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Chad: Oil Transparency Loopholes
AfricaFocus Bulletin
Feb 20, 2005 (050220)
(Reposted from sources cited below)
Editor's Note
Oil revenues for Chad are now beginning to increase rapidly from
the long-debated "model project" involving World Bank financing, a
pipeline through Cameroon, and a consortium of major oil companies.
A new report from two U.S.-based groups says the mechanisms for
transparency and accountability, while welcome, are still full of
loopholes.
Without additional political will in Chad as well as greater
openness by outside companies and agencies, says the report from
Catholic Relief Services and the Bank Information Center, the
chances that the new wealth will in fact reduce poverty in Chad are
low.
This AfricaFocus Bulletin contains excerpts from a press release
and the executive summary from the report, released on February 17.
A set of recommendations and the full report are available on the
websites of the two organizations at http://advocacy.crs.org/oil
or http://www.bicusa.org/chadreport.
Also included in this Bulletin is a set of links to previous
AfricaFocus Bulletins with background on the use of oil revenues in
African countries, as well as on the debate about World Bank
involvement in extractive industries projects.
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African Attempt to Defy "Resource Curse" Hanging by a Thread
Will Chad's Oil Be a Miracle or Mirage for the Poor?
Press Release
February 17, 2005
Contact: Caroline Brennan 410-951-7408, cbrennan@catholicrelief.org
February 17, 2005, Baltimore, MD - The World Bank-financed attempt
to transform oil revenues into poverty reduction in Chad - a
country marked by corruption, instability and human rights abuses -
is hanging by a thread after the first year of oil exports,
according to a report released today by Catholic Relief Services
(CRS) and the Bank Information Center (BIC).
With the United States expected to receive as much as 25 percent of
its petroleum imports from Africa within the next ten years, Chad's
experience as the continent's newest and arguably most precarious
petro-state is of particular interest not only to Chadians and to
the World Bank, but to prospective consumers of the continent's
growing supply of "black gold." The CRS/BIC report reveals that,
despite the support received from the World Bank and other donors,
the country remains unprepared to manage the complexities of an
economy increasingly dominated by oil, adding to concerns about the
stability of African oil-exporting countries.
"We and our local partners in Chad want this project to succeed.
The several billion dollars in oil revenues that the Chadian
government will be receiving represent an important opportunity to
reduce grinding poverty in Chad," said report author Ian Gary, CRS
strategic issues advisor for extractive industries. "But with
billions of dollars falling outside the revenue transparency
safeguards, limited government capacity to spend the money
effectively and ongoing problems with human rights and the rule of
law, we are concerned that poverty reduction objectives may not be
achieved."
In Chad's Oil: Miracle or Mirage? Following the Money in Africa's
Newest Petro-State, co-authors Gary and Nikki Reisch, BIC Africa
program coordinator, identify major weaknesses and loopholes in the
management of petroleum revenues. ......
According to the report, one of the most serious loopholes in
Chad's oil revenue management system is the failure to apply
requirements regarding transparency, accountability and pro-poor
expenditures to all oil developments in the country. The pipeline
from Chad to the export terminal in Cameroon has spurred the rapid
growth of the country's petroleum sector, but regulations regarding
oversight of oil activities and revenues do not apply to
developments outside the first three fields in southern Chad,
operated by a consortium of ExxonMobil, ChevronTexaco and Petronas.
Exploration is ongoing with growing interest from foreign oil
companies, and ExxonMobil plans to produce from new fields by the
end of 2005 or early 2006.
Revenues from these new fields, combined with forthcoming taxes on
oil production which also fall outside the revenue management
system, may soon dwarf those that are covered by the country's
transparency rules and monitored by the innovative government-civil
society petroleum revenue oversight committee.
For all the attention given to the pipeline project's transparency
innovations, much remains hidden concerning the oil sector and
revenues generated from production. Confidentiality clauses
continue to shield key contracts between oil companies and the
government, which are negotiated in secret by a handful of select
officials.
While Chad has achieved a degree of transparency over oil revenues
not seen in some other oil-rich countries, in order for the
petroleum revenue oversight committee, the independent press and
civil society groups to play an effective watchdog role over the
use of the money, reports of mismanagement or corruption must be
followed-up by government action.
"Everything in the Chad model rests on the enforcement of laws and
sanctions for violators in a country with a history of neither,"
said Reisch. "The project depends heavily on the political will of
the government to respect the rule of law, develop accountable
institutions and encourage democracy. While transparency is
essential for oversight, it alone does not lead to accountability."
The World Bank bears significant responsibility for the fate of the
project, given its catalytic role in the project's funding and
implementation. Although it is too early to declare Chad's oil
project a failure or a success, the experience to date confirms the
danger of investing in the extractive industries before a country
is shown to meet minimum conditions of respect for human rights,
fiscal transparency, and demonstrated government capacity to
implement pro-poor programs. World Bank-financed programs to
increase the capacity of the Chadian government have lagged far
behind the pace of the oil export project.
"At a time of heightened awareness of the pitfalls of dependence on
petroleum exports, the World Bank has justified its involvement on
the ability of the project to transform Chad's economy and benefit
the country's poor," said Reisch. "The very propriety of World Bank
support for the extractive industries is largely riding on the
outcome of this experiment." ...
Unless urgent attention is given to close loopholes in the revenue
management system, to support active public involvement in tracking
oil spending, and to increase external pressure for adherence to
the rule of law and democratic freedoms, there is little hope that
Chad will escape the corruption, conflict and poverty of its
oil-rich African neighbors. ...
Gary and Reisch conducted research between September 2002 and
November 2004, including four trips to Chad and ongoing exchanges
with civil society organizations in the country. CRS and BIC are
committed to helping to ensure that Africa's oil boom improves the
lives of the poor through increased investment in education,
health, water and other vital necessities.
Executive Summary
Chad's Oil: Miracle or Mirage?
The Chad-Cameroon Petroleum Development and Pipeline Project,
transporting oil from landlocked southern Chad to the Atlantic
coast of Cameroon for export, represents the foremost test case of
the extent to which oil revenues can be used to alleviate poverty
in a challenging developing country context. The most innovative
feature of the project is the establishment of a legal framework
(Chad's Law 001 and subsequent amendments and decrees) that
earmarks money for poverty reduction expenditures and creates an
oversight committee to ensure the transparent management of the
country's oil wealth. Touting the promise of petrodollars for
Chad's poor over public concerns that new revenues would be lost to
corruption and mismanagement, the World Bank provided financing
that catalyzed the ExxonMobil-led oil development.
Given the dismal track record of oil-producing countries around the
world and the high stakes in a country as unstable as Chad, this
experiment has come into the international limelight. The fate of
the $4 billion-plus project is not only of vital importance to the
people of Chad, who hope to reap its benefits but risk bearing
enormous costs if oil production leads to corruption, conflict and
the further concentration of power in the hands of a few. It is
also of great interest to other countries facing the challenge of
transforming their oil wealth into benefits for their people; to
donors attempting to solve the problem of the "resource curse"; and
to energy-hungry industrialized countries searching for new and
stable sources of oil.
Poverty, Politics and Petrodollars:
Chad is a landlocked country with a long history of civil war,
continued political instability, a weak judicial system, widespread
corruption and an all-encompassing institutional capacity problem.
This is an extremely challenging environment in which to attempt to
turn oil revenues into benefits for the poor. And the stakes are
high if Chad's oil money is mismanaged, it could mean increased
hardships and conflict for the nearly seven million people in Chad
living on less than $1 per day. Since independence in 1960, Chad
has known more years of war than of peace, and rising tensions in
the region mean that violence is never far off. A coup attempt in
May 2004 reminded observers of the fragile political environment,
and tensions have increased over the attempt by President D‚by's
ruling party to change the constitution to allow him to run for a
third term in 2006.
The Chadian oil experiment depends largely on the political will of
the government to respect the rule of law where there is little
history of doing so, to develop accountable institutions, and to
encourage democracy. In an environment where the government faces
internal and external threats, such political will appears to be
in short supply.
Chad's Landlocked Treasure:
After decades of on-again, off-again exploration and negotiations,
in July 2003 Chadian oil began to flow through the 1,050 kilometer
pipeline, produced by a consortium comprised of ExxonMobil,
ChevronTexaco and Petronas, the Malaysian state oil company.
Production from the three active fields in the Doba basin reached
its current peak capacity of 225,000 barrels per day in late 2004
and more than 60 tanker shipments have been exported to date.
Beyond the 1 billion barrel estimated reserves in these three
fields, the presence of the pipeline infrastructure is spurring new
oil production and exploration in Chad. ExxonMobil plans to add
five new "satellite" fields to its existing production in 2005-2006
and, together with other companies like Canada's EnCana, is
exploring other parts of Chad. With these ongoing activities and
the government's efforts to attract more investment in the sector,
Chad's oil windfall is likely to be much larger than originally
predicted.
Oil Revenues - Chad's First Taste of Black Gold:
The unprecedented measures put in place to safeguard against
misappropriation of oil revenues are now being put to the test. In
late 2003, ExxonMobil made its first royalty payment into the
government of Chad's escrow account at Citibank in London, and Chad
was likely to receive $140-150 million in oil revenues during 2004
and over $200 million in 2005. Over their 25-year production span,
the first three oil fields in southern Chad may earn the
government more than $5 billion in oil revenues. Just how much
more Chad will receive from other oil fields tapped in the future
is yet unknown.
In response to pressure from civil society organizations concerned
that the benefits of oil development would not reach the poor, the
World Bank conditioned its financing for the pipeline project on
the establishment of a revenue management plan. Chad's innovative
petroleum revenue management law stipulates that the majority of
direct revenues from oil production royalties and dividends be
earmarked and spent on "priority sectors" targeting poverty
reduction. In addition, a joint government-civil society petroleum
revenue oversight committee (the CollŠge) has been established to
play a "watchdog" role, approving projects and monitoring the
quality of their implementation.
While some information on Chad's oil revenues is made public,
details regarding the calculation of revenues and many key
agreements between the oil companies and the government remain
secret. Furthermore, legal safeguards contain notable loopholes.
For example, all indirect revenues including income taxes on the
oil companies will go directly into general government coffers.
These indirect revenues may amount to more than $3 billion over the
next 25 years. In addition, the revenue management law does not
cover any revenues from oil produced outside the three original
Doba fields. These and other weakness mean that it is difficult for
citizens to verify the accuracy of revenue information disclosed
and that much oil revenue will fall outside of the jurisdiction of
the law and the control of the CollŠge.
On the government side, there is a profound lack of capacity to
master the technical aspects of monitoring oil production and
determining oil revenues. More than one year into Chad's life as an
oil producer, many basic aspects regarding the calculation of oil
revenues remain the subject of dispute between the government and
the ExxonMobil-led consortium.
"Just Add Oil" Accountability from Scratch:
In a country lacking an effective system of checks and balances,
the joint government-civil society revenue oversight committee
created by Law 001 is a unique institution, critical to the effort
to hold the government accountable for the use of oil money.
Experience to date has shown that the CollŠge has made promising
strides to establish itself and exert its authority. At the same
time it needs increased access to information, an improved ability
to investigate expenditures and the cooperation of government to
prosecute any wrongdoing identified. The CollŠge lacks an
independent and steady source of funding, and without support from
Chadian civil society will be unable to effectively carry out
oversight in a country as large as Chad. Finally, the government
has placed trusted allies such as President D‚by's brother-in-law
on the CollŠge and has interfered with the selection of civil
society members. While the CollŠge can influence the budgeting
process, reject ill-founded expenditures and investigate the
execution of projects it approves, ultimately its ability to ensure
that oil revenues are used for poverty reduction depends on the
willingness of the judiciary to prosecute cases of misuse, fraud
or corruption that the CollŠge may uncover.
Budgeting for the Boom - Spending Chad's Oil Revenues:
For a $4 billion-plus investment, the oil industry enclave in Chad
is creating precious few jobs, making the generation of non-oil
employment and the careful management and spending of oil revenue
paramount. The ultimate success of the Chad experiment will be
judged not on barrels of oil produced or revenues generated, but on
the successful investment of these revenues in Chad's people
through a well- planned and executed budget system.
Chad has little record of effectively budgeting and spending
government resources, and has a history of corruption and
mismanagement in bidding and procurement procedures. The experience
of the 2004 budget the first containing oil revenues and plans for
2005 show that there are many obstacles standing between
transparent budgeting of oil revenues and spending those monies in
a way that reduces poverty.
With increased scrutiny of revenue flows at the macro-level,
problems with corruption and mismanagement will likely migrate
downstream where they are more hidden from public view. As in other
oil rich countries, systems of patronage may develop through the
non-transparent awarding of government contracts funded by oil
revenues. These tendencies, together with limited government
capacity to absorb increased levels of funding, have grave
implications for the poverty reduction objectives of a project
dependent on the effective use of massive new government revenues.
World Bank projects designed to increase capacities in these areas
prior to the arrival of first oil have failed to meet their
objectives. Despite World Bank promises, the result has been a
"two-speed" project whereby the pipeline was completed a year ahead
of schedule but the government remains largely unprepared to manage
its oil windfall.
Changing Chad - The Role of External Actors:
Ensuring that Chad's oil boom benefits the poor requires not only
building government capacity, but altering policies and,
ultimately, changing politics. The experience to date reveals both
the limits of external actors' ability to influence these changes
and the urgent need for those actors to use what leverage they do
have to support adherence to the rule of law and compliance with
the revenue management safeguards. In Chad, where citizens have
limited influence on their government, external actors such as the
World Bank, IMF, and the U.S. and French governments can be
important sources of pressure for greater transparency and
accountability. The rapid accumulation of petrodollars in Chad
confronts the World Bank, IMF and other donors with a choice
between using their known leverage today and relying on their
uncertain leverage in the future.
A "Model Project" Hanging by a Thread:
Many obstacles stand in the way of converting Chad's oil wealth
into concrete improvements in the lives of the country's poor.
While some have prematurely hailed the Chad project as a "new
model" for harnessing oil revenues to benefit development, the
record of Chad's first year as a petro-state provides many reasons
for concern.
Important building blocks for transparent and effective oil revenue
management are being developed and need to be nurtured, but limited
progress on this front is tempered by worrying trends in the
political environment, weaknesses and loopholes in the revenue
management system, problems with corruption, transparency deficits
and severe government capacity constraints. The oil experiment
hangs by a thread.
Chad's experience shows that transparency is but one essential
ingredient in a system of oversight, accountability and sanction.
Transparent information can be used for both formal and informal
enforcement of the law, but the tools to use it have to be in
place. Investigative and judicial arms of the government must be
independent and capable of prosecuting wrongdoing. Elections must
be free and fair and Chadians must have the ability to change their
government through the ballot box if they think it has not managed
the oil wealth well. Informal enforcement through monitoring by
civil society and publicizing information on the radio and via
other media must be part of a system of accountability.
Transparency is only meaningful if information is understood by the
government and the public, and if the findings of oversight bodies
lead to action.
It is too early to declare the Chad experiment a failure or a
success. Whether or not Chad manages to escape the "paradox of
plenty" may not be known for years. There are, though, clear
lessons that can be drawn from Chad's experience to date, which can
serve as signposts to correct pressing problems in Chad and to
guide efforts to assist other developing countries in managing
resource wealth. And one of the most fundamental lessons that Chad
offers today is the importance of ensuring that minimum conditions
of respect for human rights, fiscal transparency, and demonstrated
government capacity to implement pro-poor programs are in place
prior to promoting investment in the extractive industries.
Additional related links
http://www.africafocus.org/docs03/sud0311.php (Sudan)
http://www.africafocus.org/docs03/nig0312.php (Nigeria)
http://www.africafocus.org/docs04/ang0401.php (Angola)
http://www.africafocus.org/docs04/oil0401.php (World Bank)
http://www.africafocus.org/docs04/wb0404b.php (World Bank)
http://www.africafocus.org/docs04/eq0407.php (Equatorial Guinea)
http://www.africafocus.org/docs04/eir0409.php (World Bank)
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