Matters such as public governance and integrity may be already addressed by existing legislation; if not, they should be addressed in the oil revenue management law or in ancillary regulation. At a minimum, the basic principles of public governance and integrity, as applicable to the management of oil revenues, should be included in the revenue management law unless clearly addressed elsewhere.
Conflicts of Interest
If not already defined by law, an oil revenue management law should set forth the elements of impermissible conflicts of interest and the basic rules for handling situations of unacceptable conflicts of interest. Laws and regulations governing ethics in public service often include mechanisms such as mandatory disclosure, temporary and permanent limitations, anti-nepotism rules, blind trusts, and mandated divestiture or liquidation of a public official’s interest. Again, one should be cautious about establishing rules that require or permit discretionary judgments; for example, the term “abuse of office.” It may be better to provide bright-line rules, for example, “no employment of a relative” (with “relative” carefully defined).
For Guyana, the oil revenue management law must set out strict conflict-of-interest standards that prohibit government officials from holding interests in oil revenues or representing any entity in which the oil revenues deposited into the oil fund are held or invested and also provides for the Petroleum Oversight Commission to establish its own conflict-of-interest regulations. Ethics rules aimed at avoiding unacceptable conflicts of interest also exist in Alaska, Azerbaijan, and elsewhere. Having the rules and enforcing them, however, are two different things.
Bribery and Corruption
The local oil revenue management law should also require all oil-related agreements and contracts to include no-bribery and procurement compliance representations, public disclosure obligations, and prevailing language provisions, if necessary, as well as a provision conditioning the effectiveness of the agreement or contract on full compliance with applicable government contract law. Under the law, agreements and contracts must be construed to include these provisions, even if such provisions are not expressly written therein. Where the standards are included in the contract, any violation will constitute a breach of contract, allowing for an additional cause of action in case of bribery or corruption. The law can go even further and can make any contract voidable in case of violation. As this is a severe-sanction and could itself be abused by the government, further elaboration may be necessary in order to limit voidability to situations of gross abuse or bribery related to the contracting process itself.
In any event, it is recommended that the oil revenue management law itself contain an express prohibition of bribery and any illegal or undue advantages in the oil sector. Note that most Western companies will already be subject to penal sanctions for bribery in their home country so that one effect of anti-bribery provisions is to equalize, at least in principle, the standard for all companies.
Public procurement is one of the areas in public governance most prone to corruption. With a view to reducing the opportunities for corruption and undue favouritism and patronage in public procurement, an oil revenue management law should stipulate that all significant contracts and agreements relating to oil revenues or to oil resources must be subject to open competitive public procurement. For example, under the Saotomean oil revenue management law, oil contracts – which are defined very broadly – are void unless entered into pursuant to the competitive provisions required by the Act. Hence, Guyana’s law should require that oil contracts be awarded pursuant to competitive public tenders in accordance with general legislation. In the absence of such legislation; contracts should be approved by the Petroleum Oversight Commission. This may present an issue until the Petroleum Oversight Commission is fully implemented and operating.
Integration with Other International Obligations
Frequently, oil resources may be shared with adjacent countries, and in such cases, any oil management law must take account of the regime that governs such resources. If care is not taken, the joint zone can become a separate pocket of off-budget activity with limited control.
Domestic law, while it cannot always directly control a joint development zone, can control the activities of domestic officials acting on behalf of the government with respect to the joint zone. In particular, no official is authorized to approve any contribution to the budget for the administration of the joint zone without such contribution being approved by the National Assembly. Officials are also subject to the conflict of interest and other legal provisions that apply to all government officials and representatives.
While a problem area in some cases, joint resources could, with some imagination, be an opportunity for enhanced and more secure oil management. For instance, it would be much easier to set up a truly independent international trust account with fixed rules that neither country could arbitrarily void even if its government changed or was subject to instability. The rules could be changed by agreement of all participating parties, but the account would not be subject to change simply because of the instability of one of the parties.
Keeping the Law in Place
A central issue for an oil management law is how to create practical and legal barriers that will inhibit subsequent governments from abandoning or evading the law while at the same time maintaining flexibility to meet changing conditions. Sovereignty means that any law passed by the current government is in principle subject to amendment or repeal by any future government. The action in Chad is a case in point. Still, measures can be taken even legislatively that may make it harder to change the law. For instance, in certain countries, it is possible to create special supermajority legislative approval and referenda requirements for changes in the law. Recent experience shows that referenda may be abused. Referenda are two-edged swords and may be used to compromise legislative prudence and weaken effectiveness of the existing revenue management framework (Bell and Faria 2007).
Another way to reinforce the oil law is to adopt a constitutional amendment addressing certain key elements. A constitutional amendment would significantly strengthen the controls over the collection and use of oil revenues and would inhibit – but not prevent – the ability of any party or subdivision of the state to arbitrarily or unilaterally change the rules governing the oil account. In the unlikely event that an unconstitutional government attempts to seize power, such an amendment might also help protect the country from the seizure of funds, especially if the funds are held in an international institution outside of the country.
An amendment could reaffirm key principles of the oil revenue management law. For instance, the amendment might state that all petroleum resources and the revenues derived from them are the property of the state and cannot be pledged or encumbered, that all revenues from such resources must be deposited in the oil account, that all transfers from the oil account to the general funds of the Treasury must be approved by the appropriately designated institution or institutions, that the activities of the oil account, including all deposits and withdrawals, shall be public, that monies from the oil account can be made available only for particular specified uses and, possibly, that pledges or other encumbrances on the petroleum resources of the state are prohibited. The constitutional amendment could be passed separately or in conjunction with the oil law. Such amendments need to be carefully drafted so as not to be construed as creating a monopoly on drilling and production by the state. Such restrictions in Mexico and elsewhere have resulted in significant distortions.
The state constitution of Alaska, for example, provides in Article IX, Section 15, that “[a]t least 25 percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue-sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law.”
The Alaskan fund is interesting in another respect and that is its use of a trust. Trusts, at least at common law, are frequently used to put assets beyond the control of either the party establishing the trust or the beneficiary of the trust. The trustee or manager of the trust is then required to act in accordance with the instructions setting up the trust, and the beneficiaries of the trust can sue the trustee if it fails to act as required. Although trusts are typically a common law institution, a somewhat similar arrangement can be established in civilian systems through the use of a “foundation” controlled by a self-perpetuating board of directors. The arrangements are more subject to the oversight of the state and the board of directors would usually have much more power to control the disposition of funds than the typical trustee. In the oil fund context, the difficulty is the sovereign binding future sovereigns. More generally, it is hard to imagine any government being willing to commit large sums to a foreign trust and then to throw away the key.
Even though the government maintains full control of a fund, the stability of a fund could also be enhanced by the involvement of regional or international institutions such as the World Bank. Chad provides a good example of the power of such involvement and the limitations on that power. Even where such institutions have simply observer status or non-voting membership, they can provide an additional degree of professionalism, transparency, and accountability. Apart from enhancing management, their presence could be especially helpful in resisting domestic pressures driven by short-run political advantage.
Whatever form the fund takes, however, legislators and those assisting them must recognize that the law without strong supporting institutions may become just paper. In the end, popular support rather than good drafting is the most important sustaining mechanism, but a well-constructed law may help increase and build that support. There is a possibility of a virtuous circle in which a workable and effective law creates stronger popular constituencies who in turn will act to support and maintain the law.