortunately, before Megatron, we still have some time and a lot of work to do to get us on the right path. Now get to work Humans!

Gavin Hayman is the Executive Director of the Open Contracting Partnership, a silo-busting collaboration across government, businesses, civil society, and technologists seeking to open up and transform public contracting, the world’s largest marketplace. Before that, he was Executive Director for Global Witness where he oversaw their ground-breaking and award-winning investigative, campaigning, and advocacy work uncovering secret deals, corruption, and conflict around the world.

Further Reading

Fiscal Futures: Financial Transparency in the Era of Financial War

This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.

The widespread protests that rocked Iran in early 2018—catching both the government and political analysts by surprise—had an unlikely trigger. When Iranian president Hassan Rouhani unveiled his budget for the forthcoming Iranian year, he for the first time made public aspects of government expenditure that had long been kept hidden. Rouhani was hoping to boost his credentials as a reformer by exposing how significant state funding was being provided to religious and quasi-state institutions – many of which were controlled by his political rivals. But the gambit backfired, and the Rouhani government and the wider Iranian state came under criticism. Thousands of Iranians participated in loosely-organized protests around the country, with some mobilizations reportedly encouraged by Rouhani’s political rivals to express their anger that the state had long allowed such transfers while ordinary people saw their standard of living fall due to growing inflation and unemployment.

Though the protests eventually subsided, public anger at financial mismanagement and fiscal governance in Iran has been a consistent feature of domestic politics. Nationally representative polling demonstrates considerable concern about the lack of transparency in Iran’s economy among the public. Nearly 60 percent of Iranians believe that Iran’s “economy is currently run by a few big interests,” rather than for “all the people.” About the same proportion attribute “the greatest negative impact on Iran’s economy” to “domestic economic mismanagement and corruption,” rather than “foreign sanctions and pressures.” But the proportion of respondents who blame sanctions as the primary driver of the country’s economic downturn has been increasing, from 26 percent in May 2015 to 36 percent today. This shift in public sentiment is one example of how sanctions have complicated the domestic politics around financial reforms and fiscal transparency in Iran.

In May 2018, the Trump administration withdrew from the Joint Comprehensive Plan of Action (JCPOA), reimposing sanctions that had been lifted as part of the nuclear deal. The United States has subsequently pursued a “maximum pressure” campaign on Iran, seeking to starve the Iranian government of budgetary resources and to induce an economic crisis to stoke an internal political crisis. Iran’s trading partners have been caught in the sanctions crossfire. European leaders have lamented the impact of extraterritorial sanctions on European companies and banks, decrying a challenge to Europe’s economic sovereignty, while Iran’s oil buyers sought waivers from the Trump administration to allow them to continue buying Iranian crude. Iran’s economy has begun to contract as episodes of currency devaluation, inflation, and rising unemployment take root.

In the face of these intensifying internal and external pressures, the Rouhani administration has nonetheless continued to push for greater financial reforms, most notably in the context of the action plan set forth for Iran by the Financial Action Task Force (FATF), a global body that establishes standards for anti-money laundering and combating financing of terrorism controls. Other initiatives, such as the adoption of International Financial Reporting Standards (IFRS) and an effort to cleave the Revolutionary Guard, part of the country’s armed forces, from its business activities, have also featured as part of these reform efforts. But the intense politicization of what are essentially technical and regulatory reforms, spurred by both domestic political dynamics and the broader fate of Iran’s nuclear deal with the world powers, have hobbled these efforts. As a former finance executive lamented to the Financial Times in January 2018, “Mr. Rouhani is unable to make the budget transparent. His first step to make hardliners more accountable was answered by the unrest.”

The present circumstances in Iran make it a cautionary tale for domestic and international stakeholders seeking to improve financial regulations, fiscal governance, and government accountability in developing economies. The specific ways in which a combination of domestic political rivalries and international sanctions have combined to stymie reform suggest that advocates of reform need to develop more robust interventions to ensure that both the incentives and means necessary for reform are preserved.

When the Rouhani administration launched its efforts to clean up the finances of the central government, state enterprises, and the private sector, the incentives were widely understood—if Iran was going to successfully attract much needed foreign investment, having been deprived during its decade under international sanctions, it would be necessary to raise transparency and governance practices to conform more closely with international standards. But the re-imposition of sanctions, and the characterization of those sanctions by the Trump administration as part of a “financial war,” have not only eliminated this incentive, but also allowed opponents of financial reforms to oppose new regulations and transparency measures on the basis that such measures compromise Iran’s national security. Nowhere has this been clearer than in the intersection of the FATF action plan requirements and issues of fiscal transparency.

Iranian foreign minister Javad Zarif, whose mandate to repair political and economic ties with the international community depends in large part on the FATF process, has complained of a campaign to stop the reforms, telling reporters, “those places that do launder thousands of billions are certainly financially capable of spending a few hundred billion on propaganda and psychological operations in the country.” These “psychological operations” were highly targeted. When Iranian parliamentarians were preparing to vote on a new law related to global standards for combating the financing of terrorism, supporters of the law received death threats.

In a sign of real political leadership, parliament passed the law. But the ultimate ratification of these laws depends on Iran’s non-elected government bodies, which serve as arenas for consternation and compromise among Iran’s political factions. Mohsen Rezaei, the secretary of one such body, the Expediency Council, has suggested that final ratification of the FATF laws will depend on Europe continuing to support trade and investment with Iran in a “constructive manner.” The Assembly of Experts, an influential body comprised of jurists, has described the Rouhani governments’ pursuit of FATF compliance as “response to the enemy’s demands” and “a strategic mistake,” a likely allusion to the impact of new transparency and CFT rules on Iran’s ability to provide funding to proxies such as Lebanon’s Hezbollah. Rouhani has countered these arguments by suggesting that failure to meet the FATF action plan would be a form of self-sanctioning, imploring “everyone, no matter their political party or faction, not to build walls around the government because this wouldn’t be to the benefit of the people.”

Cognizant of these internal battles, the FATF has repeatedly extended the deadline for Iran to complete its action plan, despite protests from the U.S. It is in the interest of the FATF, as a technical body, for Iran to remain engaged in the action plan process, even if reforms are slow to materialize. But a second challenge for external proponents of reform is that those Iranian stakeholders who—despite political headwinds—continue to labor towards greater transparency and accountability lack sufficient technical assistance.

In most emerging markets, technical assistance, whether delivered by consultants or non-governmental advisers, plays an important role in developing capacities within both governmental organizations and commercial enterprises. But in Iran, the United States’ primary and secondary sanctions have made it near impossible for consultants and advisers to operate in the country. On one hand, U.S. officials have continually warned businesses to conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” But U.S. sanctions mean that no entities with a “U.S. nexus” can conduct business with Iran unless generally or specifically licensed to do so by the U.S. Department of Treasury. Given the significant costs and operational challenges associated with establishing completely self-contained teams to pursue engagements in Iran, only a handful of consultancies and non-governmental organizations undertook projects there. The Iranian government therefore lacked much of the expertise and support that has been instrumental to financial and fiscal transparency efforts in so many other emerging markets worldwide.

The situation led some compliance professionals to wonder “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?” Iranian bankers think the answer is yes. A board member of a major Iranian bank stated in an interview, “If the objective was to promote greater transparency… it would have been simple to pave the way by encouraging specialized international firms to advise and assist the Iranian government and financial institutions to develop and implement the necessary legislation, procedures, and programs.”

These sanctions-induced failures of reform, which arise from ruined incentives and restricted means, are unlikely to remain unique to Iran. Sanctions are typically targeted at countries that have weak regulatory environments, where either the state or political elites generate rents from activities such as money laundering, and divert those rents for the purpose of political patronage, sometimes including terrorist financing. In other words, sanctions target precisely those countries where interventions focused on financial reform and fiscal transparency are most in need. Aside from Iran, an expanding program of sanctions targeting Russia and Venezuela, as well as recurring calls to impose sanctions on Turkey, threaten further complications for supervision of the global financial system.

Many stakeholder groups in Iran, including political parties, business organizations such as the chamber of commerce, and civil society groups such as teachers unions, continue to push for greater fiscal transparency. Iran’s newspapers regularly feature sharp commentary about the state of the country’s economic mismanagement, and how nontransparent practices and poor regulation contribute to rentierism and graft. Encouraged by this broad campaign, Iranian reformist parliamentarian Mohammad Sadeghi recently stated, “Transperancy has become a discourse and ongoing demand.” However, alluding to political pressures introduced in part by sanctions and the securitization of the national budget, Sadeghi also noted that “the complexity of the transparency issue has created obstacles in some sectors.”

Unless stakeholders committed to fiscal transparency develop strategies to account for the increased use of sanctions, global reform efforts could be seriously compromised. It may be necessary for stewards of global financial integrity to take a more assertive stance on the responsible use of economic sanctions lest years of progress in improving global regulations and supervision be undone in an environment of financial warfare where global financial integration is tantamount to entering a blast radius, and where domestic reforms, such as increased budget transparency, become akin to exposing the location of a piece of critical infrastructure and leaving it vulnerable to attack.

Esfandyar Batmanghelidj is founder and publisher of Bourse & Bazaar, a project dedicated to the free exchange of information and ideas related to commercial opportunities in Iran. Follow him on Twitter @yarbatman.

Further Reading

Fiscal Futures: Media’s Role in Reporting Fiscal Topics is a Matter of Relevance

Fiscal Futures: Media’s Role in Reporting Fiscal Topics is a Matter of Relevance

This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.

Topics such as fiscal policy, accountability, and fiscal justice do not usually generate sweeping media coverage. Fiscal issues are among the kinds of stories that media producers would probably rather leave to economists and academics, or NGOs specialized in this field. Why? Because these topics are complicated, not easy to break down, and hard to visualize – in short, they’re not “sexy” stories. For these and other reasons, journalists and the media have largely stayed on the fringe of fiscal accountability research. Yet recent exposés such as the Panama Papers show that the media can still make powerful contributions to the greater fiscal transparency cause.  The question is whether, given current digitalization and ownership trends, the media can consistently rise to this challenge.

The “media” is a commercially driven industry and therefore has its own strengths, weakness, and idiosyncrasies. Let’s break down the “media” and look at journalism as the primary source of news. Journalism is still considered the intellectual backbone of today’s media industry, but like most other media products, journalistic products are considered content that has to sell, and therefore favors storytelling over — allegedly — dry facts.

Journalism usually only covers bits and pieces of fiscal issues and rarely covers the whole picture. Stories about corruption and other sorts of white-collar crime touch on one aspect of fiscal accountability, because obviously there is a market for that line of reporting. Beyond that, the business journalism niche covers complex topics like public budgets, tax, corporate finances, central banks, and the markets. However, this type of journalism is tailored to decision makers and professionals who work in these fields and understand the context and jargon. While business journalism covers fiscal decision making and public budgets, for example, these stories go mostly unnoticed by the larger audience.

There’s hardly anything in between those two approaches. Public budgets, public spending, or tax policies often seem to be a blind spot for mainstream reporting. Politicians often are not interested in advertising where public money goes, or how it is redistributed within the fiscal system, and journalists are often not chasing down that information.

Maybe too many media outlets have come to think that there is no merit in emphasizing that kind of coverage – because, supposedly, there is no larger market for it. As a New York Times columnist put it in a column called “Fiscal Ecstasy:” “Budget deliberations in Congress aren’t the most exciting topic in the universe.”

Media headlines from the LuxLeaks investigation. Source: International Consortium of Investigative Journalists

Even though the work of investigative journalists conducting large cross-border investigations such as Luxleaks, the Panama Papers, or the Paradise Papers has led to increased attention on the kinds of stories that touch on fiscal accountability, journalists reporting on them inevitably face a certain dilemma. Audience is often measured digitally, and losing audience, no matter how important the story, can mean instant loss of revenue. Journalists increasingly have to ask themselves: how much detail can the audience be expected to digest? How much fiscal literacy is required to understand the topic? For example, can complex tax matters be broken down without losing the story’s meaning? In struggling with those questions, media has — more often than not — remained on the fringes of fiscal accountability rather than emphasizing it.

Journalists might just be missing opportunities, but it’s not as if there haven’t been any wake-up calls. The most recent came in January 2019 but might as well have gone unheard. A Dutch academic, Rutger Bregman, spoke at the World Economic Forum in Davos, Switzerland, and made headlines by telling a room full of billionaires: “Want to fix the global economy? Then dig deeper. Pay up. Tax the rich.” One does not need to agree with his opinions, but he touched on an important fiscal issue that is a core problem in many countries that were represented in Davos: the so-called “top one percent” of the income pyramid do not pay taxes according to their wealth.

His passionate appeal went viral and drew lots of responses from a larger audience. Why? He made it personal. He challenged people face to face, pointing to a major lack in accountability, transparency, and fiscal justice. He gave injustice a face that, at the same time, made for good storytelling.

The lesson for future media reporting about fiscal accountability: make it personal! It’s important to note that journalists can do this without becoming campaigners or sacrificing their independence and credibility. Fiscal accountability is an abstract notion that is hard to associate with real tangible impact. However, a lack of fiscal accountability translates into a whole chain of tangible consequences: fiscal mismanagement, austerity, corruption, and poverty, just to name a few. And poverty, for example, does have a face. Millions of faces, to be exact, and behind those faces are millions of stories – personal and emotional ones that have winners and losers, fighters, heroes, and victims.

The stories needed to portray the big picture of the inner-workings of fiscal systems and their impact (“fiscal ecstasy”) that deliver exciting and in-depth insight are out there.  They may have been dwarfed by other concerns, but that doesn’t mean they’re not there.

There’s another lesson we can take from Rutger Bregman’s viral success: don’t be afraid to chase down the root cause. In an age in which stories need to become short in order to attract the even shorter attention span of the audience, there is often too little time or space to mention and track down the causes of the problems being reported. That, too, has become a blind spot in many reporting formats. Finding and defining causes for fiscal opaqueness or lack of accountability may require a lot of effort to track down money or chase paper trails, and, eventually, people. This task might involve building new knowledge and making more use of sources and experts who deal with fiscal matters in various fields. But more than anything else, it might mean departing from the traditional agenda and overcoming old habits and blind spots in order to emphasize background, explanatory reporting, and the bigger picture instead of “news only.”

While the latter might seem tantamount to renouncing basic journalistic instincts, the effort is worth it — and it might not only be a “nice to have” — it might be a “must.” In times of enhanced skepticism regarding media, fake news, and an ongoing struggle against declining relevance of quality media reporting, what could be more relevant than shedding light on the public budgets that impact peoples’ lives, peoples’ tax bills, the public goods (roads, schools, hospitals) people use, as well as illicit financial flows which deprive citizens of the very same. While journalists face more and more challenges of press freedom in many countries and regions, it’s vital to remain relevant to their audiences and supporters.

The good news is it can be done, and has been done increasingly in recent years, particularly in cross- border investigations in which journalists are joining forces rather than competing with each other. With the backlash against democracy and anti-press sentiment growing, the need for investigations around issues like corruption and accountability continues to rise. Cross-border investigations have shown that if journalists join forces they can create momentum – even for complex matters and stories. The Panama Papers and Paradise Papers shifted public opinion on tricky issues like tax avoidance, corruption, and illicit financial flows. In the wake of the Panama Papers, heads of state had to resign, millions of unpaid taxes were recovered by states around the world, and tax offenders in many countries turned themselves in. Tax evasion is not considered a trivial offense anymore and tax havens — particularly in Europe — have suffered severe damages to their reputations when it became clear that they were instrumental in the industrial scale of abusive tax conduct.

However, there are substantial challenges ahead for the media. Revenues from advertising, a classic pillar of the business, are declining steadily and irrevocably in many countries around the world. Digitalization will continue to be disruptive and continue to change the face of journalism as well as distribution. Further concentration of media ownership will inevitably follow, which might curb journalists’ ability to serve the public interest and tackle issues such as fiscal accountability. Media integrity is at risk when media becomes more and more commercially driven, or when outlets are primarily loyal to sponsors, or even governments. Like any other industry, media needs healthy, market-based competition – which is eroding and will continue to do so.

Where does this leave us? If journalism is still “printing what someone else does not want printed” and “everything else is public relations,” as George Orwell is often quoted, tackling stories that grow out of fiscal injustice could well be a promising strategy and a way forward. Many recent leak-based financial investigations such as Swissleaks, Luxleaks, the Panama Papers, and the Paradise Papers drew fierce criticism – not from consumers of media, but from those who have been held accountable in the wake of ground-breaking revelations that came to light because of the media.

Petra Blum is an independent journalist working for WDR, a public broadcaster in Cologne, Germany. In 2015, she was part of the Swiss Leaks investigation, studying secret bank accounts and focusing on tax fraud. During the Panama Papers, Petra was part of the team which unearthed the hidden money of people closely associated with Russia’s head of state. During Paradise Papers, Petra helped unravel corruption cases in resource-rich countries like the Democratic Republic of the Congo.

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