Notes

2. How would vertical distribution be determined? A decision needs to be made on the share of revenues assigned to each level of subnational government, authority, or institution (the split). In Ghana 91 percent of the royalties are allocated to central government while 4.95 percent goes to municipal governments in producing areas and 4.05 percent to private landowners such as traditional institutions. The transferred revenues ought to match expenditures over the medium term. 3. Which revenue streams would be shared? Some governments choose to share all revenue streams between levels of government but others choose only a selected few. Typical streams are royalties, signature bonuses, border taxes, and production entitlements. Are onshore activities to be considered only or both on- and offshore? 4. What revenue-sharing formula would be used? The main kinds of formula are derivation based (a higher proportion accrues to the producing area), indicator based (where revenues are allocated according to needs, poverty for example), or one based on revenue- generating capacity (population, for example). 5. Who is to receive a share of the revenues? It may seem that region- or state-level authorities are the obvious recipients, but in practice transfers can be made to traditional authorities, municipalities, landowners, and even directly to residents. 6. How can incentives be improved for efficient spending? The way in which revenues are transferred—earmarked for specific expenditures such as education, for example— helps to determine whether or not they contribute to improving development outcomes. 7. What transparency and oversight mechanisms to verify accurate resource revenue transfers may be appropriate? Without these, local governments cannot verify whether they are receiving their resource revenue entitlements under the law, and conflict may ensue. 8. How can a negotiating process for a revenue sharing formula be best conducted? Consensus among the key stakeholders needs to be sought if there is to be long-term stability for the outcome. Key elements in this are to share knowledge, identify the stakeholders, and depoliticize the debate.

Ultimately the outcome—the formula and the implementing rules—should be enshrined in a law.

Transparency

Little success in the management of resource revenues can be achieved without sound data on government revenues. Guidance on this can be found in the IMF (2014b) “Template to Collect Data on Government Revenues from Natural Resources 2014.” The template is based on the IMF’s (2014a) Government Finance Statistics Manual 2014. This is the internationally accepted standard for compiling financial statistics.35

The guidance in the template aims to facilitate the task of assigning the various revenues streams in the Extractive Industries Transparency Initiative (EITI) reports for each country to the corresponding category or subcategory in the template. Among the substantive points is that the definition of reported revenues needs to be clearly and publicly stated, with an independent agency, such as an auditor-general, assigned to assess whether revenues are being correctly and fully reported. International standards should be applied, particularly those that have been developed specifically for reporting on natural resources. The benefits can be expected to include an informed understanding and scrutiny of revenue flows by parliaments, citizens, and third parties. This should help ensure that revenues are used efficiently in accordance with national objectives, that revenues are all incorporated within the national budget, and the risk of misuse is reduced.

NOTES

1. For a comprehensive discussion of these issues see IMF (2007a), Guide on Resource Revenue Transparency. 2. For case studies of resource revenue management, various sources are available. For example, there are papers available from a joint project of the University of Oxford Centre for the Analysis of the Resource Rich Economies and the Revenue Watch Institute, covering the experiences of Cameroon, Chile, Kazakhstan, Malaysia, Nigeria, and Zambia. These can be found at http://www.oxcarre.ox.ac.uk/index.php/Projects / revenue-watch.html. The International Monetary Fund (IMF) Fiscal Affairs Department has produced a series of working papers and several collections of papers in book form over the past 10 years. A recent example is Arezki, Gylfason, and Sy (2011), Beyond the Curse: Policies to Harness the Power of Natural Resources. References to IMF working papers can be found throughout this chapter in the notes. 3. For example, the work of the Natural Resource Governance Institute and Columbia Center on Sustainable Investment, www.resourcegovernance.org/natural-resource-funds. 4. One caveat here is that the inclusion of all public investment as savings carries the risk that fiscal discipline will be undermined. 5. The typology is used in Budina et al. (2012) and in RWI and Vale (2014, 50). There are other kinds of fiscal rule but these are the most common by far. As table 7.1 indicates, fiscal rules can also be imposed.

212 OIL, GAS, AND MINING

6. Various IMF papers have been produced that illustrate how its own views on this subject have evolved in recent years. “Since the mid-2000s, calls for reconsidering the conventional advice (i.e., based on the PIH formula) and prompting investment spending of resource revenue in developing countries have emerged” Berg et al. (2012). Examples of literature that supports the use of fiscal rules include Collier et al. (2010); RWI and Vale (2014, 47–58); and Lassourd and Bauer (2014). 7. For example, Iimi (2006, 3) notes, in developing countries in particular, “The quality of regulation, such as the predictability of changes of regulations, and anticorruption policies, such as transparency and accountability in the public sector, are most important for effective natural resource management and growth.” 8. It will not be desirable if the fiscal position is unsustainable, if inflation is high, if the external current account of the balance of payments is in a nonfinanceable deficit, if public spending is of poor quality and resources are wasted, or if the public capital stock is decent. Specific circumstances are a crucial determinant of whether a significant allocation of revenues to spending is desirable. 9. The eight features are investment guidance, project development, and preliminary screening; formal project appraisal; independent review of appraisal; project selection and budgeting; project implementation; project adjustment; facility operation; and project evaluation. Core weaknesses are also identified by the study team to encourage reforms to focus resources where they are likely to have the greatest impact. These include poor project selection including wasteful projects; delays in design and completion of projects; corrupt procurement policies; cost overruns; incomplete projects; and a failure to operate and maintain assets effectively, resulting in benefits less than they should be. 10. Taking the case of Mongolia, one study has concluded that members of parliament have an incentive to overspend on smaller projects that bring benefits to specific geographical localities and to underspend on large infrastructure that would bring economic benefits to Mongolia as a whole. Large infrastructure projects carry a political risk because the political faction in control of the particular ministry involved would have access to very large rents and become politically too powerful. Anticipating this risk, members of parliament are reluctant to fund these projects, even though they are essential for national growth (Hasnain, 2011). 11. There is a large body of research now available, with the work of the Natural Resource Governance Institute project standing out for comprehensiveness: http://www .resourcegovernance .org/natural-resource-funds#. On mining, there is Wall and Pelon (2011). For oil see Bacon and Tordo (2006). For funds in general see Gelb et al. (2014). 12. For example, see Shabsigh and Ilahi’s (2007) “Looking beyond the Fiscal: Do Oil Funds Bring Macroeconomic Stability?” and Villafuerte, Lopez-Murphy, and Ossowski’s (2010) “Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resource Exporters in Latin America and the Caribbean.” For earlier work on this theme, see the volume edited by Davis, Ossowski, and Fedilino (2003), Fiscal Policy Formulation and Implementation in Oil Producing Countries. 13. The generic acronym for a medium-term framework for fiscal policy is MTF, connecting the annual budget to longerterm policies and sustainability objectives and enhancing risk analysis. A simple form of MTF is the medium-term fiscal framework (MTFF). More advanced in terms of their implications for how budgets are put together are mediumterm budget frameworks (MTBFs) and medium-term expenditure frameworks (MTEFs). The former incorporates realistic projections of spending by individual agencies that allocate resources in line with strategic priorities, consistent with overall fiscal objectives of the MTFF. The latter takes the analysis further and provides more detailed costing within sectors and performance measures. Their implementation, especially in the more advanced forms, has to be consistent with administrative capacity. 14. For a discussion of MTFs in general and further examples, see Ossowski et al. (2008, 20–23). 15. There are three possible approaches: (1) use of futures to fix the price a government will receive in the future, giving it certainty about the oil revenue it would receive for budgetary purposes; (2) use of options, which would work like the purchase of an insurance policy; and (3) engagement by the government with a financial institution to provide a tailor-made arrangement to hedge the oil price risk according to the government’s risk preferences and the cost of the arrangement (over the counter, including commodity swaps, bonds or loans or combinations of all instruments). See P. Daniel (2007, 41). 16. Algeria, Colombia, and the U.S. state of Texas are reputed to have experimented with it. The Finance Ministry of Kazakhstan was reported to be in discussions to develop a hedging program with Goldman Sachs in November 2014 due to a fall in oil prices, but by early 2016 had not proceeded with this option. See Tully 2014. Russia was similarly reported to be preparing the technical infrastructure necessary to implement an oil hedging program like that of Mexico. This was very much a matter of preparation for possible future use, however (Farchy 2016). 17. The program is discussed in detail by Duclaud and Garcia (2012). 18. Between 1993 and 1994, Juan Pablo Davila (the company’s former chief of the future markets department), conducted several deals, mainly copper transactions, without a

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