Good Governance in the Extractive

Industries: Latin America and Mexico in

a global empirical perspective

Daniel Kaufmann,

Natural Resource Governance Institute (NRGI)

Opening Presentation at EITI Workshop,

Mexico DF, June 30th

, 2014

Overview

Proven reserves of oil in Latin America

(billions of barrels)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

US Canada Mexico Argentina Brazil Colombia Ecuador Venezuela

1993

2003

2012

2013

Source: Own elaboration based on Statiscal Review of BP

America Latina oil production

(thousands of barrels day)

-

2000

4000

6000

8000

10000

12000

1990

2000

2010

2013

Source: Own elaboration based on Statiscal Review of BP

Fiscal contribution of hydrocarbons in LA

Source: Cepal

Resource Governance Index

Satisfactory (71-100)Partial (51-70)Weak (41-50)Failing (0-40)

Mexico’s hydrocarbons

sector overall

performance on the RGI

8

9

ffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff

ffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff

Mexico’s hydrocarbons sector

Institutional & Legal Setting (20%)

Reporting Practices (40%)

Safeguards & Quality Controls (20%)

Enabling Environment (20%)

Indicator Indicator Indicator Indicator

1 Freedom of information law 1 Licensing process 1 Checks on licensing process 1Accountability & democracy (EIU

Democracy Index & WGI voice and accountability)

2 Comprehensive sector legislation 2 Contracts 2 Checks on budgetary process 2 Open Budget (IBP Index)

3 EITI participation 3Environmental and social impact

assessments3 Quality of government reports 3 Government effectiveness (WGI)

4 Independent licensing process 4 Exploration data 4Government disclosure of conflicts

of interest4 Rule of law (WGI)

5Environmental and social impact

assessments required5 Production volumes 5 Quality of SOC reports 5

Corruption (TI Corruption Perceptions Index & WGI control of

corruption)

6 Clarity in revenue collection 6 Production value 6 SOC reports audited

7Comprehensive public sector

balance7 Primary sources of revenue 7

SOC use of international accounting standards

8 SOC financial reports required 8 Secondary sources of revenue 8SOC disclosure of conflicts of

interest

9 Fund rules defined in law 9 Subsidies 9 Quality of Fund reports

10Subnational transfer rules defined

in law10 Operating company names 10 Fund reports audited

11 Comprehensive SOC reports 11 Checks on Fund spending

12 SOC production data 12 Government follows Fund rules

13 SOC revenue data 13Fund disclosure of conflicts of

interest

14 SOC quasi fiscal activities14

Quality of subnational transfer reports15 SOC board of directors

16 Comprehensive Fund reports 15Government follows subnational

transfer rules

17 Fund rules

18Comprehensive subnational transfer

reports

19 Subnational transfer rules

20 Subnational reporting of transfers

Achievements

• Strong legal framework

• Freedom of information law

• Comprehensive industry data are available

online - but reports can be difficult to

understand and information must be pieced

together from different agency websites

• Quality of SOC reports

Pending Challenges: from RGI & beyond

• Auditors lack capacity to oversee the oil sector, and

review only a small fraction of public funds.

• Lawmakers weakness in reviewing service contracts

• Only limited information on Pemex's subcontracting

policies is published before contracts are awarded.

Information on the selection process is not always

available, and service contracts are not published.

• Not an EITI country yet (& mining needs inclusion).

• Weaknesses in rule of law and corruption

• Corporate governance of PEMEX

• Transparency & competition for licensing and contracts

• Adopt good governance practices for Sovereign Oil Fund

Contracts

Contracting – some considerations

In awarding contracts:

1.Picking the “right” company – includes fiscal terms,

work qualifications, and social commitments

2.Transparency not just around the final contract, but

the process

3.Beware of “the winner’s curse” and post-bid

negotiations

Global information asymmetries

around contracts are shrinking

All or most contracts/licenses are available

Some contracts/licenses are available

Source: Resource Governance Index, 2013

State-owned Enterprises

National oil companies (NOC) – benefits

and success stories

• Development of national skills

• Long-term financial returns

• State control over the pace and development of the industry

• Stimulator of local content and positive economic spillovers

NOC challenges: inefficient project development and

revenue collection

NOCs IOCs Majors

Average revenue per employee, 2004

NOCs $962,000

IOCs $1.8 million

Source, Victor 2007

Number of Employees

Rev

en

ue/E

mp

loy

ee (

$1,0

00)

NOC challenges: access to capital

50

55

60

65

70

75

80

2009 2010 2011 2012

Petronras dividend payout as % of net revenue

Source: Petronas 2012 Annual ReportSource: http://www.reuters.com/article/2012/07/02/us-malaysia-petronas-idUSBRE86105420120702

…but too much autonomy over revenue flows

risk creating parallel treasuries

NOC Exports as a share of total government revenue, 2010

Source: http://www.resourcegovernance.org/sites/default/files/OilSales-Transparency.pdf

…or parallel development ministries

PDVSA Spending, $ billions, 2012

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Social Programs "Operating Assets"

Source: Latin American Herald Tribune

Recommendation 1: Develop a workable

model for State-NOC fiscal flows

All revenues to consolidated fund/special funds, NOC to

receive allocation from parliament

NOC can retain a predefined part of revenues from the

petroleum sector

NOC retains all revenues from production share/equity and pays taxes and dividends to

the state

Explanation Degree of State

control

1

2

3

High

Low

• All revenues transferred to the consolidated fund

• NOC needs budget approval before receiving funding

• Part of petroleum revenues that can be retained are set by law

• All revenues in excess are transferred to the consolidated fund

• NOC operated as a 'normal' commercial entity with the state as majority (or sole) shareholder

• NOC pays royalties, taxes and dividends to the state

Rec. #2: Public listing of NOC shares

0

20

40

60

80

100

Stat

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Pe

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Pe

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Son

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Pe

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il

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DC

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Pe

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orp

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n

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PC

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GEP

etr

ol

No

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nte

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Turk

men

gas

SOE is partially privatized.

Rec. #3: limit state shareholders

Clear definition of who in government constitutes

shareholders of NOC, with emphasis on a single

shareholder or small group.

Examples:

MalaysiaPrime Minister is sole

shareholder

KazakhstanState wealth fund is sole

shareholder

Rec. # 4: Transparent reporting of key data

• Volume and price data for oil sales – how much is

the NOC selling, and at what price?

• Revenue streams – including revenues received by

the company, transfers between the company and

the treasury

• Spending and earnings projections

• E&P activities of NOC and private oil companies

• Reserve and production data, and future estimates

Natural Resource Funds

Some have helped

countries escape the

“resource curse.”

• Chile

• Norway

• Some Persian Gulf states

• Several U.S. states

Others have been

mismanaged, not met

objectives or become

slush funds.

Some in :

• Central Asia (e.g., Russia)

• Latin America (e.g., Venezuela)

• MENA (e.g., Libya)

• SE Asia (e.g., Brunei)

• Africa (e.g., Equatorial Guinea)

What has made the difference are the rules,

institutions and broad-based consensus.

SWF successes and failures

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Norway

Government revenue growth(kroners)

Government expenditure growth(kroners)

Volatility

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1991

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

2007

200

8

200

9

201

0

201

1

201

2

201

3

Mexico

General government revenue growth(pesos)

General government totalexpenditure growth (pesos)

Building consensus around the

macroeconomic framework

• Ghana

• Mongolia (starting

discussion)

• Norway

• Sao Tome and

Principe

• Timor-Leste

Independent oversight

• PIAC in Ghana

• Supervisory Council in

Norway

Transparency

• Alaska

• Timor-Leste

transparency portal

and reports

• Global: Santiago

Principles; RGI;

Truman SWF

Scoreboard

The EITI Standard

Legal framework & fiscal regime

(§3.2 )

Exploration activities (§3.3)

Taxes & Primary

Revenues(§4.2(a))

SOE level of beneficial ownership (§3.6(c))

Direct payments/

receipts (§4.2(d))

Employment §3.4(d)

Revenues in & not recorded

in budget (§3.7)

License award/transfer

process & deviations(§3.

10)

Production volumes &

values (§3.5(a) & §3.4(e))

In-kind revenues(§4.1(c))

Government transfers by

SOEs(§4.2(c))

Mandated national/

subnational transfers(§4.2(e))

Social payments(§4.1(e))

Earmarked revenues & description

of budget/audit

process (§3.8)

Register of licenses(§3.9)

Export volumes &

values (§3.5(b))

Infrastructure

/barter provisions(§4.1(d))

SOE quasi-fiscal

expenditures(§3.6(b))

Beneficial ownership (§3.11)

Economiccontribution(§3.4(a)-(c))

Transport Revenues(§4.1(f)

Contract/license disclosure

(§3.12)

Revenue disaggre-

gation§5.2(e)

Allocation of Rights Production

DataRevenue Collection

SOERevenue Management

Sub-National

Social Impact

Opportunities in

the EITI Standard

• Improve natural resource transparency,

especially downstream

• Platform for multi-stakeholder engagement

• Creates a “one-stop-shop” for extractives

information

• Promotes informed public debate about

natural resource governance and reform

• Network for international best practice

How would EITI add value?

www.resourcegovernance.org/eitiguide

A tool in reform efforts

Sub-National

Social Impact

What the EITI requires:Mandated revenue transfers from central to subnational government(§4.2(e))

What the EITI requires:Employment §3.4(d) Mandated social payments (§4.1(e))

What the EITI requires:Revenues recorded & not recorded in national budget (§3.7) *Earmarked revenues & budget/audit processes (§3.8)

Revenue Management

Looking downstream

Where do benefits go?

DOMESTIC

FOUNDATIONS

FOR RESOURCE

GOVERNANCE

PRECEPT 1Strategy,

consultation and

institutions

PRECEPT 2Accountability and

transparency

PRECEPT 11Roles of

multinational

companies

PRECEPT 12Role of international

community

INTERNATIONAL

FOUNDATIONS

FOR RESOURCE

GOVERNANCE

PRECEPT 3Exploration and

license allocation

PRECEPT 4Taxation

PRECEPT 5Local effects

PRECEPT 6Nationally owned

resource

companies

PRECEPT 7Revenue

distribution

PRECEPT 8Revenue volatility

PRECEPT 9Government

spending

PRECEPT 10Private sector

development

Investing for

sustainable

development

Managing

revenues

Getting a

good deal

Discovery and

deciding to

extract

Natural Resource Charter

Concluding

1. Latin America & Mexico: Some Achievements, Pending

Challenges & Opportunities in NR Governance

2. Contracts: Striking balance between incentives and state

benefits/control, & structuring licensing to avoid common risks.

3. State-owned enterprises: To develop a model for State-NOC

fiscal flows, & create incentives for efficiency and accountability.

4. Natural Resource Funds: Need to focus on having the right

rules, institutions and broad-based consensus.

5. EITI: Progress already on transparency in Mexico; EITI would add

value.