Corruption, corporate governance and allocation of Oil Funds

Oil government take, which derives from effects of PSAs could create incentives to “corruption” at various stages of the oil value chain including exploration, development, and production and trading. If left unaddressed, these vulnerabilities could result in the misappropriation of public sector funds. The identified main sources of corruption risks in oil revenue management, are (i) the Production Sharing Agreements (PSAs); (ii) inadequate budget reporting and misallocation of oil funds; and (iii) the national oil company, the AlbPetrol sh.a.

The Oil revenues from fiscal and operational environment in the case of PSAs created vulnerabilities for corruption based in the experiences from the past management of the hydrocarbon sector, which showed that serious signs of lack of transparency regarding the implementation of PSAs created an unfavorable environment for budget revenues and a minimal benefit from PSAs implementation. On the other side, the absence of audit of costs reported by oil companies created the terrain for more bribes and a mismanagement of the fiscal system, based in the cost recovery formula.

But a serious risk is also the capacities and corruption level of the proper administration, which is the proper responsible authority to monitor the PSA implementation and performance. They lack skilled and experienced experts and so the Government lack the proper forecasting data for next periods of oil production and other economic and fiscal forecasts. The uncertainty of estimates of oil receipts stemming from commodity price volatility complicates oil revenue management. Forecasting oil revenues suffers from weaknesses that have also affected some of the impacts on the budget, such as the implementation of fiscal policies for the sector with ambiguity and non-compliance with the international fiscal legal framework for this type of agreements.

Earlier this year, the Ministry of Finance and Economy, in cooperation with the Ministry of Infrastructure and Energy, after a protracted work of more than two years have launched a draft law, which is in the process of public consultation and with experts in the function of addressing to many issues of a technical, economic and fiscal nature that have led to difficulties in the practical implementation of the PSAs.

On the other side, the AKBN and the Ministry of Infrastructure and Energy work closely with the AlbPetrol sh.a. and Ministry of Finance and Economy to adapt the methodology for oil production projections for budget purposes. However, yet there is no clear methodology used for oil forecasting, and there are inconsistencies between the estimates of oil production and oil revenues produced by the oil companies at the end of the year and the data collected by the Ministry of Finance and Economy. Furthermore, the reconciliation between the value of production from oil sales based on PSA’s terms with the amounts reported by Treasury has been and continues to be unresolved issues.

The government agencies often do not have attention regarding the off-budget operations including to finance oil-bartered investments and other expenditures. On the other side, the experiences have shown that the performance of government agencies does not function together to cooperate the capacities and logistic. Another unsolved problem is the lack of transparency in subsidies to local refineries.

The other important unnoticed weakness is the lack of transparency about supervisory capacity of company, including the cooperation with antilaundering money structures. The proper state-owned company of oil, has demonstrated signs of opacity about oil sales, reserves, oil companies’ duties and traders’ details. The AlbPetrol sh.a. has not yet also improved the corporate governance model, which in the case of the PSAs monitoring, together with AKBN, the agency which is the responsible to monitor the performance of PSAs should be in the same level of skills and knowledge as their counterparts, which are the contractors.

The corruption during the process of management of PSAs is very common in different jurisdiction in the Europe (Malta, Croatia, Poland) but also in Azerbaijan, Kurdistan and other countries, which apply the model of contract like PSAs implemented in Albania.

In this occasion the governments should take in consideration to manage the oil funds for the transparent non budgetary expenditures’ directions.

Rose-Ackerman, 1996 and World Bank, 2007 conclude their study saying that “if governments do not have incentives to implement adequate policies for project selection and public procurement, they are likely to discretionally allocate spending allocations to favor projects that allow them to collect bribes and/or with which political incentives are aligned”. Meanwhile, economic groups with close links with governments and members of governmental coalitions representing the “private agents” of the domestic market with interests focused on the oil industry have the goal and urge to continue the status quo of poor governance. They often have the power to influence the design of sector policies including the enactment of laws, the awarding of exclusive rights, and tax “incentives” and tax exemptions, in a way that the process dictates only one result: to derive political or economic benefits, personal or party at its expense and using public spending.

Albania as an oil exporting country, where the budget has received significant tax amounts over the 15 years, can use them to mitigate the short-term impact of the problems that have caused the use of resources but also those currently created by transport and storage. A reserve budget plan is needed to compensate for the negative effects of the oil production industry. Meanwhile, the focus should be on improving the management of natural resources and improving the efficiency of budget expenditures by naming budget spending by comparing with the return of contributions received from the sector. If these microbalances are drafted within the huge government budget, where each contributor must meet its own needs (social policy, investment), then governance transparency will also create the right premises for co-governance with the citizens.

An exercise done by experts of ALTAX[1] for the period 2014–18 help identify substantial amounts of off-budget oil revenue. These amounts relate to share of oil production contracted by AlbPetrol sh.a. with oil companies (€ 35 – 40 million). If they will be part of a special fund, they could be a good source of funds to finance local infrastructure projects and other social and economic projects helping the wealth and everyday life of workers in the extractive industry.

The lack of transparency during the project allocation phase provides opportunities for influence by people and groups who may financially benefit from the projects. Anecdotal evidence reminds us that valuable contracts are often allocated to members of the governing coalition. Against a lack of transparency and accountability for budget execution, discretionary extra-budgetary spending has occurred as it is the case of oil barter agreements to remain outside of the monitoring of the budget. The corruption risk associated with such agreements is that the selected investment projects linked with the projects of various areas have bypassed official budget processes for selection, qualification and monitoring.

During implementation, weak procurement processes and internal controls may create widespread opportunities for sub-optimal decision making and misuse of public funds. Public procurement is particularly susceptible to corruption if it endows excessive discretion to public officials when selecting private sector vendors or bidders, if processes are not transparent and the underlying the legislative, regulatory, and institutional frameworks are weak. Projects are sometimes tendered in a competitive process, but the public does not have access to complete, reliable and timely procurement information.

However, there is no available data on public tendering versus direct procurement. Other corruption risks include insufficient controls of the procurement process; the absence of mechanisms to impose sanctions when the regulations are breached; and weak capacity of civil servants responsible for conducting procurement transactions in line ministries.

Many of the problems associated with these ‘failed’ management and lack of monitoring the performance are rooted in ‘state capture’ influential interest groups, which routinely and day after day use the government authority to foster their own interests and extract rents at the expense of a developmental vision and collective wealth.

[1] See www.altax.al