Making oil a cure, not a curse
Author: Tom Baird
Article Date: 13 Nov 2007
Managing financial windfalls after discovering natural resources
For nearly 50 years, local and international energy companies drilled for oil in Belize, but without significant findings, they eventually left. A decade of relative inactivity followed until 2005, when Belize Natural Energy discovered potentially lucrative oil fields in Spanish Lookout in Western Belize, prompting a resurgence of exploration.
With a population of under 300,000, a substantial burden of foreign debt and a high level of unemployment, the Government of Belize realised they had to prepare to effectively manage a potential windfall. An injection of substantial revenues into a relatively small economy often produces what is known as the ‘oil curse’ -- where a country is unable to cope with the money they receive for a natural resource.
After discovering oil over 50 years ago, Nigeria is one example of a number of countries who have been affected by this.
“It is a paradox that countries who find oil often end up poorer than they were before the discovery,” Pat Utomi, Professor of International Political Economics at Lagos Business School in Nigeria explained. When a significant amount of money is introduced into an economy in a short period of time, it is difficult to know how to deal with it.”
On 31 August this year, the House of Representatives in Belize approved the establishment of a Petroleum Revenue Management Fund. The Fund aims to ensure transparent collection of petroleum revenues, proper investment policy of the accumulated funds as well as regulating the payments made to the State Budget.
The design and ‘engineering’ of the Fund as well as the drafting of the Law that sets it up were developed by John Gara and Daniel Dumas , two officers from the Special Advisory Services Division (SASD) of the Commonwealth Secretariat. Mr Dumas asserts that “avoiding the paradox of the ‘oil curse’ has been addressed and debated across the world, as many developing and developed countries have suffered after receiving a sudden influx of money.”
Martin Sandbu, a Lecturer in Business Ethics at the Wharton School of the University of Pennsylvania, believes that Belize is now joining other small countries with natural resources at the forefront of best practice in this area. “It shows a lot of foresight to introduce this law while oil revenues are still small. If Belize didn’t introduce this Fund, I would take their discovery of oil as a bad sign. But passing this law is a sign of political maturity,” he said.
“If you look at countries around the world there is a general pattern of problems after a natural resource is discovered. They end up doing poorly because of economic and political reasons. The Fund creates ground rules that everyone has to adhere to, which reduces the incentive to undermine control.”
The concept of introducing a Revenue Management Fund is fundamentally guided by a need for transparency and improved management of income generated by oil. In Belize, public access to information on the amount of money received from oil companies is guaranteed by the Fund, which requires official reports to be consistently generated by a Public Information Office. An Independent Oversight Board, mostly made up of non-government members, ensures that the management of the Fund is in line with the law.
“We now have a law that clearly spells out how these funds will be managed, invested and spent, leaving very little room for discretionary decision-making by the political party of the day. This takes transparency and accountability to a completely new level,” said John Briceño, former Minister of Natural Resources and the Environment in Belize, who was responsible for petroleum in Belize for nine years.
He also points out that “the issue of corruption and the spending on useless projects,” will be tackled by the Fund.
Jose Maurel, Director of the SASD said that “the Belize project highlights the importance of managing not only government expenditure but also revenues prudently.”
He added: “A Fund like this can only work effectively if it is tailored to the specific needs of a country and this was taken into consideration for Belize. We hope our expertise in this area will prompt other Commonwealth countries with natural resources to implement their own model and SASD will be happy to assist any country facing similar challenges.”