21 November 2005
Bank Information Center, Oxfam America, Intermon (Oxfam Spain), Environmental Defense and Amis de la Terre (Friends of the Earth-France) have issued a statement concerning the current crisis in Chad over the government's proposal to fundamentally alter the petroleum revenue management law. The fate of the Chad-Cameroon oil pipeline project, a flagship investment for the Bank in the extractive industries and in Africa, has implications not only for the people of Chad, but for the Bank's future involvement in the sector.
17 November 2005
In October, the Chadian government announced its intention to substantially modify the legal framework governing the use of the country’s new oil wealth. Chad’s Law 001 on Petroleum Revenue Management is the centerpiece and principal governance “safeguard” of the World Bank-supported experiment designed to ensure that oil revenues benefit the poor. The government’s proposed amendment would gut the law, essentially stripping the legal framework of its strongest components. Often cited as a “model” in the making, Chad’s experience with oil revenue management reveals the fundamental risks of promoting the petroleum sector in a country where the government has little track record of acting in the interest of its people. As Chadian civil society groups have demanded, the project’s chief proponents – the World Bank and ExxonMobil – as well as influential international lenders and foreign governments such as the IMF, the U.S. and France, must make clear and public statements against the proposed revisions, and work actively to ensure that this important legal framework remains intact.
World Bank conditions for pipeline financing
In response to pressure from civil society organizations concerned that the benefits of oil development would not reach the poor, the World Bank conditioned its financing for the Chad-Cameroon pipeline project in 2000 on the establishment of an oil revenue management plan and legal framework. Among other provisions, this framework requires that the majority of royalties and dividends from oil production be earmarked and spent on poverty reduction through “priority sectors” such as health, education, and infrastructure, and that 10% of proceeds from oil sales are to be set aside in a fund for future generations in the post-oil era – an account which now contains more than $27 million.
Changes proposed by Chadian government
Claiming that it faces both a financial and a security crisis, the government of Chad has proposed modifying Law 001 in order to increase its access to revenues for discretionary use. However, with more funds in the Chadian treasury today than it has had in past years, and donor support that was projected to close the budget financing gap, the sources of the current liquidity crisis need to be explained. The planned amendment seeks to:
- Increase from 15% to 30% the amount of revenues deposited into general government coffers, bypassing the joint government-civil society revenue oversight committee (the Collège);
- Eliminate the Future Generations Fund (FGF) and use the money accumulated for immediate expenditures;
- Redefine “priority sector” expenditures to include spending on security.
Civil society opposition to law modification
Civil society organizations in Chad have expressed their firm opposition to the modification of the law, stating that the problems facing the country do not stem from the text of the law but from poor governance, including mismanagement of funds, poor budget discipline and widespread graft. They have reaffirmed the importance of setting aside resources for future generations, not only to protect against potential harms resulting from the management of the economy today but to allow those generations to decide for themselves what investments meet their needs. Furthermore, they have challenged the government’s proposal to include security spending among the “priority sectors”, stating that to do so would facilitate the financing of military operations, and make a mockery of the country’s poverty reduction strategy and its commitment to meeting the Millennium Development Goals.
Chadian civil society organizations have called upon the World Bank and other donors to use their influence to defend the minimum safeguards in place. External creditors and donors supply a significant portion of the Chadian government’s fiscal resources, as well as much needed political support for the government. Because democratic processes and institutions in Chad are weak and in much need of reinforcement, international donor influence on the government can play a critical role in encouraging greater transparency and accountability and in supporting local civil society demands vis-à-vis their own government.
World Bank and donors should oppose the amendment
The World Bank and other donors should take a common public stance, unambiguously stating that amendment of the law as proposed will jeopardize current and future donor support for Chad and result in immediate and clearly defined consequences. As the chief architect of this experiment, the World Bank has a particular obligation to react decisively to the proposed modification of the law. If the law is modified, the Bank should suspend all further financing to Chad, withholding disbursements on active loans and postponing consideration of future projects unless and until key demands of Chadian civil society groups concerning the management of government finances are met. In addition to rejecting the amendment of Law 001, these demands include: an independent and credible audit of public finances to determine the root causes of the financial crisis; legal actions against those responsible for the misuse of funds documented in recent reports by the revenue oversight committee and auditor general; the transparent management of all donor funds; and concrete steps to improve transparency and efficiency of the budget formulation, execution and auditing process. These measures to strengthen public financial management in Chad need to be taken regardless of what happens with Law 001.
ExxonMobil's responsibility
In addition to concerted donor action, the ExxonMobil-led oil consortium has a responsibility to defend the revenue management system in which it, too, has a reputational stake. ExxonMobil has often portrayed itself as a champion of transparency and a driving force behind the Chad experiment. In March 2005, ExxonMobil published an advertisement on the op-ed page of the New York Times claiming that it “has long-supported transparency,” and “led a path-breaking initiative in Chad” where “in partnership with the World Bank and the Government of Chad, a formal Revenue Management Plan was agreed,” dedicating funds to spending on poverty reduction. If these words are not to ring hollow, and before the government directs more of the money it receives from ExxonMobil to finance military expenditures and dubious investment projects, ExxonMobil should join the World Bank and international donor community in publicly stating its opposition to the modification of Law 001. If the law is amended as planned and ExxonMobil continues “business as usual”, delivering regular payments to the government of Chad, it risks being seen as aiding a government that may be acting against the best interests of its own people.
The proposed dismantling of the oil revenue management system in Chad would not only fail to resolve problems stemming from the government’s lack of budgetary discipline, but would pose a significant threat to the welfare of the country’s present and future population. The international actors who helped catalyze the Chad-Cameroon oil project must act quickly and decisively to help the people of Chad defend themselves against the government’s potential abuse of the oil windfalls.
Background materials: statements and reports
Chadian Civil Society Statements
Bank Information Center/Catholic Relief Services reports
Environmental Defense
Amnesty International
Background Information on Chad-Cameroon Pipeline Financing and Revenue Management System
Oil Revenue Management System At-a-glance
Chad’s innovative oil revenue management system – based on Law 001 and subsequent decrees – sets out a legal and institutional framework for managing oil revenues from Chad’s three Doba fields. Key features of this system include:
- All direct revenues – royalties and dividends – are paid by the ExxonMobil consortium into Chadian government-controlled escrow accounts at Citibank in London.
- Indirect revenues – income taxes on the oil companies, customs duties, etc. – are paid directly into Chad’s treasury.
- After debt payments to the World Bank and European Investment Bank are withdrawn from the Citibank account, the remaining direct revenues are allocated as follows:
- 10% to a Future Generations Fund to save for the post-oil era in Chad;
- 72% to capital investments in five “priority sectors” to fight poverty: education, health and social services, rural development, infrastructure, and environmental and water resources
- 4.5% to the oil-producing region in southern Chad as additional, earmarked funding
- 13.5% to Chad’s treasury for discretionary spending, until 2007; thereafter, these funds will be divided among priority sectors
- A joint government-civil society Petroleum Revenue Oversight and Control Committee –a.k.a. the Collège – established with the authority to approve or reject specific projects financed by direct oil revenues.
The oil revenue management system contains many weaknesses, not least of which is its limited application to revenues from only three oil fields in Chad, rather than the whole petroleum sector.
Financing a Project: The Chad-Cameroon Oil Development and Pipeline Project
World Bank Group participation in an oil project opens doors to other financing sources, as in the case of the $4.2 billion Chad-Cameroon project.
Project finance includes:
World Bank Group
- IBRD loans to Chad and Cameroon: $92.9 million
- IFC loan: $200 million
European Investment Bank: $41.5 million
Export Credit Agencies
- U.S. EXIM Bank: $200 million
- COFACE (France): $200 million
- African Ex-Im Bank: $500 million
More than half of the total project cost was met by the equity partners – ExxonMobil, Chevron and Petronas – who covered the full cost of oil field development and one third of the export facilities.
Remaining financing was provided by commercial arranging banks:
- ABN-Amro
- Credit Agricole Indosuez
(Note: Project cost was originally estimated at $3.7 billion. In an October 2004 presentation, ExxonMobil stated that the total project cost was $4.2 billion.)
The World Bank Group’s Participation in the Chad-Cameroon Project
Between its public and private sector loans, the World Bank Group provided over $300 million in financing for the Chad-Cameroon project. The International Bank for Reconstruction and Development (the commercial-rate public sector lending arm of the World Bank) provided loans to the governments of Chad and Cameroon to support their participation in the ownership of the transport system (the pipeline) itself. The “soft window” lending arm of the World Bank, the International Development Association, provided three concessionary loans for capacity building to the governments of Chad and Cameroon, with the stated intent of reinforcing the countries’ institutional, legal and regulatory capacity before oil production commenced. IFC provided both direct loans to the Consortium and syndicated loans from private financiers.
World Bank Group Financing
IBRD Loans
- To Chad: $39.5 million
- To Cameroon: $53.4 million
IDA Loans
- Chad: Management of the Petroleum Economy Project $17.5 million
- Chad: Petroleum Sector Management Capacity Building Project $23.7 million
- Cameroon: Petroleum Environment Capacity Enhancement Project $5.77 million
International Finance Corporation Loans
- A-loans to the Consortium $100 million (of which $85.5 million to COTCO, $14.5 million to TOTCO)
- B-loan umbrella (leveraged over $100 million in additional financing for T/COTCO)
Proposed Supplemental IDA Financing
- Chad: Petroleum Sector Management Capacity Building Project $11.5 million
(anticipated approval: April 2005) - Chad: Management of the Petroleum Economy Project $8.5 million
(anticipated approval: March 2005)
Total Financing $259.87 million