In principle, oil or mineral revenues could be handled like any tax or other receipts, placed in Treasury accounts, and allocated in accordance with normal budgetary process. However, in a resource-dependent economy, the magnitude of the receipts and the difficulties of control suggest the need for special legislation directed to the particular problems posed by such revenues.
As an initial matter, any oil revenue management law – like other laws must be adapted to the needs, institutions, and legal framework of the country. Drafting must take place within the parameters of the local legal system and must take account of existing laws and practices. Many subjects that might be included in a revenue management law may be already addressed in other legislation and regulations. Laws or regulations governing public procurement, public information, disclosure, conflicts of interest, and judicial review, for instance, may all come into play.
Any law must also be integrated with existing expenditure rules, limitations, and laws that govern budget processes. One size does not fit all, and the failure or success of any oil law is likely to depend in large measure on the way it is integrated with, or in some cases separated from, existing institutions and practices. It is also essential to understand how statutory law actually works in the country.
Many times, formal codes are merely “show” laws often adopted from developed world models but in practice not enforced. This may be the result of lack of resources, lack of experience, overriding political and economic considerations, or simply the lack of a culture of compliance. Details count, but drafters must be cautious to avoid excessive complexity. Not only does the new law impose a number of requirements that current institutions may not be equipped to carry out, but contrary to recommendations, the law itself calls for additional laws to establish a public information office and an oversight board. The need for these additional laws has significantly delayed the start-up of both these institutions, for related countries.
Particularly in weak states, it is important to work through the responsibilities of each entity, its capacity to carry out its intended functions, and the possibility of using bright-line rules-which do not require or permit discretionary judgment. Moreover, one must not assume that “new” institutions will somehow master government and administrative skills that existing institutions lack. Indeed, there is some research suggesting that in the face of limited resources, focusing on new rules for existing institutions may be more fruitful than focusing on the establishment of new institutions (Posner 1998). Nor can one assume that the norms and mentality will necessarily change because wine has been put in new bottles.
In this context, oversight and transparency play a key role in law enforcement. The participation of a broad base of constituencies in the oversight of the oil revenue management strengthens its implementation and enforcement. Finally, a critical aspect of any law is transparency regarding the sources, amounts, and use of oil funds and with respect to the contracting processes. Without this, government officials, oversight committees, and the public will simply not have the basic information necessary to ensure responsible use of the nation’s resources. On the other hand, transparency can help make up for the deficits of even weak institutions, as civil society, the press, and responsible elements of government can use such information to demand accountability and to press for reform. Transparency cannot ensure the responsible use of resource revenues, but without transparency, abuse is almost certain.
Against this backdrop, an emerging petroleum-producing country such as Guyana must focus on the analysis of issues relating to the structuring and management of oil accounts. The country should also address revenue management oversight and control mechanisms and the roles of transparency, public governance, and integrity in the process. Moreover, the particular aspects of integration of oil revenue management systems with the oil-rich government’s existing international obligations, and ideas on how to keep the oil revenue management law in place should be developed in a very proactive manner.
Structuring an Account for Oil Revenues
Establishment of the Account
There are often important reasons for establishing a special account for managing oil revenues. It is possible for oil funds to be held and managed in an account held by the central bank or treasury, as is the case with Norway, or in a trust fund, as is the case with Alaska. Given the central importance of oil revenues, however, the management, transparency, and protection of oil funds may be enhanced by the establishment of a separate, segregated account – an “oil fund.” While most of the discussion here is oriented toward such an account, many of the considerations discuss remain relevant, even if a special account or fund is not established.
In practice, a number of basic decisions must be made in determining how best to establish an oil account:
- Whether the account should be a trust fund, a special account, another subaccount of the reserves held by the Central Bank, or simply a segregated account or accounts held by the Ministry of Finance.
- Whether the account should be held in an offshore depository or in domestic institutions.
- What the qualifications of the custodian should be and how the custodian should be selected.
Before actual oil production when the only receipts are signature bonuses or if the amounts otherwise are relatively limited, one could use an official institution where the Central Bank already holds an account. In that case, the oil fund will need to be segregated into a separate account or subaccount. (For example, Sao Tome and Principe is provisionally using the New York Federal Reserve to hold its account). For larger amounts and a fuller range of services and capabilities, one must turn to the major international institutions. In fact, the universe of eligible institutions is quite small given the need for strong technical capacity and the highest credit rating (Bell and Faria 2007).
If an oil fund is to be held outside of the normal government accounts, it is necessary to select a “custodian” institution. It is preferable that the funds be held in an institution outside the oil-producing country and that the holdings be denominated in international currencies. Holding the account in domestic institutions or in domestic currency would increase the vulnerability of the country to “Dutch Disease,” which would result in further distortions of the economy. Also, most domestic banking systems do not have the controls and capacity necessary to ensure the integrity and safety of an oil account, particularly given its potential magnitude.
Further, the selection of a domestic institution to be a custodian is likely to be a highly politicised process. The role of the custodial bank is to hold the assets of the fund as securely as possible so that the only risk is the market risk inherent in the investments of the account. In addition, the custodial institution must be able to provide a range of services to allow the efficient management of the account. This is particularly important if domestic capacity is weak, as may be the case, especially during the start-up period. For instance, it can provide to the public direct access to information about the fund and its activities, as well as summary financial reports on the performance of the fund managers. The custodial institution may or may not be an investment advisor, as the two functions are distinct.
A number of different persons in the government could be charged with establishing the account depending on the local political structure. Ordinarily, the Central Bank would be the logical candidate to take the lead, as it would have the relevant experience. Given the importance of the custodian, however, it may be desirable to include a larger number of officials in the process, as was the case in Sao Tome and Principe. Selection between private custodians should be made on the basis of a competitive open tender.
Deposits and Withdrawals
The petroleum sector may generate a large number of different cash streams that move to the government, for example, bonuses, taxes, royalties, and receipts from the sale of government oil. There is a question then about which of these should be covered by the law. In general, one would expect the definition of revenue to be as comprehensive as possible. Chad’s petroleum revenue management law, for example, was severely criticised because in its original form it covered only a portion of the oil stream although partial coverage may have been the most that were politically feasible. A good example is Sao Tome and Principe’s Oil Revenue Law, which defines oil revenues for the purposes of the law in a very inclusive manner. In the case of a national oil company, there are a number of specialized issues for the determination of payments owed to the government by the company, which should be set forth in the instructions to the custodial bank.
Deposits
To enhance transparency and to avoid possible diversion or delay, payments should be made by electronic transfer directly into the oil account by the entity bearing the payment obligation. The obligation to the government should not be considered discharged until the payment is received into the account. Such electronic transfers should be free of any transfer or exchange taxes. This enhances controls (such as auditability) and dovetails with transparency obligations.
Withdrawals
While ordinary accounts may be subject to electronic transfer orders simply from the Central Bank, an oil account requires a more formal structure to provide protection where institutions are not strongly and deeply established. For instance, in the case of Sao Tome and Principe, the signatures of four officials from different parts of the government are required on withdrawal orders. [In the draft discussed among the Saotomean lawmakers the officials were also required to certify as part of the withdrawal order that it was in accordance with the provisions of the oil law.] Another possible protection mechanism is the requirement of a delay of several days between the presentation of transfer documents and the actual withdrawal of funds. This would allow for informal or formal intervention prior to the movement of funds when an irregularity is suspected. Provisions also need to be made for payment of the expenses of the fund itself, such as custodial charges, payments to investment advisors, transactional charges, and possible refunds in the case of mistaken payment or overpayment.
A further control, which might or might not be included in the instructions to the custodial institution, is to limit by law the transfer of funds to the budget to a single annual withdrawal, as was mandated by the Saotomean oil revenue law. The amount of the withdrawal each year, the “Verba Anual,” is determined in the budget process and then there is only a single transfer from the oil account to the Treasury. This enhances regularity in the process and reduces the temptation to meet each short-term financial need by recourse to the oil fund.
