Daniel Kaufmann, President & CEO Natural Resource Governance - - PowerPoint PPT Presentation

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Lessons from Global Evidence & Experience on Governance and Anticorruption -- and Implications for Ukraine (with Natural Resources focus)

Daniel Kaufmann, President & CEO Natural Resource Governance Institute (NRGI) & member of International Board of EITI Presentation at the Tax Reform and Corruption Panel at the Media Crisis Center, Kyiv, Ukraine, December 8th, 2015

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Ideas

• Extractive Industry Transparency Initiative

(EITI) and mandatory disclosure standards

• Resource Governance Index
• Natural Resource Charter
• Research: Contracts, tax regimes, revenue

sharing, revenue management, local content, transparency and accountability Technical Assistance

• Fiscal regimes and contracts (e.g., Ghana,

Guinea, Mongolia, Sierra Leone)

• Revenue management and distribution

(e.g., Canada, Ghana, Indonesia, Libya, Mongolia, Myanmar, Nigeria, Peru, Timor- Leste) Capacity Building

• Parliamentary training program
• Training hubs (e.g., Oxford, CEU, regional)

The Natural Resource Governance Institute (NRGI) & EITI

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Outline

• Challenges of managing non-renewable

resource revenues

• International experiences (&

Implications for Ukraine) of Natural Resource revenue management:

– Macroeconomic frameworks – Sovereign wealth funds – State-owned company reform – Resource revenue sharing – Transparency & Accountability (& EITI)

• - Tax Reform & Anti-Corruption Considerations

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Can represent large capital inflows Are volatile and uncertain Are “free money” that are not directly tied to citizens

Oil, gas and mineral revenues:

Are finite

1 2 3 4

Results in specific challenges

Macroeconomic management: Why treat

• il, gas and mineral revenues differently?

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Common tools and institutions used to manage and distribute natural resource revenues

• Policies and tools

– Macroeconomic frameworks and fiscal rules – Revenue forecasting – Transfers to subnational entities – Budget planning – Monetary policy

• Institutions

– Sovereign wealth funds – National oil or mining companies – Development banks

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How resource dependent is Ukraine?

• Coal, iron ore, titanium ore, uranium and

manganese ore producer, plus some gas production.

• Non-renewable resource rents represented
• approx. 7.7% of GDP in 2013.
• Gas transit revenues represented USD 2-4

billion per year from 2013-15 (5-15% of fiscal revenue).

• Minerals and fossil fuels represented 33.4% of

exports in 2012.

Sources: World Bank; USGS; Eurasia Daily Monitor

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Is expenditure volatility a problem in Ukraine?

• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Pro-cyclical fiscal policy in Ukraine

General government revenue growth General government total expenditure growth

Data source: IMF WEO

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Expenditure volatility in Chile

Data source: IMF WEO

• 30.0%
• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0% 40.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Counter-cyclical fiscal policy General government revenue growth General government total expenditure growth

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Expenditure volatility in Chile and Venezuela

Data source: IMF WEO

• 30.0%
• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0% 40.0%

Chile

General government revenue growth General government total expenditure growth

• 40.0%
• 20.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Venezuela

General government revenue growth General government total expenditure growth

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What revenue management tools exist in Ukraine?

• Macro management: Annual deficit targets as

part of IMF program; no fiscal rules

• National oil / mining companies: Large

deficits and cash calls; off-budget borrowing (e.g., Naftogaz; Severgeologiya; Zaporozhye Titanium & Magnesium Complex (ZTMK))

• Subnational transfers: Existing fiscal

decentralization, currently under review

• No sovereign wealth fund (ok for now

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Three questions following a discovery in extractives

• 1. How much resource revenue should

we spend and how much should we save?

• 2. How should we save, by paying down

public debt or in a sovereign wealth fund?

• 3. What mechanisms should we use

to spend our resource revenues most efficiently?

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What is a fiscal rule?

Definition: A permanent quantitative constraint on government finances How do they work?

• Constrain spending in good

years so the government can spend more in bad years

• Stronger monitoring of

government budgeting since there is a benchmark to measure against

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What mechanisms promote compliance?

• Robust
• rganizational

structure

– Economic development ministry or agency – Compliance or audit within the bureaucracy

• External oversight
• Consensus building

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Sovereign wealth funds: Help or hindrance?

Some have helped countries escape the “resource curse.”

• Chile
• Norway
• Timor-Leste
• Some Persian Gulf states
• Several U.S. states

Others have been mismanaged, not met

• bjectives or become

slush funds.

Some in :

• Central Asia (e.g., Russia)
• Latin America (e.g., Venezuela)
• MENA (e.g., Libya)
• SE Asia (e.g., Malaysia)
• Africa (e.g., Equatorial Guinea)

What has made the difference are the rules, institutions and oversight.

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Good Governance of SWFs

• 1. Set clear fund objectives
• 2. Establish fiscal rules
• 3. Establish investment rules
• 4. Clarify good institutional structure
• 5. Require extensive disclosure and audit
• 6. Establish strong independent oversight

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If Ukraine establishes a Sovereign Wealth Fund at some point…

• Stabilization objective is more important

than savings

• Have clear deposit and withdrawal rules
• Limit investment risk in legislation
• Integrate with budget (no ‘off-budget’

funds)

• Require extensive disclosure and

independent audit (& with EITI)

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www.resourcegovernance.org/nrf

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SWFs & SOEs & Subnational

• SWFs: Not top priority now
• SOE reform & beyond: a key priority
• Subnational / Revenue Sharing: priority

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Benefits and risks of SOE participation

Some benefits that a country can gain from an SOE in NRs?

• Development of national skills
• Long-term economic control

and financial returns

• More effective state control
• ver the pace and development
• f the industry
• Stimulator of local content and

positive economic spillovers

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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 Revenue/Employee ($1,000)

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Extra-budgetary expenditure

$31 billion

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Financial risk to taxpayers

• Mexico
• Pemex’s $127 billion in

unfunded pension liabilities;

• ne third to be taken over by

Mexican government

• Nigeria
• “Cash calls” are a major drain
• n taxpayers ($7 billion in

2010)

• Petrol subsidies cost $11

billion in 2008-09

• Refineries lose hundreds of

millions of dollars per year

Sources: The Economist; NRGI

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Good Governance of SOEs

• 1. Define mandate clearly
• 2. Develop a workable revenue retention

model

• 3. Publicly list SOE shares where

feasible, allow private participation

• 4. Independent and professional boards
• 5. Invest in staff integrity and capacity
• 6. Audits, transparency and legislative
• versight

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Objectives of resource revenue sharing (subnational)

• Compensation for the negative

impacts from extraction

• Conflict mitigation and

prevention

• Local claims for benefits based
• n idea of local ownership
• Regional income inequality

between producing and non- producing regions

• Balancing Objectives

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No ‘best practice’ in fiscal decentralization except rules, transparency and oversight Fiscal transfers should be linked to expenditure responsibilities To reduce conflict and ensure stability, any specific allocation regime for oil, gas or mineral revenues should serve one or several nationally-agreed objectives

A B

Key points on resource revenue sharing

C

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Complementary Reform Measures to Improve Revenue Management:

• 1. Tax Reform
• Simplification of the Tax Code Regime
• Closing extensive tax loopholes
• Tax Rates consistent with major deficit

reduction (cannot be lowered now)

• Reformed tax code for natural resources/gas,

shifting form royalties to profit tax in gas: better incentives for investment (but ensure tax collection and No transfer pricing/tax loopholes)

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Complementary Reform Measures to Revenue Management: 2. Anti-corruption measures

• Rules-based: i) budgeting; ii) project appraisals; ii)

procurement, & iv) monitoring, for all budget expenditures (national & subnational) and SOEs

• Strong conflict of interest rules: business out of gov’t
• Independent external audits for capital projects,

special funds and state-owned enterprises

• Parliamentary oversight and independent boards of

state-owned enterprises

• Transparency of all resource revenue flows – online

and easy-to-read format -- & working towards Ukraine compliance in EITI; Contracts/B.O.

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Extractives Industry Transparency Initiative (EITI): Ukraine is in it, and progressing!

• Commenda

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• duced
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Yet much more is needed on anticorruption…beyond natural resources

• An important start…
• But deeper, and implementation…

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2014 Voice and Accountability from WGI

Source: Worldwide Governance Indicators, http://www.govindicators.org

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2014 Rule of Law

Source: Worldwide Governance Indicators, http://www.govindicators.org

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2014 Control of Corruption

Source: Worldwide Governance Indicators, http://www.govindicators.org Kaufmann, D.. and A. Kraay

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Ukraine Governance Indicators: 2000, 2007, 2014

Source: Worldwide Governance Indicators, http://www.govindicators.org

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Ukraine Governance Indicators: 2009, 2013, 2014

Source: Worldwide Governance Indicators, http://www.govindicators.org

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Worldwide Governance Indicator Trends: Control of Corruption in Select Countries

10 20 30 40 50 60 70 80 90 100

Governance Indicator % Ranking

2000 2007 2014

35

Source: Worldwide Governance Indicators, http://www.govindicators.org Kaufmann, D. and A. Kraay

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2015 Open Budget Index:

Ukraine score: 46. It ranks 49th among 102 countries

10 20 30 40 50 60 70 80 90 100

New Zealand United States Romania Germany Mexico Philippines Argentina Colombia Papua New Guinea El Salvador Ghana Hungary Ukraine Namibia Benin Burkina Faso Afghanistan DRC Liberia Macedonia São Tomé &… Nigeria Niger Sudan Equatorial Guinea Qatar Open Budget Index Score

Source: International Budget Partnership 2015 Open Budget Index, http://internationalbudget.org/opening-budgets/open-budget- initiative/open-budget-survey/

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2015 Open Budget Index: Select Countries

10 20 30 40 50 60 70 80 90 100

Open Budget Index Score

Source: International Budget Partnership 2015 Open Budget Index, http://internationalbudget.org/opening-budgets/open-budget- initiative/open-budget-survey/

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How good revenue management can reduce corruption

• Smooth budget spending focuses government on social

services rather than infrastructure projects, the largest sources of corruption

• Sovereign wealth funds can be huge sources of

corruption, especially via asset allocation and patronage positions – strong rules on asset allocation and conflict of interest, along with transparency and independent

• versight, can prevent mismanagement
• State-owned enterprises can also be huge sources of

corruption, especially via procurement and patronage positions – strong financing and procurement rules, audits, independent boards, transparency and parliamentary oversight can help reduce incidences

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Snapshot of Corruption in Ukraine

• Judiciary: widespread corruption, nepotism and vulnerable

to political influence; questionable and opaque court decisions

• Police: pervasive corruption, extortion and abuse of power;

subject to political control as enforcement agencies lack autonomy

• Public Services: bribes are often needed to get even basic

services, increasing costs of getting permits and licenses

• Public Procurement: no transparency or effective regulation,

bribes are needed to win government contracts and legislation exempts tenders by government agencies and SOEs from transparency and competition requirements

• Natural Resources: endemic graft, corruption and lack of

transparency; extraction and transportation of oil and gas controlled by SOE Naftogaz; regulations and pricing adjusted to benefit business elites close to politicians

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Anti-Corruption Reforms in Ukraine

• Proposed International Anti-Corruption Mission to bring in
• utside investigators from the U.S. and elsewhere to assist

in corruption cases

• Establishment of National Anti-Corruption Bureau, National

Agency for Prevention of Corruption, and Specialized Anti- Corruption Prosecutor’s Office

• Political reform to deoligarchize government (no tycoons in

the Cabinet) and legislation to provide public financing of political parties to further reduce influence of oligarchs

• Oil and gas sector reform to break up monopoly of

Naftogas, take out intermediaries, impose fees on distributors for access to gas networks, and oblige companies to publish reports to increase transparency

• Judicial reform package designed to shield judges from

political interference

• Legislation on open data and access to public information

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CONCLUDING, 1: IMPROVING GOVERNANCE

• 1. Adoption of macroeconomic framework with rules to

improve fiscal sustainability and lower budget volatility

• 2. Transparency and oversight of natural resource revenues

(as key for effective revenue management), with EITI

• 3. Major Reforms of State enterprises in extractives
• 4. Governance & Accountability in Subnational transfers
• 5. Tax Reform that simplifies, no loopholes, & improves

fiscal sustainability

• 6. Effective implementation of Anti-corruption program

with: i) support from the top; ii) tax reform; iii) subnational anticorruption; iv) civil society & accountability; & v) focus on enforcement: No impunity

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General Global Lessons from evidence and experience on Anti-Corruptiontions & lessons from experience

• Central government efforts need to be backed by top

leadership, and complemented by: i) Subnational Reforms, & ii) Ukraine Citizens/NGO/MPs/media

• Competition across oblasts/cities + data + citizens: an

Anticorruption Observatory, with public data on: i) corruption; ii) Impunity Index & iii) implementation of anticorruption reforms

• Transparency: economic, financial, institutional, political
• Reform SOEs, & Judiciary (No to Impunity – Guatemala?)
• Tax Reform: Simple, No discretion, No loopholes. Enforce

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Perceived Trends in Corruption by Oblast (Early vs Late 2015): Survey of Companies, Perceived Changes prior 6 months) [Source: TI, Gfk, PrvtBnk, PWC, see footnote, Preliminary chart]

• 1.75
• 1.25
• 0.75
• 0.25

0.25 Khmelnytskyi Luhansk Chernivtsi Ternopil Odessa Kherson Zhytomyr Zakarpattia Cherkasy Kharkiv Lviv Mykolaiv Volyn Ukraine Average Kyiv City Chernihiv Kyiv Kirovohrad Sumy Dnipropetrovsk Poltava Vinnytsia Rivne Donetsk Zaporizhia Ivano-Frankivsk

Average Score

Wave 1 Wave 2

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Note: Scale is from -5 to +5 where -5 is significant deterioration, +5 is significant improvement, and 0 is no change. Columns pointing downwards below zero means deterioration. Wave 1 conducted in early 2015 (?); Wave 2 in late summer 2015. Preliminary, cation in interpretation is warranted. Source: Transparency International, Gfk, Privatbank, and PricewaterhouseCoopers, survey of company directors (2471 respondents) http://www.corruption- index.org.ua/index_en.html

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Thank You! www.resourcegovernance.org