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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.

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

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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