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November 29, 2018

Tackling Mismanagement and Corruption in Natural Resource Enterprises

Donkeyoil
Posted by Andrew Bauer and Ines Schjolberg Marques[1]

Oil, gas and mining state-owned enterprises (SOEs) are pervasive in resource-rich countries. Outside of China—which has dozens of SOEs at the national and provincial levels—there are at least 139 such companies. A third of them operate in the mineral sector.

While some SOEs are commercial or operational companies—selling crude oil or raw minerals, managing state equity or participating directly in extractive operations—others are regulatory or administrative entities, responsible for allocating licenses or collecting taxes, for example. Still others are instruments of economic or state development.

SOEs can generate significant revenue for the state. For instance, the presence of an SOE in the upstream oil sector is associated with a higher ‘government take’ as negotiated in contracts.

They can also enable a government to exercise greater control over the sector; help improve local technologies and skills; or tackle market failures. Some SOEs such as Abu Dhabi’s ADNOC, Chile’s Codelco, China’s Sinopec, Norway’s Equinor, Saudi Arabia’s Saudi Aramco and Thailand’s PTT have generated significant value for their primary shareholder, the state, and have made substantial economic contributions to their countries. SOEs such as Madagascar’s Kraoma and Papua New Guinea’s Ok Tedi Mining have stepped in to fill gaps left by the private sector.

Yet, as a new report published by the Extractive Industries Transparency Initiative (EITI) shows, financial and governance challenges are common. In OECD countries, oil, gas and mining enterprises had the highest rates of corruption and irregular practices among SOEs over the last three years. These sectors are likely to be characterized by natural monopolies, are particularly secretive and are engaged in high-value procurement projects, which makes them targets for rent seekers.

The report highlights five major recurring challenges posed by such SOEs, namely: slow project development; high costs; low revenues; excessive liabilities; and an inefficient allocation of revenues between SOEs and other public entities. Interesting cases can be found around the world.

For example, in a typical case of excessive risk-taking and weak government control, New Zealand’s state-owned coal company Solid Energy began borrowing heavily, accumulating losses, and receiving government bailouts starting in 2012 when coal prices were slumping. The company is now being liquidated, having cost taxpayers more than USD 130 million in combined bailout and debt repayments.

In an egregious example of a transfer of assets without any benefit to the state, Angola’s Sonangol transferred its 20 percent stake in an oil block purchased for USD 1.3 billion in 2010 to another company named China Sonangol. 70 percent of China Sonangol was owned by Dayuan International Development Ltd., a Hong Kong stock-exchange listed private company. The transaction represented a free transfer of an asset valued at USD 910 million from the SOE to Dayuan.

Similar undervalued sales of assets are well documented at the DRC’s Gécamines, Nigeria’s NNPC, the Republic of Congo’s SNPC and Russia’s Surgutneftegaz, Lukoil and Gazprom. In the Gazprom case, the government lost more than USD 9 billion from undervalued share sales, many of which benefited company managers.

These are billions of dollars in lost government revenues that otherwise could have been invested in improving national healthcare, education or infrastructure. Mismanagement of SOEs also empowers and sometimes enriches officials and those with connections to the government, at the expense of the average citizen.

Addressing these governance challenges requires revising national legislation concerning procurement, the oversight of SOEs, management incentives, and the purchase and sale of assets. But that is not sufficient. Greater public surveillance, risk management and enforcement of the law is also needed to prevent cases of mismanagement.

Many monitoring and law enforcement agencies are not able to assess risks or act on malfeasance since they do not have access to timely, accurate and relevant information. When oversight bodies do receive the required information, they often act. Public disclosure of information can improve accountability by allowing the public, civil society and media to engage in a constructive dialogue around policy formulation and SOE governance. For instance, the Ghanaian parliament restricted state petroleum company’s (GNPC) spending on quasi-fiscal projects such as roads, a motel and the national football team.

Public reporting is improving through the disclosures of annual reports, greater adherence to international accounting standards, and participation in EITI reporting. Companies like Chile’s Codelco, Colombia’s Ecopetrol, Ghana’s GNPC, India’s ONGC, Mongolia’s Erdenes Mongol, Nigeria’s NNPC, the Philippines’ PNOC and Zambia’s ZCCM-IH have made great strides in disclosing information on their finances and activities. Yet, these companies remain the exception. The majority of  the world’s oil, gas and mining SOEs do not publicly disclose sufficient information to enable an effective monitoring of their activities.

The EITI is one tool that can contribute to improving SOE transparency globally. The EITI Standard includes disclosure requirements related to state participation in oil, gas and mining activities, and at least 55 SOEs already participate in EITI processes across 51 implementing countries. The EITI Board recently decided to leverage this existing framework and work in a more targeted manner with leading implementing countries and SOEs to improve transparency and share best disclosure practices. This way, the EITI aims to step up its efforts to ensure that improved transparency can help tackle governance challenges related to SOEs.    

[1] Andrew Bauer is a public finance consultant, formerly with the Natural Resource Governance Institute, and author of the report published by EITI on “Upstream Oil, Gas and Mining State-Owned Enterprises: Governance Challenges and the Role of International Reporting Standards in Improving Performance.” Ines Schjolberg Marques leads and coordinates the EITI's work on key policy areas including beneficial ownership, state-owned enterprises and commodity trading transparency.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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