November 4, 2002—For many oil-producing developing countries and countries in transition, petroleum revenues make up a substantial share of gross domestic product, national and state budgets, and foreign exchange earnings. The potential to do good is tremendous. In Malaysia, for instance, resource revenue management has been associated with progress on the development front.

More often than not, however, oil wealth is mismanaged, said Charles McPherson, Senior Advisor in the World Bank Group’s Oil, Gas, Mining and Chemicals Department. In the case of Nigeria, which is emblematic of many oil-producing developing countries, GDP per capita remains at less than $1 a day, despite the fact that $300 billion in oil rents have been generated over the past 25 years.

"Proper management of petroleum revenues depends on a number of factors, including institutional capacity and more importantly, the quality of governance. Where governance is poor, there is little chance that sound policies will be implemented. Furthermore, in weak institutional environments, petroleum revenues are associated with the further erosion of governance," said Peter Woicke, Managing Director of the World Bank Group and Executive Vice President of the International Finance Corporation (IFC).

The link between oil revenues and governance taken up at a recent two-day workshop convened at headquarters by the Oil, Gas, Mining and Chemicals Department along with the Energy Sector Management Assistance Programme (ESMAP). The 150 participants came from governments, major oil corporations, nongovernmental organizations, and multilateral organizations to debate the merits of existing and proposed methods of revenue collection, management and distribution.

Much of the discussion on revenue collection focused on the importance of transparency for companies, governments and civil society directly and indirectly involved in revenue collection. In his opening address, Woicke called on natural resource companies to adopt a new standard of transparency by disclosing net taxes, fees, royalties, and other payments to host governments. "This level of transparency would in turn introduce a new level of accountability. The public at large would know just what governments have received. Governments would then have to address the issue of what they ultimately do with their revenues."

Karin Lissakers, Senior Advisor to George Soros, underscored the importance of disclosure in her keynote address in presenting Publish What You Pay, a transparency initiative led by the Open Society Institute and Global Witness that targets disclosure for natural resource companies in G8 countries.

Yet full disclosure by companies is not sufficient. Representatives of the governments of Angola and Nigeria and of NGOs noted that weak institutional capacity precludes host countries from using information effectively—regardless of how complete and accessible it may be. "You must view Angola in the proper context; we are emerging from 26 years of war…we simply lack capacity," explained Josefina Perpétua Pitra Diakite, Ambassador of Angola to the United States.

Even assuming capacity is built, participants agreed that there is a need to simplify tax arrangements. Peter Macnab and David Reading, two energy economists, put forth a model for a central reconciliation unit, with the aim of simplifying and streamlining revenue collection. Such a unit would be responsible for reconciling taxes due with those paid as well as have the capacity to model revenue flows. However, Senior Public Policy Specialist at Bank challenged the value of this model "if it is a mere island within a corrupt government."

The complex issue of revenue distribution was also tackled. Past experience has revealed that, "the government’s take is not necessarily the public’s take," said Arvind Ganesan, Senior Researcher at Human Rights Watch. "It may just be the government’s take." According to Paul Collier, Director of the Bank’s Development Research Group, petroleum revenues are often linked to conflict and specifically to secessionist movements. Proper distribution, specifically to oil producing regions, could go a long way in discouraging such movements.

As with revenue collection and management, institutional capacity is essential for effective revenue distribution. Chad, for example, said Country Director Ali Khadr, faces a race against time to ensure that sufficient capacity exists by the time the revenues arrive—currently expected in early 2003.

"The issue of revenue management is not going away," said Alan Detheridge, Vice President, International Affairs of Shell International. "It’s not just pressure from NGOs, NEPAD, the UK government, it’s the communities themselves, among whom we operate." Civil society is an integral part of the revenue management equation; it may in fact be the most important part. It is therefore the role and responsibility of all those engaged in petroleum projects to engage civil society, wherever possible.

But, said Oby Ezekwesili, Senior Advisor to the President of Nigeria, reform, including the active engagement of civil society, must be in line with political realities. "The shift from an environment of no transparency to transparency involves a tremendous cost."