A reliance on rules is vulnerable to the possibility that policymakers have incentives to break them. In states where the costs of breaking rules are low, therefore, other mechanisms are needed to change policymakers’ incentives.
An alternative to (or reinforcement of) attempts to reduce discretion through rules is to change the incentives of decision-makers by spreading or dividing decision-making authority. If several political actors (including potentially nongovernment actors) participate in spending decisions, it can become necessary for each party to take the interests of the others into account in each period, thus altering the types of policies that emerge.
A Natural Resources Fund (NRF) whose institutional structure spreads decision making authority across several constituencies with partly overlapping and partly divergent interests may encourage compromise solutions that are to the benefit of all and reduce the intertemporal disagreements that can give rise to inefficient expenditure.
The degree to which power is shared can range from granting an equal standing to several constituencies in the decision-making process, through giving some constituencies veto rights over the decisions made by the executive, to merely affording other constituencies a monitoring and supervisory role.
The NRF can be set up so that it vests the authority to make (or approve) spending decisions across multiple political constituencies. In Norway, for example, transfers from the State Petroleum fund must be approved by the parliament, even though the fund itself is managed by the Bank of Norway and therefore ultimately by the Ministry of Finance.
Since the political opposition is typically strong in Norway, and the electoral system often produces minority governments, this constitutes a real (if not very deep) division of decision-making authority. Nevertheless, this particular mechanism is unlikely to work as well in countries where the opposition may be too small or too weak to influence parliamentary decisions. In such countries, one can envisage other forms that the division of power could take, such as:
- requiring the assent of a supermajority of the legislature for spending decisions.
- requiring the main opposition party, or some share of the opposition, to sign off on spending decisions every year before the NRF can disburse. [The Alberta Heritage Savings Trust Fund Act provides that its standing committee include 3 members (out of 9) who are members of the Legislative Assembly but not members of the governing party. While a minority, this does give the opposition some influence on decisions concerning the fund.]
- dividing the decisions about how much to spend and on what to spend across different levels of government. For example, the national executive could decide on the aggregate amount, while the allocation to different projects could be decided by local governments. [Colombia’s 1995 law which regulates the Fund of Petroleum Saving and Stabilisation imposes stabilising rules for municipalities’ aggregate spending of their share of oil royalties, without specifying on what the local authorities must spend the available amounts.] Alternatively, in bicameral legislatures, the two decisions can be vested in separate chambers.
The focus so far has been on the consideration of dividing discretionary decision authority between different political constituencies (or removing discretion altogether by rules, if they can be made to work). Another “separation” of powers would be to shift either the discretionary decision-making power or at least the power to approve or supervise decision making to a constituency that does not have incentives for overspending. An NRF could do this by vesting the authority to make spending decisions in independent or technical bodies (if such exist) or civil society representatives. Examples of such mechanisms for institutional independence include the following:
- Giving the NRF itself legal personality and institutional independence. Alaska’s Permanent Fund, for example, is a separate public corporation, although its trustees are appointed by the governor.
- Giving courts the authority to review compliance with the spending rules/funds.
- Creating a new technical body not beholden to the executive, and giving this the authority to determine a spending cap. This solution has been chosen in Sao Tome and Principe, which has created a “Petroleum Oversight Committee.” Alternatively, the Central Bank, if sufficiently independent, could be given such a role.
- Giving civil society representatives decision-making power or supervisory authority over how much to spend, how to spend it, or both. This has been done in both Sao Tome and Principe and Chad, where civil society representatives belong to the Petroleum Oversight Committee and the College de Controle, respectively.
- Writing spending rules into the contract with the bank holding the NRF. The bank has incentives to comply with its contract and does not have the same incentives for overspending as the executive. This possible mechanism is not restricted to the government’s relationship with private banks.
The establishment of an NRF is an opportunity to vest decision making authority in institutions that are independent of the executive. In countries with strong executive branches, however, that opportunity might sometimes not be very attractive to rulers. The regulations governing the recently established oil funds of Kazakhstan and Azerbaijan, for instance, eschew a use of this opportunity. In both of these funds, the supervisory board is controlled by the president of the country, and spending decisions are determined by presidential decrees (Humphreys and Sandhu 2007). As before, in countries with weak institutional capacity, the formal separation of powers might not be sufficient to produce genuine counterbalancing forces. Among the weaknesses identified in the case of the College de Controle in Chad, for example, are that the institution has been under-resourced, particularly in terms of skilled personnel and information; this has limited it in its ability to act as a counterbalancing force.
Again, the aim should be to ensure not just that the right institutions are formally in place but that the incentives are properly aligned so that these institutions can function as intended. A number of legal and other mechanisms could be used to strengthen such bodies. Companies could be required to provide information directly to such bodies (in the case of Chad information is passed from companies to the executive and the College then relies on the executive to receive this information in a timely manner), or the agreement of such bodies could be treated as a requirement for access to fresh funds from an NRF or indeed from development partners.
A problem with using NRFs to implement a separation of powers is that in many poor countries, truly independent institutions are rare. Even private actors, such as banks, may be exposed to pressure from the executive. Again, there are possibilities here for emerging countries such as Guyana to draw on the institutional strength of other actors. A country with weak institutions could in extremis consider “contracting out” some of its political economy through an NRF, in the following sense. If the institutional resources at home do not prevent overspending, a foreign institution might be better suited to enforce commitments by politicians. For example, spending rules could be written into a contract with foreign financial institutions in which the fund’s account would be held. More far-reaching institutional reforms could include the following:
- Rich countries could finance a “global clearinghouse” for natural resource revenue funds. This clearinghouse could deal with the logistical issues, but far more importantly, with the commitment issues. It could, for example, accept only accounts that come with strict rules on the magnitude of funds that could be withdrawn every year and only implement changes to such rules subject to some predetermined lag.
- Alternatively, the contract with the global clearinghouse might stipulate that disbursements be made only with the required signatures of several branches of government, or only pursuant to the assent of an independent control/oversight committee.
- To discourage the temptation to use unconstitutional means to take over the state, the global clearinghouse could also commit to not disbursing a country’s NRF monies to the new rulers after a non-constitutional power change. For example, the account could be frozen in the case of a coup, until the regime was recognized as legitimate by an appropriate international organisation.
In sum, many of the solutions we have listed might be easier to implement with the help of a foreign institution such as the suggested global clearinghouse. Such an institution is better placed to stand firm in the face of attempts to circumvent the various possible constraints on spending. In the case of breach of contract, the global clearinghouse might be prosecuted under the laws of its home government, which could provide a stronger legal regime than that of the country owning the fund. This proposal may run up against problems of sovereignty. However, the idea is not to devolve sovereignty. The global clearinghouse would act as the agent and the sovereign country as the principal in this relationship, but it would permit the latter to solve commitment problems by using the agent as a proxy in certain short-term decisions. This is not too different from the way democratic governments devolve certain decision-making powers in monetary policy to independent central banks. The difference between devolving such authority to the domestic central bank and a foreign bank is that the former is subject to the country’s own laws. The situation, which is being considered, in contrast, is one in which the rule of law is stronger in the country of the foreign bank than in the natural resource exporting country itself. In a sense, making use of a stronger legal regime abroad might paradoxically increase the government’s ability to exercise its sovereignty, as a wider range of policy options become achievable – in particular the desirable one of accumulating oil revenues.