Background materials for UN workshop on oil and gas in Iraq Dead Sea Marriott Resort, Jordan (April 4-6, 2006)

1. Module 4
Institutions for sound governance of oil & gas
in Iraq’s evolving federal arrangements
Prepared by David Péloquin
Background materials for
UN workshop on oil and gas in Iraq
Dead Sea Marriott Resort, Jordan
April 4-6, 2006

2. Fiscal / oil & gas institutions in federal countries
• Key institutions in most oil & gas-producing countries include
– government ministries (finance, planning and oil ministries) and
legislatures that play key policy-making roles
– roles in independent agencies that may administer those policies
– (in most cases) state oil companies that manage state commercial
interests (and sometimes play certain policy and regulatory roles)
• In federal countries, these institutions may exist at both the
federal and regional levels – with a resulting need to
– describe their distinct (but sometimes overlapping) responsibilities
– develop mechanisms for harmonization and/or coordination
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3. Design principles for fiscal / oil & gas institutions
• Key government policies in relation to oil & gas include
– overall resource management (including its pace of development)
– ensuring security of supply
– determining oil & gas market structures, e.g. domestic market and
exports, distribution networks, the role of state oil companies, etc.
– setting the structure of oil & gas fiscal regimes (including
incentives for private investment)
– determining how resulting revenues are to be shared
– setting environmental and safety standards
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Clear responsibility for policy making:
Which policies?

4. Design principles for fiscal / oil & gas institutions
• In most federations, the design of oil & gas policies within
each level of government is the joint responsibility of
– the legislature (in setting policy into law)
– the finance ministry (especially in relation to fiscal regimes)
– the energy and planning ministries (e.g. in relation to pace of
development, technical and market regulation)
– the environment ministry, trade ministry and other ministries with
interests in oil & gas
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Clear responsibility for policy making:
Who?

5. Design principles for fiscal / oil & gas institutions
• In any well-functioning system of government:
– the legislature and ministries work together in advancing the
overall policy interests of the government as a whole
– key policies are established (by the legislature) in laws and
(by the government or agencies) in published regulations
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Clear responsibility for policy making:
Who?

6. Design principles for fiscal / oil & gas institutions
• When different aspects of oil & gas policy are assigned to
different levels of government, need to ensure
– that all important policy areas are clearly assigned to at least one
level of government (i.e. to minimize the risk of policy “gaps”)
– clear paramountcy (or rules) in cases where the independent
policies of different governments may potentially be in conflict
• Concurrency of federal and regional powers (as under
Iraq’s constitution) can also help minimize policy “gaps”…
… but increases the need for clear paramountcy
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Clear responsibility for policy making:
Who?

7. Design principles for fiscal / oil & gas institutions
• Where particular aspects of oil & gas policy are subject to
joint decision-making (e.g. management of oil & gas under
article 111), need to
– make clear what the decision rules are (e.g. by consensus, by
simple or weighted majority voting, etc.)
– build trust and common understanding among governments of the
interests of other governments
• Will be particularly important to avoid “joint decision traps”
that prevent timely decision-making in key areas
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Clear responsibility for policy making:
How?

8. • When aspects of oil & gas policy are made independently
by different governments, need to strike a balance between
– benefits to citizens from more coherent policies
– benefits to citizens of more timely policies (in the absence of
coordination-related delays) and policies tailored to local needs
• Because of the importance of its oil & gas sector, a federal
Iraq may have a particular need to coordinate fiscal regimes,
regulatory / environmental policies, revenue collection, etc.
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Design principles for fiscal / oil & gas institutions
Clear responsibility for policy making:
How?

9. • Even when different governments have independent (rather
than joint) responsibility for policy, it remains important to
– have mechanisms to ensure regular communication and
consultation between their respective legislators and ministries
– build up trust and common understanding of each government’s
legitimate interests in pursuing particular policies
• Often, their interests may coincide, enabling them to
informally harmonize their policies or make policy jointly
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Design principles for fiscal / oil & gas institutions
Clear responsibility for policy making:
How?

10. Clear responsibility for administration of policies:
Which aspects?
• Key aspects of the administration of government oil & gas
policies include
– technical regulation of industry practices (e.g. to prevent depletion
of reservoirs, prevent pollution, inspect workplaces for safety, etc.)
– economic regulation of individual industry players (e.g. pricing of
monopoly pipeline services, enforcing export quotas, etc.)
– collecting and remitting revenues generated by oil & gas fiscal
regimes
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Design principles for fiscal / oil & gas institutions

11. Design principles for fiscal / oil & gas institutions
• Many governments choose to separate most administrative
functions from policy making (and from policy makers)
• Many use independent commissions of experts acting
transparently and “at arm’s length” from government, i.e:
– commission members enjoy secure tenure
– commission and its members insulated in principle and practice
from day-to-day and behind-the-scenes interference by ministries
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Clear responsibility for administration of policies:
Who?

12. • To act transparently, an independent commission needs to
apply clearly stated rules / principles that are set out
– in explicit statements by joint or independent policy-makers
– or by the commission itself (if it sees a need to clarify its interpretation
of the rules and principles it is applying)
• Must also be publicly answerable for its decisions, e.g.:
– stakeholders to publicly present arguments (and respond to others’)
– commission to make public the reasons for their decisions and be
subject to formal appeal to another similarly transparent body
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Design principles for fiscal / oil & gas institutions
Clear responsibility for administration of policies:
Who?

13. • Clearly separating (general) policy making from (case-
specific) administration can minimize “leakages” to corruption
and unduly favourable terms for private firms if:
– commissions (and their members) have minimal discretion in
dealing with particular cases (including with state oil companies)
– commissions and members are subject to ongoing scrutiny likely to
expose or “short-circuit” wrong-doing (e.g. regular audits,
successful appeals against wrongful decisions)
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Design principles for fiscal / oil & gas institutions
Clear responsibility for administration of policies:
Why / how?

14. • Stakeholder governments likely to apply intense scrutiny…
… especially where financial stakes are high (e.g. revenue collection
agencies, fiscal commission assessment of “needs”)
• Even when discretion is inevitable (e.g. assessment of
“needs”), scope for systematic unfair treatment is limited by
– intense scrutiny of gains/losses resulting from decisions
– the repeated nature of the decisions that would be required (and
the corresponding increase in pressure if unfairness persisted)
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Design principles for fiscal / oil & gas institutions
Clear responsibility for administration of policies:
Why / how?

15. • Public and civil society confidence in the soundness of oil &
gas policy (and in its administration) is also enhanced by
– ready availability of information and data on oil & gas that do not
compromise commercial or other confidences
– regular reporting on the activities of fiscal / oil & gas institutions
• To facilitate administration, may also need to be able to share
confidential information among federal / regional agencies
(subject to requirements to preserve confidentiality)
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Design principles for fiscal / oil & gas institutions
Clear responsibility for administration of policies:
Why / how?

16. Fiscal / oil & gas institutions in the Iraqi context
• A key feature of Iraq’s constitution – the joint management
of oil & gas – needs further clarification:
– how is the joint decision-making body to be structured (i.e. its
membership and their relation/obligations to governments)
– the decision rules to govern joint policy making
– the precise nature of the policies to be made jointly (and which
related policies may be made independently by governments)
– the relationship of the joint body to any independent agencies
charged with administering joint policies
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Joint management of oil & gas (article 111)

17. • Also need clarification on Iraq’s fiscal commission:
– its composition (‘”experts and representatives” from both federal
and regional governments) suggests a joint policy-making body
– some of its responsibilities (e.g. ensuring appropriate use and
division of federal resources) also seem to be clear policy matters
– but: other responsibilities appear suited to independent agency:
 e.g. distribution of grants, aid, loans and shared revenues to regions
on the basis of transparent principles is frequently delegated to
independent fiscal commissions (e.g. India, South Africa, Australia)
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Iraq’s fiscal commission (article 105)
Fiscal / oil & gas institutions in the Iraqi context

18. Fiscal / oil & gas institutions in the Iraqi context
• Decision-making bodies consisting of both government
representatives and “independent” experts are problematic:
– “independent” members would often be de facto federal or
regional representatives (depending on how they were chosen)
– because of the central importance of political considerations to
the views expressed by government representatives, such bodies
may not succeed in generating a truly independent perspective…
… nor would accountability for policy be served by depicting policy
decisions as technical matters for “experts” to deal with
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Iraq’s fiscal commission (article 105)

19. Fiscal / oil & gas institutions in the Iraqi context
• Similarly, inherent conflicts of interest make it difficult for
state oil companies to play policy-making / regulatory roles:
– the impacts of their policy influence or regulatory decisions on
partners and competitors would inevitably colour their views
– they are also less likely to effectively regulate their own activities
on the same basis as they regulate the activities of others
• However, government policies / laws can empower them to
– hold the state’s commercial stake in oil & gas developments
– make oil & gas investments and generate government revenues
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Role of Iraq’s national oil company

20. Fiscal / oil & gas institutions in the Iraqi context
• May be important to coordinate policies made independently
by federal / regional governments
– e.g. to avoid unintentionally heavy taxation / regulation
• Coordination among regions may also help reduce risk of
“race to the bottom”:
– e.g. excessive fiscal competition, tendency to lax environmental
regulation, etc.
• Oil & gas commissions at both federal and regional levels
(e.g. as in Sudan) may be worth exploring
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Need for coordination of fiscal / regulatory regimes?

21. Fiscal / oil & gas institutions in the Iraqi context
• Until regional policy/administrative capacity in place, may
need to rely on federal collection and remittance
– could, however, consider options for jointly managed (i.e. federal /
regional) revenue collection agency
– asymmetric revenue collection (federal in some areas, by regions
in others) can also work if capacity is uneven across regions –
providing coordination is in place (e.g. Canada, Spain)
• When multiple governments collect revenues, also need
timely publication / sharing of information
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Need for coordination of revenue collection / remittance?

22. Key issues for discussion
• Policy-making:
– should Iraq more clearly distinguish between institutions designed
for policy making and those designed to administer policies?
– in which areas should policy be made by the federal government?
by regional governments? jointly?
– in areas of joint decision-making (e.g. management of oil & gas
under article 111), what should be the decision rules?
• Administration of policy:
– to what extent should the administration of policy be delegated to
independent commissions?
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23. Key issues for discussion
• Role of national oil company:
– should a national oil company be limited to serving as an
instrument for managing Iraq’s commercial interests in oil & gas
(including as a vehicle for generating revenues)?
– should it be prevented from playing either a policy-making role or
a regulatory role?
• Other institutional arrangements:
– How can Iraq facilitate informal coordination of federal / regional
fiscal regimes, regulatory policies and revenue collection (i.e. in
addition to formally joint decision-making in specific areas)?
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