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Cloud computing services over the Internet have the potential to spur a significant increase in government efficiency and decrease technology costs, as well as to create incentives and online platforms for innovation. Adoption of cloud computing technologies could lead to new, efficient ways of governing.

On April 7, the Brookings Institution hosted a policy forum that examines the economic benefits of cloud computing for local, state, and federal government. Federal Chief Information Officer Vivek Kundra delivered a keynote address on the role of the government in developing and promoting cloud computing. Brookings Vice President Darrell West moderated a panel of experts and detailed the findings in his paper, "Saving Money through Cloud Computing," which analyzes its governmental cost-savings potential.

After the program, panelists took audience questions.

Video

• Cloud Computing a Fiscally Smart Move
• Cloud Computing Saves Money, Makes Government More Open
• Cloud Computing Will Fundamentally Change Government Operations
• Government on Cloud Will Yield Cost-Effective System

Audio

• The Economic Gains of Cloud Computing

Transcript

• Uncorrected Transcript (.pdf)

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• 0407_cloud_computing_kundra_remarks
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Technology offers the greatest source for innovation in the public sector and one of the best examples falls within the area of cloud computing. As I noted in a recent paper, the U.S. federal government spends nearly $76 billion each year on information technology, and $20 billion of that is devoted to hardware, software, and file servers. Traditionally, computing services have been delivered through desktops or laptops operated by proprietary software. But new advances in cloud computing have made it possible for public sector agencies alike to access software, services, and data storage through remote file servers.

I looked at possible cost savings a federal agency might expect from migrating to the cloud. After undertaking case studies of government agencies that made the move, I found that the agencies generally saw between 25 and 50 percent savings in moving to the cloud. Public officials can save money by reducing the number of file servers they need to purchase, cutting software costs, relying on fewer information technology specialists, and improving the efficiency of their data storage utilization.

In 2008, Washington, D.C. city government shifted many of its 38,000 employee email services across 86 agencies to the cloud, and the migration saved 48 percent on email expenditures. In 2009, the city of Los Angeles moved email service for its 30,000 employees to the cloud. An analysis undertaken by City Administrative Officer Miguel Santana for the City Council found that the five-year costs of running the new Google system would be $17,556,484, which was 23.6 percent less than the $22,996,242 for operating GroupWise during that same period. And in terms of personnel savings, the city needed nine fewer people in its information technology department.

The U.S. Air Force 45th Space Wing is responsible for launching and tracking unmanned space vehicles from Cape Canaveral Air Force Station and employs more than 10,000 workers. The Wing had 60 distinct file servers, but found that it utilized only 10 percent of central processing unit capacity. Commanders modernized their system and saved $180,000 per year in annual computing costs. In addition, the unit saved money by not buying new hardware or deploying new software. These are just some of the ways the government is using technology to save money and increase efficiency of its operations.

Executive Summary

Government information technology is subject to a variety of rules, regulations, and procurement policies.  Computing is treated differently depending on whether the platform is based on desktops, laptops, mobile devices, or remote file servers known as cloud computing.  There are differences between the executive, legislative, and judicial branches of government, as well as in the level of privacy and security expected for various applications.  

Some people perceive higher security on desktop or laptop computers and lower security with the cloud because the latter’s information is stored remotely through third-party commercial providers.  In reality, though, there are serious security threats to all electronic information regardless of platform, and cloud server providers often take security more seriously than mass consumers or government officials employing weak passwords on their local computers. 

In this paper, I review current federal IT policy and discuss rules, practices, and procedures that limit innovation.  There are a variety of obstacles that make it difficult for policymakers to take full advantage of the technological revolution that has unfolded in recent years.  After outlining these issues, I make recommendations on policy changes required to improve the efficiency and effectiveness of federal computing. 

My specific recommendations include:

1. Public officials should develop more consistent rules on computing across desktop, laptop, mobile, and cloud platforms.  
2. The use of video, collaboration, and social networking should be authorized for congressional offices.  This would make legislative branch policy consistent with that of the executive branch.
3. Judicial branch computing should be modernized, with greater emphasis on cloud computing. 
4. There should be a more uniform certification process for federal agencies.  Right now, each agency is responsible for certifying its own applications.  It makes sense to have a “joint authorization board” with the power to review management services and certify particular products for use across the government. 
5. Congress should update the Electronic Communications Privacy Act to change the process by which law enforcement agents obtain electronic information.  Instead of using a prosecutor’s subpoena, legislation should require a “probable cause” search warrant that is approved by a judge.  This would provide greater safeguards in terms of online content, pictures, geolocation data, and e-mails.
6. Privacy rights should be placed on the same footing regardless of whether a person is using desktop or cloud computing.  It makes little sense to have weaker standards on one platform than another.  Consumers and government decision-makers expect the same level of protection whether they are accessing information on a desktop, laptop, mobile, or cloud storage system. 
7. Congress should amend the Computer Fraud and Abuse Act to strengthen penalties for unwanted intrusion into computing systems.  The law has inconsistent penalties and prosecutors have found that it is hard to prosecute cyber-crimes. 
8. Apps.gov represents a big step forward and government use should be expanded because it makes procurement easier and speeds public sector innovation.  It is a model of how the government can reinvent itself through digital technology in ways that improve efficiency and effectiveness.
9. Countries need to harmonize their laws on cloud computing so as to reduce current inconsistencies in regard to privacy, data storage, security processes, and personnel training,  
10. There should be mechanisms for data exchange that encourage portability across platforms.  We should avoid vendor lock-in that precludes data exchange.
11. Data on uptime, downtime, recover time, archiving, and maintenance schedules would help build public trust by providing information on computing performance.

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The U.S. government spends billions of dollars each year on computer hardware, software and file servers that may no longer be necessary. Currently, the public sector makes relatively little use of cloud computing, even though studies suggest substantial government savings from a migration to more Internet-based computing with shared resources.

On July 21, the Center for Technology Innovation at Brookings hosted a policy forum on steps to enhance public sector adoption of cloud computing innovations. Brookings Vice President Darrell West moderated a panel of experts, including David McClure of the General Services Administration, Dawn Leaf of the National Institute for Standards and Technology, and Katie Ratte of the Federal Trade Commission. West released a paper detailing the policy changes required to improve the efficiency and effectiveness of federal computing.

Audio

• Moving to the Cloud: How the Public Sector Can Leverage the Power of Cloud Computing

Transcript

• Uncorrected Transcript (.pdf)
• Download Dawn Leaf's PowerPoint Presentation (.pdf)
• Download David McClure's PowerPoint Presentation (.pdf)

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Although research suggests that considerable efficiencies can be gained from cloud computing technology, concerns over privacy and security continue to deter government and private-sector firms from migrating to the cloud. By its very nature, storing information or accessing services through remote providers would seem to raise the level of privacy and security risks. But is such apprehension warranted? What are the real security threats posed to individuals, business and government by cloud computing technologies? Do the cost-saving benefits outweigh the dangers?

On October 26, the Brookings Institution hosted a policy forum on the privacy and security challenges raised by cloud computing. Governance Studies Director Darrell West moderated a panel of technology industry experts examining how cloud computing systems can generate innovation and cost savings without sacrificing privacy and security. West will also present findings from his forthcoming paper “Privacy, Security, and Innovation in Cloud Computing.”

After the program, panelists took audience questions.

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20101026_cloud_computing

Executive Summary

Cloud computing can mean different things to different people, and obviously the privacy and security concerns will differ between a consumer using a public cloud application, a medium-sized enterprise using a customized suite of business applications on a cloud platform, and a government agency with a private cloud for internal database sharing (Whitten, 2010). The shift of each category of user to cloud systems brings a different package of benefits and risks.

What remains constant, though, is the tangible and intangible value that the user seeks to protect. For an individual, the value at risk can range from loss of civil liberties to the contents of bank accounts. For a business, the value runs from core trade secrets to continuity of business operations and public reputation. Much of this is hard to estimate and translate into standard metrics of value (Lev, 2003) The task in this transition is to compare the opportunities of cloud adoption with the risks. The benefits of cloud have been discussed elsewhere, to the individual to the enterprise, and to the government (West, 2010a, 2010b).

This document explores how to think about privacy and security on the cloud. It is not intended to be a catalog of cloud threats (see ENISA (2009) for an example of rigorous exploration of the risks of cloud adoption to specific groups). We frame the set of concerns for the cloud and highlight what is new and what is not. We analyze a set of policy issues that represent systematic concerns deserving the attention of policy-makers. We argue that the weak link in security generally is the human factor and surrounding institutions and incentives matter more than the platform itself. As long as we learn the lessons of past breakdowns, cloud computing has the potential to generate innovation without sacrificing privacy and security (Amoroso, 2006; Benioff, 2009).

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EXECUTIVE SUMMARY

Many web services are examples of cloud computing, from storage and backup sites such as Flickr and Dropbox to online business productivity services such as Google Docs and Salesforce.com. Cloud computing offers a potentially attractive solution to customers keen to acquire computing infrastructure without large up-front investment, particularly in cases where their demand may be variable and unpredictable, as a means of achieving financial savings, productivity improvements and the wider flexibility that accompanies Internet-hosting of data and applications.

The greater flexibility of a cloud computing service as compared with a traditional outsourcing contract may be offset by reduced certainty for the customer in terms of the location of data placed into the cloud and the legal foundations of any contract with the provider. There may be unforeseen costs and risks hidden in the terms and conditions of such services.

This document reports on a detailed survey and analysis of the terms and conditions offered by cloud computing providers.

The survey formed part of the Cloud Legal Project at the Centre for Commercial Law Studies (CCLS), within the School of Law at Queen Mary, University of London, UK. Funded by a donation from Microsoft, but academically independent, the project is examining a wide range of legal and regulatory issues arising from cloud computing. The project's survey of 31 cloud computing contracts from 27 different providers, based on their standard terms of service as offered to customers in the E.U. and U.K., found that many include clauses that could have a significant impact, often negative, on the rights and interests of customers. The ease and convenience with which cloud computing arrangements can be set up may lull customers into overlooking the significant issues that can arise when key data and processes are entrusted to cloud service providers. The main lesson to be drawn from the Cloud Legal Project’s survey is that customers should review the terms and conditions of a cloud service carefully before signing up to it.

The survey found that some contracts, for instance, have clauses disclaiming responsibility for keeping the user’s data secure or intact. Others reserve the right to terminate accounts for apparent lack of use (potentially important if they are used for occasional backup or disaster recovery purposes), for violation of the provider’s Acceptable Use Policy, or indeed for any or no reason at all. Furthermore, whilst some providers promise only to hand over customer data if served with a court order, others state that they will do so on much wider grounds, including it simply being in their own business interests to disclose the data. Cloud providers also often exclude liability for loss of data, or strictly limit the damages that can be claimed against them – damages that might otherwise be substantial if a failure brought down an e-commerce web site.

Although in some U.S. states, in E.U. countries and in various other jurisdictions the validity of such terms may be challenged under consumer protection laws, users of cloud services may face practical obstacles to bringing a claim for data loss or privacy breach against a provider that seems local online but is, in fact, based in another continent. Indeed, service providers usually claim that their contracts are subject to the laws of the place where they have their main place of business. In many cases this is a US state, with a stipulation that any dispute must be heard in the provider’s local courts, regardless of the customer’s location.

Perhaps the most disconcerting discovery of the Cloud Legal Project’s survey was that many providers claimed to be able to amend their contracts unilaterally, simply by posting an updated version on the web. In effect, customers are put on notice to download lengthy and complex contracts, on a regular basis, and to compare them against their own copies of earlier versions to look for changes.

The cloud computing market is still developing rapidly, and potential cloud customers should be aware that there may be a mismatch between their expectations and the reality of cloud providers' service terms, and be alive to the possibility of unexpected changes to the terms.

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While research suggests that considerable efficiencies can be gained from cloud computing technology, concerns over privacy and security continue to deter governments and private-sector firms from migrating to the cloud. Senator Amy Klobuchar (D-Minn.) has advanced discussion of the “Cloud Computing Act of 2011,” draft legislation that would address these challenges by encouraging the U.S. government to negotiate with other countries to establish consistent laws related to online security and cloud computing. The bill also creates new enforcement tools for investigating and prosecuting those who violate online privacy and security laws.

On June 16, the Brookings Institution hosted a forum on the policy proposals in the Cloud Computing Act of 2011. Discussion included an overview of the international policy implications as governments and firms adjust to a coherent legal framework, changes and innovations in public procurement, and challenges for private industry as it balances consumer needs and compliance with these proposed cloud computing safeguards.

After the program, panelists took audience questions.

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20110616_cloud_computing

Executive Summary

The move to the cloud is one of the defining information technology trends of the early 21st century. By providing businesses, universities, government agencies, and other entities with access to shared and often physically dispersed computing resources, cloud computing can simultaneously offer increased flexibility, reduced cost, and access to a wider array of services.

Cloud computing has also created a set of new challenges. For example, the issues of privacy and security in the cloud are well recognized and have been extensively discussed in the business and popular press. However, one critical issue that has received very little attention with respect to cloud computing is export control.

In the broadest sense, export control relates to regulations that the United States and many other countries have put in place to restrict the export of various sensitive items, information, and software.

There is an inherent tension between cloud computing and export control. While the concept of the cloud is centered on the premise of removing the need to track the details of data movement among various destinations, export control regulations are built largely around restrictions tied to those very movements.

If cloud computing is to reach its full potential, it is critical for providers and users of cloud services to address its implications with respect to export control. It is equally important to adapt the export control regulations to reflect the increasing prevalence of cloud computing in a manner that preserves the ability of American companies to benefit from the efficiencies of the cloud while also ensuring that American national security and foreign policy interests are adequately protected.

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As of today, the federal government will require that all cloud service providers have Federal Risk and Authorization Program (FedRAMP) approval. FedRAMP is a program meant to standardize the security of cloud services, thus reducing the time and effort that independent cloud providers would need to spend ensuring cloud security. According to a 2013 annual report by the General Services Administration, agencies that use FedRAMP could save 50 percent on staffing and $200,000 in costs overall. FedRAMP will operate under similar rules as the Federal Information Security Management Act (FISMA), which helps maintain security of federal IT systems, applications and databases. Both FISMA and FedRAMP will provide enhanced protection and scrutiny for federal and independent agencies.

To learn more about cloud computing, read Darrell West’s papers Saving Money Through Cloud Computing and Steps to Improve Cloud Computing in the Public Sector. Visit the FedRAMP website here.

MaryCate Most contributed to this post.

The first instance of “cloud” computing came in 2006, when Amazon released its Elastic Compute Cloud, a service for consumers to lease space on virtual machines to run software. Now, the cloud enables the transfer and storage of data around the world, in an almost seamless fashion. Using cloud services are a seamless experience from the consumer perspective. This ease of use obscures significant regulation from governments on both sides of the Atlantic. The Safe Harbor Principles is a framework that ensures that personal consumer data being transferred from the EU to the US is still subject to a level of security in compliance with the EU’s stricter regulation on data protection. US companies must be certified within this framework, in order to transfer consumer data outside the EU.

A comprehensive data privacy arrangement that satisfies both sides of the Atlantic is necessary to preserve the free flow of data, and the resulting commerce, between the two regions. Speaking at the 2014 Cloud Computing Policy Conference, Cameron F. Kerry suggested that neither side of the Atlantic can afford to partition the Internet. Currently trade negotiators are assessing the viability including an update to Safe Harbor Principles as a part of the Transatlantic Trade and Investment Partnership (TTIP).

TTIP and the Future of Trade

The NSA revelations last year have only increased support for further regulation over the transfer of personal data in the cloud, especially in the European Union (EU). The revelations have also brought to light significant differences in the European and US conceptions of privacy. The ruling by the European Court of Justice on the “right to be forgotten” is a recent example of this transatlantic divide. In EU countries, citizens can now request Google to take down links from search results that lead users to potentially damaging information.

There are several disputes that negotiators must first resolve. Europeans would prefer that American regulators take a more active role in cases where US firms are violating the Safe Harbor principles. EU officials have also indicated they would like to include a mechanism to send an alert if data were improperly shared with US law enforcement officials. The expansion of the codes of conduct within the cloud would serve as a major step towards finalizing TTIP. A European Commission Analysis finds that TTIP would inject about $130 billion into the US economy. Ultimately both the EU and the US have so much to gain that both nations must find a way to resolve these thorny issues.

Kevin Risser contributed to this post.

Cloud computing is becoming omnipresent in the private sector as companies latch on to this innovation as a way to manage scalability, improve flexibility, and reduce cost. Analysts at IDC predict that, over the next six years, nearly 90 percent of new spending on Internet and communications technology will be on cloud-based platforms. Apple, Google, Amazon, Microsoft, and hundreds of smaller companies are positioning themselves to dominate the estimated $5 trillion worldwide market. While few companies will provide numbers, it is estimated that Amazon and Google may run as many as 10 million servers while Microsoft runs close to one million. In short, it is an innovation that makes a mockery out of Moore’s law.

But, like all innovations, cloud computing has potential pitfalls. Public sector organizations in particular have had difficulty taking advantage of new technologies. The Heritage Foundation keeps a list over 50 examples of government ineptitude including $34 billion in fraudulent Homeland Security contracts, National Institutes of Health renting a lab that it neither needs nor can use for $1.3 million per month, and the Department of Agriculture wasting $2.5 billion in stimulus money on broadband internet. Technological ineptitude received special attention with the failed launch of the Healthcare.gov, the release of classified data from Edward Snowden, and the costly FBI virtual case file debacle.

Cloud computing is far more than just a simple technology change and requires a close examination of governance, sourcing, and security. We sought to understand how well state government is prepared to address the challenges of cloud computing.

The Approach

We have gathered and started to do a content analysis of the IT strategic plans for each state. For each plan, we performed a content analysis, which is looking for certain phrases or text within the IT strategic plan in order to have a structured way to understand the data. Details for our approach can be seen in our previous blog post.

How States Are Implementing the Cloud

We were not surprised to see a number of states preparing to study or embark on cloud computing.

While some states don’t mention it (e.g. Alabama), most states are eagerly exploring it. For example, North Dakota’s plan talks about cloud computing as an integral part of the future and seven of its thirteen major IT initiatives are centered on preparation for transitioning to the cloud “where and when it makes sense”.

Vermont puts itself squarely in the studying period. The plan describes that, “While the risks of enterprise-wide and cloud-based IT must be carefully managed, trends continue to just larger-scale operations.” Wisconsin also clearly lays out its view on cloud computing, writing that, “Flexibility and responsiveness (also) guide Wisconsin’s approach toward adoption of cloud services” and suggests that its version of a private cloud “…offers advanced security and service availability tailored for business needs.” West Virginia provides an equally balanced approach by requiring that only services with an acceptably low risk and cost-effective footprint will be moved to the cloud.

In short, all of the states that are considering cloud computing are taking a thoughtful and balanced approach.

The Good

One of the most critical aspects of cloud computing is security and, without question, states understand the importance of good security. A good example of this is Colorado who designates security as one of its four “wildly important goals” and sets the target of “10 percent reduction in information security risk for Colorado agencies by close of FY15”.

South Carolina echoed the same theme by asserting that security and confidentiality are “overriding priorities at every stage of development and deployment.” Connecticut’s plans explain the need to “continuously improve the security and safeguards over agency data and information technology assets”.

The Bad

Despite the interest in cloud computing, we were only able to find a single state (Georgia) that explicitly links governance to security and, to us, by extension to cloud computing. In Georgia’s plan, they start with the idea that “strong security programs start with strong governance” and then explicitly describe necessary changes in governance to improve security.

We were, however, impressed with the seriousness that New York, North Carolina and Massachusetts took governance but it was difficult to find many other states that did.

The Ugly

Unfortunately the results on sourcing were dismal. While a few states (e.g. Kansas, Ohio, and Massachusetts) specifically discuss partnerships, most states seemed to ignore the sourcing aspect of cloud computing. The most ominous note comes from Alabama where they make a statement that innovation in the state is being stifled by a lack of strong personnel.

While we have great enthusiasm for government to address cloud computing, some of the non-technical issues are lagging in the discussion. Good government requires that these items be addressed in order to realize the promise of cloud computing.

Since 2009 the federal government started the process of replacing local computers with cloud platforms. A recent report from the Congressional Research Service (CRS) provides an interesting view into the progress of these investments. It reveals the benefits that public agencies gain when using cloud services and the barriers they face when making the transition.

Advantages of Cloud Computing

Cloud computers are superior to locally-run data centers for a variety of reasons. The CRS report identifies six specific cloud benefits:

• Cost- Cloud computer platforms use resources more efficiently than local servers. An organization that uses local Information Technology (IT) must invest in the infrastructure to support computer systems at times of peak demand. However, most times companies or government agencies require only a fraction of that computing power. Cloud computing allows organizations to pay for all of the resources they need and avoid costly investments in rarely used local IT systems.
• Energy Efficiency- Cloud computing data centers benefit from economies of scale to run more efficiently than local servers. In some cases this can result in huge energy savings. For a large cloud computing center it also makes economic sense to invest in green energy sources like wind or solar for power.
• Availability- Cloud computing systems make it easy for any device with an Internet connection to access files or software. However, if a facility temporarily loses Internet access the files on cloud system are inaccessible. Alternatively, a locally administered IT system could function without Internet connectivity.
• Agility- Cloud systems can make it easier to upgrade operating systems and applications. The available computing power also means that memory intensive software packages are cost effective.
• Security- Cloud providing companies also have the financial resources to purchase the tools necessary to ensure that networks remain safe.
• Reliability- Cloud systems can save data onto multiple servers. If a single server goes down due to a cyberattack or another issue, the data is available on another server.

Government Investments in the Cloud

Determining the exact size of government cloud computing expenditures is difficult. Government spending on IT has increased every year from 2001 to 2013 when it reached a peak of $81 billion. In the three subsequent years it has decreased. Cloud computing expenditures likely represent a tiny fraction of that total. Market research firms have estimated that the federal government spends between $1.4 billion and $7 billion on cloud computers annually.

Trends in Total Federal Investment in Information Technology

Source: Congressional Research Service

Challenges for Migrating to the Cloud

The federal government has encountered several barriers in its plan to shift more functions to cloud platforms:

• High Federal Security Requirements- The government faces new advanced persistent threats routinely. System-wide security updates are necessary more often than for private sector organizations. The short update cycle provides a unique challenge to cloud providers.
• Adopting New Technologies- Government agencies have ingrained cultures that are slow to change. This shift from locally-based servers to the cloud can be slow and tedious for this reason.
• Ancillary Technologies- Cloud technologies are known for their flexibility. However, government agencies may lack the necessary IT infrastructure or speedy Internet connections that leverage the maximum potential of the cloud.
• Technical Know How- Cloud platforms require specialized knowledge to administer. Many government agencies lack the necessary experts to oversee a migration to the cloud.
• IT Expenditure- Migration to the cloud can involve expensive initial costs. Additional funding is necessary to facilitate the shift to the cloud.

The Future of the Government Cloud

An analysis of the costs and benefits of cloud migration uncover a few specific barriers that the federal government must overcome to earn the full value from new technologies. First, lawmakers must be willing to spend more now to save money later. Cloud systems are cheaper to run than local administered servers but the initial transition costs are high. Current funding levels, which are trending down, are too low to finance such a change. Privacy and security are also major challenges. Government servers host troves of data that Americans expect to remain private. Converting these systems to the cloud will require the government’s full confidence that cloud systems are at least as secure. New legislation is likely necessary to achieve the complimentary goals of privacy and security.

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In September 2014, we released a study on mineral and energy resources in Greenland and were honored to have Aleqa Hammond, then the Premier of Greenland, with us at Brookings for the launch event. Since gaining political autonomy from the Kingdom of Denmark in 2009, successive governments in Greenland have been aggressively promoting the development of a mining industry as a solution to its deep and worsening economic woes. Our study concluded that Greenland was likely to develop large-scale mining and energy projects eventually, but that the pace of development would be much slower than the government of Greenland anticipated due to steep declines in iron ore prices and unrealistic expectations of demand for rare earth elements.

A lot has changed since then, but our original conclusions still hold. While there has been progress on smaller mines such as the Aappaluttoq ruby and sapphire project in southwest Greenland, it appears increasingly unlikely that any of the large-scale mining and energy projects that Greenland has been counting on will get off the ground in the near term. Global events beyond Greenland’s control have conspired in recent months to reduce the incentives for investment in mining and offshore oil and gas projects.

Political Crisis in Nuuk, But Siumut Remains in Control

Following her trip to Washington, Premier Hammond became embroiled in a political scandal concerning the misuse of public funds. She resigned from office and an election was called. Hammond’s incumbent Siumut party, now under the leadership of former Environment Minister Kim Kielsen, held on to power against its main rival by a tiny margin of 326 votes.

All major political parties in Greenland support the development of a mining industry, but the two main parties are divided on the issue of uranium mining, with the opposition Inuit Ataqatigiit (IA) party opposed on environmental grounds. However, following the election Siumut successfully negotiated a coalition government, bringing together rival parties (the Democrat party and Atassut) that support uranium mining.

Ebola Outbreak Leads London Mining to Bankruptcy

Global events continued to conspire against Greenland’s efforts to develop a mining industry. Just before the November elections London Mining, the British company developing the Isua iron ore mine, went bankrupt and was placed into receivership after incurring heavy losses at its Sierra Leone mine due to the Ebola crisis.

As we noted in our report, London Mining’s project in Greenland sought to attract investments, labor and engineering support from Chinese partners, but the company was not successful in its efforts to secure that support given the high costs of the project (estimated at about $2 billion) and the unique engineering challenges associated with the project. Nevertheless, the company’s plan to bring nearly two thousand foreign workers to Greenland along with the government of Greenland’s efforts to pass legislation that would exempt workers on large projects from Greenland’s minimum labor standards sparked an enormous controversy in Denmark over the scope of Greenland’s autonomy. It also led some commentators in Denmark and elsewhere to suggest that this investment was part of a larger strategic plan by Beijing to establish a foothold in the Arctic region. We concluded in our study that there was no evidence of any such geopolitical connection and emphasized that, contrary to many reports, there was in fact no Chinese investment in Greenland.

Last week, London Mining’s Greenland operations were purchased by a Chinese investment and trading group based in Hong Kong. Like London Mining, the project’s new owners are unlikely to develop the Isua project unless they can locate a major Chinese mining company willing to provide capital, labor and engineering. This would seem unlikely in the near term given the precipitous drop in iron ore prices since 2012 and increased production by the international mining majors.

The buyer, General Nice, is a privately held trading and investment conglomerate with subsidiaries in mainland China, Hong Kong, India, Singapore and South Africa. The company’s corporate background is unclear. It was founded in 1992, but a quick search reveals no information about the group’s activities prior to 2006, when General Nice acquired Singapore-listed Abterra. This listed subsidiary has reportedly come under scrutiny in Singapore for its lack of transparency concerning unusual investments in coal mines in Shanxi province. General Nice has made a handful of financial investments in overseas mines, all in partnership with major mining companies from mainland China. The company does not appear to have experience operating iron mines.

China Cancels Its Rare Earth Production Quotas

China’s decision last week to drop export quotas on rare earth elements is another bad sign for Greenland’s plans to develop mining projects. Investment in rare earth projects outside of China has largely been driven by expectations of limited supply from China, where production capacity has been restricted by quotas on both production and export. The removal of the export quotas may reduce interest in international rare earth projects, including the two projects in Greenland.

Security concerns expressed in Denmark over the mining of uranium and rare earth have not yet been resolved. A working group established in early 2014 between Greenland and the Danish government to resolve these issues was scheduled to conclude in late 2014, but these talks have been interrupted by the change in government. While the new coalition supports uranium mining, these issues will have to be worked out before mining can move forward. This is particularly important for the development of the Kvanefjeld rare earth project, which contains significant levels of uranium, but may also be a factor for the Kringlerne rare earth project—which does not contain uranium – as Denmark has reserved the right to reject proposed rare earth projects on security grounds regardless of uranium content.

In addition, several rare earth element projects outside China (but not in Greenland) have in fact moved ahead, further reducing the urgency to develop a project in Greenland.

Falling Oil Prices

Oil extraction was always at best a long-term prospect for Greenland due to harsh conditions, limited infrastructure and the wide availability of cheaper alternative supplies. As oil prices started falling in June 2014 and global demand growth slowed, arguably the need for exploration in high-cost areas like Greenland further diminished. Thus, in September we concluded that under the most optimistic scenario it would take at least ten years before commercial oil production would take place in Greenland. Oil prices have continued to fall, and if prices remain low the timeline for exploration in Greenland is likely to be further extended.

Dim Economic Prospects

None of this is good news for Greenland, which has hoped to meet anticipated budget shortfalls with revenue from new mines. This week the new government publicly acknowledged the difficulty in securing major investments in the near term and will place more emphasis on developing infrastructure to support the tourism industry, which now appears to be Greenland’s best hope for economic development. One such project is a proposed new airport serving the tourist hub Illulissat. Any such measures will be important as the government faces a growing gap between expenses and the annual block grant from Denmark, which is likely to increase further as the population ages.

Publicly traded companies in the U.S. provide their shareholders with a voice on who runs the company.  But corporate governance is not like a political democracy where voters usually choose between two candidates.   The company's slate of directors is typically the only one presented to its shareholders who have a limited choice - vote for the company's slate or withhold their votes. 

Recently, however, the director election process has begun to become more democratic. This is happening gradually on an individual company basis under Delaware law, and not by a federal rule applicable to all publicly traded companies. 

In the United States, the traditional rule is that a company's current board nominates its slate of directors for the next annual election.  Then the company foots the bill to prepare and solicit proxies for this slate from all the company's shareholders, typically mailing them ballots.

Although shareholders may nominate their own candidate to be a director, they must bear the entire expense of preparing and distributing proxy materials to all the company's shareholders.  For large publicly traded companies, this expense is so high that it effectively prevents most shareholders from making director nominations (unless someone is waging a proxy fight for control).

In an effort to help even the playing field, the Securities and Exchange Commission (SEC) in 2010 adopted the "proxy access" rule, which would have allowed certain shareholders to nominate less than a majority of a company's directors.  Then these shareholder nominees would have to be included in the company's proxy materials along with its slate of proposed directors.  However, the SEC rule was struck down by the DC Court of Appeals on procedural grounds. 

While the SEC has not proposed a revised proxy access rule, Delaware law now permits companies chartered in that state to adopt a bylaw authorizing shareholder nominations (the charters of most large American companies are registered in Delaware because of its favorable corporate laws).  Thus, Delaware law now provides a mechanism for a large company to allow proxy access under conditions acceptable to that company and its shareholders.

On February 6 of this year, General Electric led the way by adopting a bylaw allowing shareholders to nominate a few directors if these shareholders held at least 3 percent of the company's voting shares for at least three years.  Given the size and prominence of General Electric, it is a signal event – many companies should follow suit.

More broadly, this 3+3 approach of General Electric is being advocated by officials at New York City's

pension plan (NYCers), which holds over $160 billion in assets.   NYCers has submitted "advisory" shareholder resolutions to 75 public companies in which it holds shares.   While these resolutions are not binding on the company, they carry significant weight if approved by a substantial majority of voting shareholders.

In response, Whole Foods has proposed to allow director nominations by shareholders owning at least 9 percent of their shares for at least 5 years.   After a series of complex legal moves, the SEC has declined to permit Whole Foods to exclude the 3+3 proposal because the company is making a different proposal on the same subject.

The SEC's non-decision, together with General Electric's dramatic move, reopens the debate on the pros and cons of proxy access.  Here are some of the key arguments and counterarguments.

• Company officials worry that proxy access will lead to special interest groups hijacking boards for their own purposes.   But shareholder advocates say that the hijacking scenario is unlikely because of the 3 percent ownership threshold and the need to garner over 50 percent of shareholder votes for their nominees.
• Company officials believe that shareholders would be confused if there were more than one set of directors nominated in the same proxy materials. But shareholder advocates can show how proxy materials can be easily understood by clearly separating company and shareholder nominees.
• Shareholder advocates believe that proxy access is likely to increase constructive engagement between company directors and their large institutional shareholders. But company officials are concerned that proxy access will disrupt the election process and lead to dissension among directors.
• Shareholder advocates point out that in countries like Australia and United Kingdom that do have proxy access, it is used sparingly by large shareholders. But company officials emphasize that the U.S. is a much more adversarial society, with more aggressive tactics by activist hedge funds and others.

We cannot resolve these arguments and counterarguments on proxy access in the abstract.

Instead, though actions of companies like General Electric and shareholders like the New York City pension plan, we will be able to examine the actual effects of various methods and conditions for shareholders to nominate directors.  Let’s see what happens on the ground.