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that deal directly with the extractives sector spread their poor governance and corruption to other government agencies, “compromising their capacity to deliver quality public goods and services” (IMF 2010, 6), and limiting the governments’ ability to deliver predictability to investors over time. The fiscal regimes in oil, gas, and mining tend to be complex, exacerbated by the fact that these corporate taxpayers tend to be few in number, making payments disproportionately large relative to the rest of the tax base, as well as being foreign, highly informed, sophisticated, and politically influential. This creates a context in which governance of the sector can easily slide downhill. The long-term investments with heavy upfront costs and high degrees of risk create demands for stable and predictable long-term operating environments. Meeting these demands effectively and fairly is beneficial, but it demands capacity that is sometimes lacking. Market volatility around prices can make the benefits highly unpredictable, and their inherent exhaustibility make any benefit timeline finite. There are significant social and environmental impacts, particularly on local communities, and an asymmetry in dealings between expert companies and often-inexpert governments.
These and other features of the oil, gas, and mining sector were highlighted in chapters 2 and 3. The challenges have taken on a new character as the geography of oil, gas, and mining investments has evolved in the 21st century. There is increased presence of such investments in countries with weaker capacity, less infrastructure, and less sector experience than developed resource-rich countries. They are often places where the benefits of oil, gas, and mining development are sorely needed but most difficult to realize. The resulting volatility and unpredictability is a concern to public and private parties alike. Negative outcomes are often attributable to a failure to address adequately the governance issues that commonly affect the oil, gas, and mining industries. For example, ineffective implementation of a licensing regime—whether through a lack of capacity of relevant agencies, poor coordination in the granting of licenses, or the monitoring of terms—can sow the seeds of unpredictability and instability. The costs of failure are high, making the imperatives for getting it right particularly important. Some suggested responses based on the synthesis of good practice in the Sourcebook are set out in the following sections.
10.4 RESPONSE 1: APPROPRIATE AND ADEQUATE RULES
As chapters 4 and 5 have demonstrated, a wide variety of rules and policies need to be developed for the oil, gas, and mining sector. They include the following: ■
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A sector policy framework covering issues such as sovereignty, sector roles and responsibilities, treatment of state-owned enterprises, private sector participation, exploration rights and procedures, local content, fiscal objectives, revenue and expenditure management, social and environmental considerations, and commitments to investors. A legislative framework, through comprehensive and detailed legislation or through individually legislated contracts and agreements, or some combination of the two. Regulations consistent with good practice to complement the laws and contracts, typically covering health, safety, and the environment. Assignment of clear roles and responsibilities to key sector agencies and institutions, including legislative bodies, executive bodies, and sector ministries for individual EIs; regulatory agencies; state companies; finance ministry; taxation authority; the central bank; the economic planning ministry; and the environmental ministry. A fiscal regime based on an appropriate selection of fiscal instruments, such as mining royalties or hydrocarbon production sharing, profit-based taxes, bonuses, progressive tax instruments, state participation, capital gains taxes, import-export duties, value-added tax, discounted sales prices, tax holidays, cost recovery, and so forth. Policies and fiscal rules for the management and allocation of oil, gas, and mining revenues. (These should lay out a roadmap for spending versus savings and address issues such as the resource horizon, the need to balance current spending with savings, and whether and how revenues will be allocated between central government and subnational entities.) Policies and programs to foster sustainable development. (These may address economic diversification, infrastructure and transport corridors, regional and community development planning, promotion of local benefit, job creation, and management of environmental, social, and human development challenges.)
The net effect of a sound legal, regulatory, and policy framework is to enhance stability and predictability in the environment in which investors operate. Negative features likely
CHAPTER 10: WHY GOVERNANCE MATTERS
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