Limitations on Types of Investments
An oil revenue management law should limit an oil fund’s investments to certain secure and non-speculative instruments. New oil revenue management law and petroleum fund law should provide for such limitations. As a fund becomes larger, it may be appropriate to permit some portion of the assets to be invested in more sophisticated or more risky instruments. Again, this is an area in which rules and institutional capacity must be closely calibrated.
No Domestic Investment; No Development Fund
Investment advisers of a country’s oil account should not be permitted to invest the fund in the country, or in domestic enterprises or enterprises controlled by nationals of the country. This prohibition serves two very important purposes. First, it helps limit political influence in the fund’s choice of investments and enhances the likelihood of a fully professional investment regime. Second, it avoids governmental use of the oil account as an extra-budgetary fund without full governmental and parliamentary oversight. Authorization of development spending should be the responsibility of the parliament, pursuant to the budget process. As recommended, such expenditures could draw significantly from oil revenues, but development should not be done through the back door of the oil fund. The oil fund itself is supposed to be a permanent endowment for the country’s future and should be invested solely from the perspective of protecting and growing that endowment. Requiring the fund to be invested in offshore assets also keeps the oil fund itself from contributing to inflationary pressures in the domestic economy, the “Dutch Disease.”
The Sao Tome and Principe oil revenue management law expressly prohibits the investment of oil revenues deposited in the oil fund “in investments domiciled in Sao Tome and Principe, or in any investments controlled directly or indirectly, in whole or in part, by any national [or entity of Sao Tome and Principe], whether or not resident in Sao Tome and Principe, or who falls within [conflict of interest] circumstances.” The Timor-Leste petroleum fund law also contains provisions to that effect.
A critical issue in any oil revenue management law is whether borrowing against oil resources or the assets held in the fund should be permitted. One can sketch scenarios, particularly before oil production commences or in the early life of oil production when borrowing to enhance current human or capital investment would be sensible; actual experience, however, is negative. The Saotomean, Norwegian, Alaskan and Timorese oil revenue management laws all prohibit borrowing. In Sao Tome and Principe, for instance, borrowing against the assets of the fund and borrowing against the country’s oil resources are both prohibited.
In addition, an oil revenue management law should prohibit the pledge or other such use of oil resources or oil fund assets as security for loans. Such a prohibition prevents the government from borrowing against future production, which would result in the same consequences that arise from borrowing directly against natural resources. Some commentators have expressed concern about whether such an account might be subject to attachment by private creditors, but under existing international and U.S. law and longstanding doctrines of sovereign immunity, a governmental account is generally immune from attachment. Prohibiting the creation of security interests in oil fund assets does not mean that the government cannot borrow, but it does prevent the government from securing that borrowing with oil revenue or oil resources. Lenders thus must instead rely on the general creditworthiness of the country. This provides important discipline for both the country and the lenders and gives the lenders a greater stake in stability and good government. Such discipline can be particularly important during the interval between the discovery of commercial oil and the commencement of oil production – a period in which there will be strong popular pressure to increase spending.
Narrow technical exceptions to this rule may be carved out in the law to permit the borrowing of securities in connection with prudent portfolio management, Investments held by the oil account can in certain instances be used to collateralise other securities held in the account where such securities are of short duration; subject to strict conditions, and the payment of pre-established financial charges in connection with the maintenance and the management of the account, as permitted, for example, by the local oil revenue management law. The Timorese Petroleum Fund Law, by contrast, contains a flat prohibition on any liens or encumbrances whatsoever on the Petroleum Fund.
Parliamentary and Governmental Oversight
The collection, management, and use of all oil-derived revenues should be subject to wide and detailed oversight. In strong and well-established governments, this oversight may be carried out by parliamentary commissions or other governmental bodies that already have oversight functions. Traditional legislative oversight can be enhanced by requiring the publication of periodic and public reports by the various parts of government charged with carrying out the revenue law. For instance, in Sao Tome and Principe, the National Assembly is required under the Oil Revenue Law to conduct yearly public plenary sessions to discuss general oil and gas policy. Ministers, investment committee members, the Auditor General, and the oversight board are required to be present to answer questions from parliamentarians and to discuss the activities of the fund including the required annual oil fund audits.
Given the significance of oil revenues and the limitations on existing institutions, it may also be desirable to consider the establishment of additional oversight groups, especially groups which may bring in civil society and elements not necessarily represented in the government. The case of Chad provides an early example. There, the management of resource revenue generated in connection with the Chad-Cameroon Petroleum Pipeline Project was supervised by an oversight board, the Committee for the Control and Supervision of Oil Resources or “College de Controle,” which included civil society representatives among its members and was monitored by the World Bank and the International Monetary Fund. Despite the active monitoring of international financial institutions, the effectiveness of the College de Controle has proven weak at best in view of lack of enforcement of the law, insufficient human capacity and political pressures and influences (Catholic Relief Services 2005). This oversight board was charged with verifying that the oil fund complied with applicable law, and with authorizing and controlling the disbursement of funds held in the oil fund. Chad, unfortunately, also provides an example of what can happen when oil institutions are divorced from the real power institutions of the country. In a widely criticised action, the Chadian government recently amended the revenue management law to reduce the authority of the College and to undo the basic revenue management framework. In December 2005, the Chadian parliament amended Law No. 001, providing for the deactivation of the country’s oil fund, an increase in oil revenue expenditures, and a reassignment of a portion of the mandated expenditures for bureaucratic and security purposes.
Hence, the Oil Revenue Law should create a new independent oversight body, the Petroleum Oversight Commission, composed of governmental and civil society members. The commission should be charged with monitoring the management of oil revenues and assuring the implementation of the revenue management law and has been given significant investigative powers. In Timor-Leste, the Petroleum Fund Law created a Petroleum Fund Consultative Council, made up of former officials, but its function is limited to providing opinions on major issues and acting as a medium of communication with the public.
The nature, composition, and powers of any new oversight institution must be considered carefully. Such institutions have the advantage of creating a sharp focus on the resource sector and of bringing into the oversight function groups that might otherwise be excluded. Moreover, the experience built up in such groups may be very important in providing continuity in oil policy and in explaining activities to the public. Further, oversight institutions may enhance public trust and understanding which may be critical to the long-term existence and management of the fund.
At the same time, such institutions could become a second “government” and thus create further civil conflict. In some instances, this conflict may be necessary given the character of the government, and the oversight commission then becomes a brake on arbitrary governmental action. There are limits to this, however, as demonstrated by the experience of the Chadian College in its attempt to deal with its own autocratic and unsupportive government. Second, unless clearly defined, such bodies may take on an amorphous legal character. The Petroleum Oversight Commission in Sao Tome and Principe, for instance, mixes investigative and administrative powers, as well as limited judicatory powers, and in a number of respects overlaps existing institutional responsibilities.
Whatever the approach, the oil revenue management law should set forth a clear mandate for the oversight board. The Saotomean Petroleum Oversight Commission, for example, has broad responsibilities co monitor and ensure compliance by the government with the oil revenue management law, and it has independent administrative powers to investigate allegations of misconduct. Depending on its scope, an oversight board could be accorded the power to investigate, require, and compel the production of documents and information, and to initiate and conduct investigations on its own motion or on complaints. The powers of an oversight board may also include the power to enjoin the actions of any governmental institutions or governmental officials in violation of the law, and the power to take judicial action to ensure the enforcement of the law. In Sao Tome and Principe, the drafting committee considered, but then rejected, giving the oversight board the power to suspend any transfers out of the oil account in exceptional circumstances of “grave” violation, subject to the review of the country’s highest court or to action by a supermajority of the National Assembly.
To promote independence, membership of an oversight board should reflect the multiplicity of stakeholders in the management of a country’s oil revenues. To enhance legitimacy, seats could be assigned not only to the various branches of the government at all levels (national, regional, or local) but also to the opposition and to civil society. The oil revenue management law should leave the procedure of nongovernmental member selection to the discretion of the selecting constituency. Participation of the international community in the oversight board may also be desirable, through a non-voting observer represented by an international public institution present in the country. Numerous organisational issues such as term length, composition, independence from selecting bodies, staff, and compensation also need to be addressed.