Plan an oil and gas sovereign wealth fund

Thinking ahead is crucial for sustainable development

Oil and gas wealth can easily be wasted
Oil and gas wealth can easily be wasted

As part of Executive’s ‘10 Ways to Save Lebanon‘ issue, we asked leading experts from a range of fields to put the case for one major policy for the country. In this article, Sami Atallah from the Lebanese Center for Policy Studies discusses ways to protect the country’s offshore oil and gas wealth.

 

In the coming years, Lebanon could begin to reap the benefits of its offshore oil and gas reserves. These resources could be worth tens of billions of dollars in a country where annual gross domestic product is little more than $40 billion.

This new source of wealth has the potential to completely transform the country’s economy and society. But the dangers are also clear; almost every society that discovers resources ends up less competitive in other key sectors of the economy — the so-called ‘resource curse.’ Whether Lebanon can avoid this or not depends on how it manages sustainable development.

One absolutely key decision will be how the oil money will eventually be spent. Article 3 of the 2010 offshore petroleum resources law stipulates that the net proceeds of oil and gas will be deposited in a sovereign wealth fund (SWF). The law, however, stops short of dictating how the fund will be run, instead saying it would be governed by a “specific law” which will be passed later. This article alone, one of 77 in the 2010 law, dominated the debate in Parliament when the law was voted on. This is hardly a surprise — Lebanese politicians have a habit of focusing on where the cash will go.

This fund is key to Lebanon’s development. How well it is managed will depend on the institutional arrangement that the government puts in place to govern it. It must be said that Lebanon’s record in managing funds is pretty dismal. Take, for instance, the Fund for the Displaced, which has recently been marred with corruption charges, or the Council of the South, which is supposed to help develop one of the country’s poorest regions, yet the money often seems to evaporate before reaching its target.

There is one example of a country avoiding the resource curse: Norway. This was because of the country’s exemplary and powerful SWF — a product of a long and ongoing process of reform. With an eye on sustainable growth, Norwegian governments have given the fund significant independence, while also keeping it modern. It has gone through three major reforms and experimentations to become the leading SWF in the world.

Clear principles

To learn the lessons of the Norwegians and get the best deal for all, Lebanon’s sovereign wealth fund must adhere to four basic principles:

1. It must adopt clearly specified objectives and investment strategies. This provides the mandate of the fund in terms of what it should be investing in, such as bonds, stocks, or real estate in local or international markets.

2. It must abide by clear fiscal rules to access the funds. A fundamental issue that ought to be addressed is the conditions under which the government can use the earnings of the fund. Without having clearly specified criteria, politicians will be tempted to resort to the fund to finance their personal or electoral needs.

3. It needs a proper governance structure that clearly identifies the role of the government, the governing bodies and the managers of the SWF. It must state the role of the managers in making investment decisions.

4. The fund must be transparent and accountable to the public. It must show how it conducts its investment strategy i.e. what its investment categories are and how it decides where to invest. It must also regularly post the size of the fund, its rate of return, location of investment and its currency composition. It must regularly publish status reports and independent audits.

These conditions are necessary but not sufficient. For the fund to be effectively managed it must be properly integrated into the public finance, otherwise even a well-managed fund will be undermined by a weak budgetary system. Politicians will use it to further mismanage the budget and avoid necessary reforms, and the SWF could even end up as a second or a parallel budget that the government could implicitly borrow against. This would lead the country straight to the resource curse.

Lebanon’s record in managing its public finance is poor. Not only has there been no budget since 2005, the weak budgetary institutions, which include multiple budgets, inadequate auditing and lack of transparency, undermine the prospects of properly managing the fund. Without these conditions in place, Lebanese citizens will not reap the benefits of the resource.

Many Lebanese politicians are pretending that the country’s oil and gas will solve the country’s problems but that is far from certain. In fact, if badly run, it could make corruption worse. If we want to avoid the resource curse, we need to start reforming the fiscal institutions now, to ensure that the SWF will serve sustainable development.

Sami Atallah is the director of the Lebanese Center for Policy Studies

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