Introduction to the resource curse Asia-Pacific regional workshop

Introduction to the resource curse Asia-Pacific regional workshop
Willy H Olsen Advisor to INTSOK, Norwegian Oil and Gas Foundation Member of the Governing Board, Revenue Watch Institute Bali 7th August 2007

You are making an impact!
Civil society has during the last decade been a driving force for change The political agenda The oil companies’ strategy The financial institutions’ policy Environment Human rights Corruption Oil revenue transparency

The challenge is still enormous
More than one billion people live on less than a dollar a day 70% in Africa Laos, Cambodia, Burma and North Korea fall into the “bottom billion” group They are in the conflict trap More than 70% have recently been through a civil war – or are still in one And in the natural resource trap More than 30% of the poorest people live in countries where resource wealth dominates the economy And where autocracies tend to outgrow democracies Source: Paul Collier, The Bottom Billion

The resource curse will not go away
Escalating global demand for natural resources, higher prices and fierce competition is deepening the challenge The problem of the resource curse is likely to become even more entrenched and prominent in this environment Autocratic leaders will have fewer incentives to forge compromises with domestic opponents They will no longer have to yield to international pressure

What is required to turn the tide?
We have seen successes Norway Chile Botswana Trinidad Good governance, transparency and participation are essentially prerequisites Extractive industries can be an engine of development It will require Capacity to monitor companies and enforce laws Rights of assembly Freedom of information Other basic civil and political liberties

Most resource rich are at the bottom of the governance list
United Kingdom Malaysia Norway Governance Indicator Kuwait Mexico Weak Governance Strong governance Source: World Bank

Why is good governance an issue?

West Africa has produced 35 billion barrels of oil worth $1 trillion over last 40 years
Oil producing countries are no better off than non oil producing countries

“By past experience, you could wish nothing worse upon a developing country than an oil find...
No longer needing to rely on taxes, they become less answerable to their people Oil has proved an addiction for the rulers Financial Times editorial, 8 October 2003

The regions natural resources has been an attraction for generations….

Oil has historic roots in the region
Oil seepages were reported from the Dutch East Indies for hundreds of year before commercial exploitation “Earth oil” was used in traditional medicine The first commercial discovery was made in 1885 in a concession awarded to Aelilko Jan Zijlker, manager of a tobacco plantation by the Sultan of Langkat He called the company Royal Dutch Dutch King William III allowed use of “Royal Dutch” after the first oil discovery

Burma became Britain’s oil source
Burmah Oil was created based on oil in Burma in 1896 by Scottish merchants They transformed small “oil industry” in Burmese villages, building a refinery in Rangoon Supplying India and the British navy with oil Burmah Oil was the first British NOC – worked closely with the Royal Navy for years until BP emerged in Iran Burmah collapsed in the 1990s and the remains ended in BP’s hands

Intense rivalry between companies and countries
By the turn of the century, oil had been discovered in North and South Sumatra, Central and Eastern Java and East Kalimantan Refineries had been established in each area. The attractiveness of the region, resulted battles between companies and countries The Dutch Government kept US companies out of Indonesia for years Britain kept all others out of Burma There were, at that time, 18 companies exploring for, or producing, oil in Indonesia. In the first years of the century, two of these companies emerged as leaders -- Royal Dutch in production and refining and Shell in transportation and marketing. The Shell company had been founded in 1897 by Marcus Samuel, an Englishman who also traded in shells - hence the name of the company - and spices. In 1902 Shell and Royal Dutch formed a joint company to handle shipping and marketing for both firms -- The Shell Transport and Royal Dutch Petroleum Co. Ltd. After a few years in which Royal Dutch far better than Shell, Marcus Samuel proposed to De Gelder from Royal Dutch to merge in which each company . Thus On 24 February 1907, was formed the Royal Dutch/ Shell Group of Companies that was soon known worldwide simply as "Shell". Three years later, in 1910, the Shell group absorbed another producing company in Indonesia and on 24 June 1911 bought out the last independence producer -- The Dordtsche Petroleum Mij -- and Shell's domination of the oil industry in Indonesia was complete

The region created two of the world’s most famous oil men
Henri Deterding The founder of Royal Dutch His success was based on discoveries in Sumatra Marcus Samuel The founder of Shell His success was based on discoveries in Borneo The two merged and controlled oil in Asia and Russia

Where are we now?

Big Oil is still the leading force
The major oil companies have dominated the development of the oil and gas sector in Asia Pacific for some 100 years The international oil companies have the financial strength They have the technology increasingly required in the region as it moves away from easy oil and gas The major oil companies have dominated the development of the oil and gas sector in Asia Pacific for some 100 years - and are still the leading force ExxonMobil, Shell, BP, Chevron, Total, ConocoPhillips, ENI They are getting competition from national oil companies going beyond their traditional home ground CNPC, CNOOC, Sinopec, ONGC, Korean NOC, CPC, Petronas, Pertamina, PetroVietnam, PTTE&P, the Japanese Independents with ambitions Anardarko, Apache, BG, Woodside, Oil Search, BHP Billington, Medco, Reliance, Santos And a large number of smaller players Cairn, Salamander, Otto, Pearl, Camar, Cue, GFI, Vital, Premier, Husky, EMP, Cooper, Mitra, Essar,

NOCs are becoming more aggressive
The region’s national oil companies have a varied background and history ONGC established in 1956 replacing the oil and gas commission Pertamina established in pioneered the production sharing contracts Several were established in the 1970s to secure supplies of oil and gas Others were former communist ministries The NOCs are now expanding outside their home country – competing with IOCs

A new group of explorer moving in
Aabar Petroleum Anardarko Anzon Apache Arc Austral Baraka Beach BHP Billington Cairn Camar Resources Canoro Cooper Energy Continental Energy Cosmos Oil Cue Energy EMP Essar Gail GFI Hess Horizon Idemitsui Incremental Resources Inpex Indian Oil Corp Itochu Jana Corporation Japex Kufpec Lapindo Loon Energy Markmore Medco Mitsui Mitra Mosaic Oil MOGE Nexus Niko Resources Nippon Oil Oil Search OMV Origin Energy Otto Energy Petrobangla Petromin Petron Premier Range Resources Reliance Roc Oil Salamander Energy Santos Satria Energindo Satria Wijaya Kusuma Soco Sound Energy SK Energy Swift Energy Tara Resources Teikoku Oil Tepco Todd Exploration Valient International Vital Resources Woodwide Woodside

The regions reserves are small
Share of global oil reserves Share of global gas reserves Europe/ FSU Middle East Middle East Asia Pacific Africa Latin America North America

But companies invest like never before
Investments in new offshore projects 2008 – 2011 Indonesia Malaysia Billion dollars Nigeria Australia Asia Pacific represent some 27% of world’s capital expenditures in new refining and gas processing capacity due to demand growth Asia Pacific is also attracting more investments in the petrochemical sector than any other region in the world – some 45% Angola China * SEA : Australia, China, Indonesia, Malaysia

Lack of democracy no obstacle
Natural gas exports are Burma’s largest source of foreign exchange earnings Several NOCs are at the front Billion cubic meters Natural gas exports are Burma's largest source of foreign exchange earnings. Energy experts believe it could house the largest gas deposits in Southeast Asia, with the discovery of major deposits off the coast of Arakan in western Burma. This has prompted several of Burma's neighboring states to engage in cross-border energy economics while turning their back on the junta's coercive and abusive handling of its internal economy. Shwe is one such gas field, jointly developed by a consortium of South Korean and Indian firms and the Burmese military government's State Peace and Development Council. South Korean conglomerate Daewoo International leads the Shwe project, with partners from several state-controlled companies, including a subsidiary of India's state Oil and Natural Gas Company, ONGC Videsh Ltd., and the South Korea Gas Corporation. Although the consortium has a production-sharing agreement with the Burmese government's Myanmar Oil and Gas Enterprise, China and India are competing to secure bids to buy much of the gas while Japanese and Korean companies have expressed interest if it is provided in liquefied form. While proposals to build a natural gas terminal to transport the gas to India, China, and regional markets are being considered, the idea of developing an overland route across Burmese territory is also under consideration. So are separate pipelines to deliver the gas to border towns in India and China, or possibly through Bangladesh Source: BP’s statistical review of world energy

Economic growth needs energy

Securing energy supplies
Security of supply is on top of the agenda Securing energy supplies Asia Pacific’s new challenge is to secure enough energy to meet the fast growing demand The region is still discovering new resources in challenging environments and deeper waters Countries like Timor Leste and Papua New Guinea are increasingly exposed to risk of resource curse

Politics and oil go hand in hand

Strengthening links between countries
The Asian countries offer billion dollar investments in infrastructure for attractive oil and gas assets China, India and Korea are grabbing assets all over the world Paying well above what IOCs are willing to offer – entering deals of limited interest to most IOCs President Roh Moo-hyun of Korea meets President Olusegun Obasanjo

Driven by the need to secure energy
Share of global oil consumption Share of global gas consumption Asia Pacific North America North America Over , China contributed just over one third of world oil demand growth. Developing Asia as a whole contributed about half of world demand growth over this period Europe FSU Europe FSU Middle East Africa Latin America

“Resource nationalism” not a major factor in Asia Pacific
National interest Commercial interests High Russia Venezuela Kazakhstan India China Angola Libya Timor Leste Iran Malaysia Thailand Vietnam Indonesia Philippines Nigeria Bolivia Algeria Bangladesh Australia Are we paid a fair value for our resources? Who should reap most of the windfall gains from increases in energy prices? Should foreign oil and gas companies get a fair return on their capital, or a supernormal return? Have the foreign investors fully lived up to their commitments

Economic growth needs raw material

Symbols of wealth – but often only symbols
Gold and diamonds are a symbol of wealth, but mining in developing countries has done little to reduce poverty Mining has been closely linked to conflict Mineral-dependent developing countries are as likely to suffer from corruption and poor governance as the oil and gas dependent And the mining companies have often caused lasting damage to communities and to the environment

Civil society scrutiny can work
The Norwegian Petroleum Fund has withdrawn its investments in several mining companies due to their behavior after strong civil society engagement DRD Gold Limited, the owner of Emperor Mines Limited, which runs a gold mine in Papua New Guinea and disposes tailings into the river Freeport McMoRan Copper and Gold Inc, operating one of the world’s largest copper mines in New Guinea in Indonesia. The pressure is now on to exclude Barrick Gold for its operations in the Philippines

Competition is becoming tougher
Mining activity is dominated by multinational companies, from the United States, Canada, South Africa, Australia and the UK They have the capacity to carry out large-scale operations. New aggressive giants are emerging from Russia, Brazil and China A large number of mining ‘juniors’ are prepared to take on higher risks, operating in an area of political instability, often far less transparent than the big companies The mining industry is again making large profits, pursuing the few world-class assets left

The miners find the region tough
65 mining regions are included and most Asia-Pacific countries are among the bottom 20 Source: Fraser Institute’s annual mining survey 2007

The new issue on the top of the agenda

How will the region react to the climate issue?
The climate issue will become critical Energy fuels the regions – and especially China’s relentless economic growth China’s carbon dioxide emissions in will surpass those of the United States Coal delivers 80% of the China’s electricity 500 new coal fired plants planned The world faces an economic collapse on the level of a World War or a depression if climate change is not averted” “We have the time and knowledge to act but only if we act internationally, strongly and urgently” Sir Nicholas Stern Report to the UK Government October 2006 How will the region react to the climate issue? Illustration: The Economist

Lets return to the resource curse and look at the Asia – Pacific region…

The dream for many… The petroleum sector should be
Source of Government revenues Engine of growth Supply industrial raw material Creating multiplier effects in the society And not leave harmful environmental footprints

The dream is just a dream for many
Some 50 countries are rich in hydrocarbon and mineral resources, but the potential for positive developmental impact has not been realized Resource-rich developing countries have experienced Low per capita growth rates Slow progress in human development Social and political instability and violence And high corruption If the criterion for being resource-rich is that at least 25 percent of the government’s total revenue or of total export proceeds is from oil, gas, or mining, then 50 countries were resource-rich based on the data from 2000–2005. Brunei Indonesia Vietnam Mongolia PNG Potential in Timor Leste and Cambodia

PNG has not seen the benefits yet
Mining has been a dominant part of the economy Oil and gas is growing in importance LNG scheme on the drawing board Oil Search generates 13% of GDP and 23% of export earnings Economic growth has been volatile and declining since 1960 Real GDP per capita was 50% lower in 2004 than at independence in 1975 But some progress in the last 4 years Rent-seeking activities are reportedly high in many areas, particularly in the resource-based sectors When ministers, MPs, public servants, lawyers, police and the public are united in their will to see a functioning legal system put before the vested interests of the few, reform and change may become possible. Established in PNG in 1929 􀂬 Operates all of PNG’s producing oil and gas fields 􀂬 In 2006, generated approx 23% of PNG’s export revenue and 13% of its GDP. Largest investor and taxpayer. PNG Government is 17.6% shareholder. 􀂬 Has major interest in substantial undeveloped PNG gas resource – approx. 1 billion boe including liquids The forthcoming elections in July 2007 will mark the first time in Papua New Guinea’s history that the Government will have remained in office for its full term. At the same time, poverty remains high, human development indicators weak, the quality of education and health care delivery poor, and the incidence of HIV/AIDS has increased sharply

Did Indonesia escape the resource curse?
The Asian financial crisis had a devastating effect on the Indonesian economy. The crisis highlighted other weaknesses in the economy including a weak banking system and an overextended pattern of international lending IMF was brought in and demanded changes Natural resource revenues are volatile and depletable, which makes it very hard to establish good economic policies Indonesia illustrates how a major oil producer has overcome unfavorable initial conditions and temptations to squander oil windfalls

Saved by the oil price collapse
Indonesia was one of the world’s poorest countries in the mid-1960s Invested in agriculture during the oil boom in the 1970s Economic reforms when the price collapsed in the 1980s The share of manufactures exports rose from 7% to nearly 50% between 1983 and 1992 The collapse of world oil prices became a blessing in disguise Indonesia was one of the poorest countries in the world in the mid-1960s, with large government deficits and hyper-inflation nearing 1,500 percent a year During the oil boom in the 1970s, the government allocated some 20% to agriculture, compared to 2% in Nigeria Oil revenues funded fertilizer subsidies and spread of high-yielding crop varieties Invested in irrigation, roads, and schools in rural areas Stabilized rice prices When oil prices fell in the early 1980s, the government reacted swiftly with expenditure reduction, exchange rate devaluation and economic reform

Pertamina – one of the worst NOCs
The national oil company Pertamina has been one of Indonesia’s problems Made risky investments in the 1970s Lost billions of dollars in the 1990s through corruption and inefficiencies Pertamina built strong political alliances It had a large number of contracts with former President Suharto’s family and associates More than 150 contracts have now been cancelled or re-tendered President Suharto held office from 1967 to 1998 In early 1975, Pertamina began defaulting on bank loans from Western Banks. By mid-year, the Bank of Indonesia had declared a cap of $560 million on its ability to make good the Pertamina debts. Most of these loans had little or nothing to do with the oil business, and left Pertamina with a legacy of hotels, golf courses, automobile assembly plants, foreign real estate, aircraft and airlines, ships and shipping companies and other “non-core” assets12. The total amount of the Pertamina debt has been estimated at $10 billion, and it is believed that the country was bailed out by fellow OPEC members

Facing a new reality with new reforms
Oil sector Gas sector World’s largest LNG exporter Domestic consumption Focus on domestic gas use

Malaysia has been successful
Malaysia initiated export oriented industrial policy, welcoming foreign direct investment The government invested in infrastructure, education and health The petroleum sector was not allowed to drive up costs and wages in the economy, resulting in rapid non-oil industrialization The result has been sustained economic growth, curtailed high poverty rates and reduced income inequalities

Petronas is a model NOC for many
Payment to Government 2006 Petronas is a Ministry, a regulator and a NOC It reports directly to the Prime Minister It is an important instrument at home and abroad Government does not interfere in day-to-day operations But is it a transparency model? Gas subsidies Billion RM Malaysia has Southeast Asia’s third largest economy behind Thailand and Indonesia, in spite of the fact that its population of almost 26 million is considerably smaller than these two states. Its GDP was $229.3 billion in 2004 and growth has usually been 4-6% in recent years, in line with most of its neighbors. Per capita purchasing power is estimated at $10,725, 27 making Malaysia an upper middle-income state by World Bank standards. It also has a low level of poverty for a Southeast Asian country, only 4.3% in Literacy is over 95% and there is a good system of tertiary education.

Philippines’ gas dream
Malampaya is the first deep water gas field in the region and will have significant impact on the country’s economy Reducing energy import burden with some 700 mill dollars a year 13 billion dollars in royalties over 20 years “These enormous sums should go a very long way towards financing our plans and programs for the conquest of mass poverty and for our country’s modernization” Prime Minister at the opening of production 2001 The Philippines’ GDP grew by 5.0 percent in 2005, boosted by buoyant services, such as business process outsourcing, telecommunications, and tourism. Despite higher oil prices and intense regional competition, the balance of payments remained strong. But, largely because of the oil price increases, average inflation for the year was significantly above the central bank’s target range of 5–6 percent. Since taking office in mid-2004, the administration has raised tariffs on power generation to cut the power company’s losses and fully implemented the value-added tax reform. Political turbulence in mid-2005 disrupted economic reforms, but the authorities kept fiscal consolidation on track, and uncertainties receded. Fiscal performance in 2005 was better than targeted, and the national government deficit was substantially lower than in 2004, with equal contributions from buoyant revenues and expenditure under runs. Export growth, weighed down by anemic electronics growth, was 3¾ percent in 2005, and oil-related imports were offset by higher remittances. Equity inflows were sizable, and foreign reserves (adjusted for pledged assets) reached $18.0 billion at end If economic reforms were to stall, investment would probably remain subdued and keep GDP growth below 5 percent in Heavy reliance on external commercial borrowing also puts the Philippines at risk, a point underscored by the recent turbulence in emerging markets.

Timor Leste’s dream Looking for a sustainable future
The Bayu Undan gas and condensate field is providing substantial revenues Part of the treaty with Australia Timor Leste will become very dependent on petroleum revenues 90% of GDP by 2010 The oil fund is growing fast Institutions and objectives in place but do not match the rapid growth in revenues Building a transparent system Looking for a sustainable future Timor-Leste is very fortunate that Bayu Undan development was already well advanced prior to Independence in 2002 The Petroleum Fund is used to transform Timor Leste’s “wealth in the ground” into “wealth in investments” which will generate sustainable income for the Nation. All revenue flows are open, transparent, and soundly governed

Vietnam prefers to invest – not save
Vietnam has achieved sustained economic growth and progress in poverty reduction Growth has outperformed most other low-income countries IMF recommends saving the windfall oil profit, but Vietnam disagrees and will increase investments Oil production Thousand barrels/day Vietnam has achieved impressive economic performance over the past decade. With the help of broadly prudent macroeconomic management and a gradual opening of the economy, its growth has outperformed that of most other low-income countries. Poverty has remained on a rapidly declining path, falling from 32½ percent in 2002 to 23 percent in 2004, and most social indicators of development recorded large gains A part of the large oil windfall should be saved in 2006 and 2007, and the non-oil deficit placed on a declining trend over the medium term. The appraisal and monitoring of all publicly-funded investment projects should be strengthened. The authorities also questioned the appropriateness of saving the oil windfall. In their view, a country at Vietnam’s stage of development, which faces huge gaps in public infrastructure, would be better off using the windfall upfront to increase investment. They noted that the SEDP viewed the removal of infrastructure bottlenecks as key to fostering private investment and sustained growth. In addition, recognizing the need to tackle the systemic causes of corruption, the National Assembly has passed the law on the prevention of corruption. The Prime Minister has issued an action plan delineating the roles of various ministries and agencies in ensuring

Bangladesh dilemma – export or not
Export of natural gas has been a major political issue in Bangladesh for years The government has been under pressure to take a decision in favor of exporting natural gas to India, but has preferred gas export in the form of electricity and fertilizers “No exports unless we have reserves to meet domestic demand for 50 years”, has been the message Bangladesh has seen good economic progress, but will not to prosper until the country has improved its political and economic governance

Can Cambodia prepare itself?
Cambodia has found oil – but will it be able to handle future revenues? Up 1 billion dollar annually are seen as the potential future revenues The country has seen progress, but still faces difficult challenges High rural poverty rate Lack of access to quality health services. Weak institutions and high level of corruption Hydrocarbon law on the menu Chevron has found oil but how much? And when will it begin to flow? The government is understood to be seeking international assistance in formulating the legislation which will be the regulatory framework “We have to have the legal framework in order to avoid the oil curse. We have learned the lessons”, the Cambodian national assembly investment committee chairman, Phan Sina, said recently The country will need to manage future revenues carefully to ensure its social fabric remains intact The Prime Minister has promised to spend much of the future revenues on health and education A risk of the textile industry being crowded out Chevron is planning to firm up development plans after completing the multiwell program in 2007

New countries hope to join the club
Sri Lanka will offer three blocks in its maiden offshore licensing round in August Two blocks are earmarked for Indian and Chinese NOCs Laos has awarded the UK based Salamander Energy the first PSC The block was operated Enterprise from Nepal is hopeful that Cairn Energy will be successful Its subsidiary Capricorn holds most of the acreage and is accelerating exploration work Afghanistan is trying to revitalize the old oil and gas sector and has been approached by companies Sri Lanka is finalizing its PSA model Signature bonus Discovery bonus Production bonus Work program key decider The US has been an active supporter of the licensing round and has provided several grants to help the country develop its framework

Why is the natural resources such a challenge?
The revenues are a source of revenue independent of a countries’ citizens Economists call it “rent” Government see no need to grow tax base Patronage politics often dominate Rapid increases in revenues leads to unsustainable spending Brain-drain reduces capacity to diversify economy Rent-seeking reinforces clan structures and social divisions Dutch Disease Oil Revenue Volatility Institutional capacity

You must handle volatile oil prices
During periods of high prices and tight markets, Governments desire to maximize and control rents NOCs are championed During periods of low prices and slack markets, governments are more concerned about efficiency and performance Greater competition for NOC, even privatisation Source: EIA

But will they be as volatile in the future?
Many governments and companies in the extractive industries are now emboldened by the new “super-cycle” The boom in commodity prices have lasted for more than five years China’s demand for oil, gas and metals to drive the economy forward will not change any time soon India’s growth will provide further price support Politicians and industry leaders are becoming more bullish Companies are paying a premium for assets enabling them to grow And governments are fast expanding their budgets

Many hope the price stays high
25 dollar per barrel 60 dollar per barrel Azeri profit oil Thousand barrels per day Azeri profit oil Cost oil IOC profit oil BP får 200 millioner fat mindre ved 60 dollar fatet enn ved 40 dollar fra ACG I Aserbajdsjan Source: BP

But catching a sniff of Dutch disease
Azerbaijan has established an oil fund to handle the large revenues – but is struggling to manage the revenues Some 500 billion dollars could be transferred to the Government by 2024 The high revenues are undermining budget discipline Government spending increased 80% in 2006 Inflation is growing fast Azerbaijan signed the first PSA in 1994 An Oil Fund was set up in 2000 The Fund is now 1.3 billion dollars

What needs to be done?

Good governance is critical
Resource-rich countries do not score well on governance They often lack Clear and stable laws and regulations High level of capacity and skills in government Fiscal monetary and budget discipline Open dialogue between government and civil society Public sector/private sector balance Transparency We have developed a better understanding of what helps governments function effectively and achieve economic progress in the last half-century. It is the combination of transparent and accountable institutions, strong skills and competence, and a fundamental willingness to do the right thing We call it good governance. Poor governance deters investment, undermines competition, encourages rent-seeking behavior, and distorts public expenditure in an economy, and as a result, negatively affects productivity..

Governance – you have a long way to go
The indicator is based on six different dimensions from voice and accountability to rule and law as well as corruption -3 -2 -1 1 2 4 6 8 10 12 14 16 18 Laos Brunei Cambodia New Zealand Australia Japan China Myanmar Vietnam Source: World Bank Governance Indicators 2006

Good Governance adds significant value
Governance matters for the country’s competitiveness and income distribution Improvements in governance and anti-corruption actions can unleash the full potential of private sector led growth The impact of improving governance from a low level to an average level is substantial Almost tripling the income per capita of the population Reduce infant mortality and illiteracy

Transparency – crucial element
Transparency is one of the fundamental building blocks of good governance Transparency: Increases accountability and reduces the risk of waste and corruption Fosters democratic debate Improves macroeconomic management Enhances access to finance Transparency and accountability will build trust

Companies will benefit from openness
Several large companies have joined EITI Others are still reluctant Some a making all revenue payments known Others hide behind “aggregated payments” Corporations will benefit It will ensure that people has realistic expectations It can reduce social tension, potential for corruption and macroeconomic instability It will improve the investment climate

State owned companies must improve
The situation for many Unclear mission and role Low transparency Lack of accountability Inadequate budget procedures Fund confiscating And they often operate as a state – in - the - state Principles of good Governance A clear mission A professional Board Good management structure Published audited accounts Transparent and accountable

Fight the war against corruption
Nigeria decided that being perceived as the poster child for corruption was no longer acceptable Anti-corruption policies have to be more than a political statement It will require enforcement – also against the “big guys” It will require institutional reforms It will need committed leadership

“Oil profits generally seem to find their way by some invisible pipeline into private pockets”
Lloyd George, British Prime Minister 26 March 1920

The region needs to intensify the fight
Corruption is a huge drain on public resources Undermining the social fabric and people's confidence in their country's future. New Zealand Australia Japan Malaysia Brunei Cambodia Myanmar Source: World Bank Governance Indicators 2006

Contracts need to be transparent
Contracts with oil, gas and mining companies should secure maximum revenue transfer to host country Indonesia created a “simple” production sharing contract in 1967 The contracts have become far more complex since then They are often non-transparent and difficult to understand Even for government officials Many are now creating model contracts and introducing transparent bidding to reduce the risk of corruption

Reduce opportunities for theft
Transparency and reliability of natural resource revenue data are needed for the effective management of public resources Policy makers need good information to devise the right policies The public needs high-quality information to trust the policy makers in their handling of the country’s wealth Fiscal systems and structures have to be transparent and accountable to ensure success Nigeria is now publishing monthly all revenue allocation figures of all tiers of government.

Audit the sector Institutionalize regular independent audits of reserves, financial flows and processes and practices Auditors should identify and comment on any observed irregularities or discrepancies. Government may comment on the auditors’ reports, but audits should be made independently of any government review or editing. And audits must be made available to society at large

Building institutional capacity critical
One of the major challenges for Governments is lack of skilled people Norway has been active in capacity building in Bangladesh for a long period – but the results have been limited The Hydrocarbon Unit has not been able to retain is good staff due to lower salaries Petrobangla, the national oil companies, has been able to pay more – and get the best What will happen in Timor Leste? Or Cambodia?

The right to know The public have a right to know how much revenue is being generated, ensuring that its distribution is fair and correct. Transparency not only removes the cover for corruption, it also allows rapid intervention and builds trust. Accountability of decision-making provides assurance to society Petroleum resources are a national asset and should bring maximum benefit to the society The public have a right to know how much revenue is being generated, ensuring that its distribution is fair and correct. Transparency not only removes the cover for corruption, it also allows rapid intervention and builds trust. Accountability of decision-making provides assurance to society that decision-makers explain their decisions and that their performance is assessed. Accountability is at the heart of good governance. Without it, corruption and malpractice can flourish and good practice can go unrecognized. To be transparent means to be bright, clear, lucid and open. To be transparent therefore means to open up a system or a place that has not been so. To be accountable means to be answerable and responsible In the context of anti-corruption and reform, it can be argued that one precedes the other. You need to open up something to make it transparent and put a system in place to make it accountable. Accountability therefore is transparency on a sustainable basis Moving from transparency to accountability means moving from the need to know to the right to know

We still have a major job to do!
Secure EITI implementation Get countries from the region to join Scrutinize more companies Expand the transparency agenda beyond natural resource revenues Licensing Contracts And expand focus on Government expenditures How governments disburse their revenues is often more important the how much they get

And never give up It is unfortunately a lot easier and quicker to build an oil pipeline than an efficient state or a functioning democracy.

Introduction to the resource curse Asia-Pacific regional workshop

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