A report by the watchdog group, Global Witness on the draft oil legislation for Liberia has raised concerns that there may not be insufficient political will within the Liberian Government to bring about the sweeping changes the sector needs.
The report says while the controversial oil draft legislation contains some progressive and positive provisions, including requirements for the public disclosure of the ultimate beneficial owners of companies and strong transparency provisions, there are areas that need to be improved for the country to fully realize the potential benefits of its emerging oil sector.
The House of Representatives is expected to review the draft Petroleum Exploration and Production Act 2013 (Petroleum Act) and the draft National Oil Company of Liberia Act 2013 (NOCAL Act) in early 2014.
'Strong transparency, oversight key
GW concluded that the success of the laws in developing a petroleum sector that supports the country's economic development will be in part determined by the safeguards within the Revenue Management Bill which has yet to be developed.
"Strong transparency, oversight and accountability provisions will be needed to ensure that any revenue from a potential oil find in Liberia can be effectively harnessed. The Petroleum and NOCAL Acts contain some progressive and innovative clauses on beneficial ownership and transparency of information. However, they fail to recognise and accordingly protect the land rights of all of those who may be affected by petroleum operations and do not require international competitive bidding in all cases."
The Liberian Legislature has the opportunity to revise these acts and ensure that sufficient safeguards are put in place to enable any potential income from Liberian's oil sector, in the absence of other sources of finance being available, to contribute to real development benefits.
The GW report examines the strengths and weaknesses of the draft acts to support the Liberian House of Representatives (the House) in its ongoing review. "There have already been significant weaknesses with the legislative and consultation processes for these acts. This raises concerns that there may be insufficient political will within the Liberian Government to bring about the sweeping changes the sector needs."
Presidential Powers Weakens sector
The report says one of the most significant weaknesses with the Petroleum Act is that it gives the President the power to bypass competitive bidding procedures, and award petroleum agreements on the basis of direct negotiations, when the President decides that it is in the national interest.
"While the President does have to publish the grounds for this decision, what constitutes the national interest is not defined under the Act, and this creates the opportunity for abuse. "
"The lack of constraints risk creating a parallel allocation process, one that lacks the transparency and value-maximization that competitive bidding should achieve."
The report continues: "Companies which the government enters into direct negotiation with must be pre-qualified, which will ensure some level of financial and technical capacity to operate.
However, the country will be unable meaningfully to assess whether the company is offering them the best possible deal.
A transparent, competitive bidding process also encourages more reliable firms to enter the sector, as it provides assurance that bids will be evaluated, contractual terms negotiated and concessions awarded fairly. Chatham House's report on good governance of the petroleum sector states that "transparent processes can increase competition and raise the standards of work programmes and generate more investment."
The mechanisms to ensure that the country gets the best possible deal are also weaker for direct negotiations, according to the report. "Contrary to the provision on bidding rounds, for direct negotiations the negotiating team does not have to include individuals with knowledge of the oil industry, is smaller than for bid evaluations, does not include any representative from the LEITI, and does not have to be free from any conflict of interest.30 Direct negotiation is also likely to favor the companies who have greater access to financial resources and technical expertise."
Sequential rounds of competitive bidding, according to the report, will help secure a better deal for Liberia by allowing the government to compare terms and develop expertise over time. "As such, the draft act should be edited to require that all concessions be competitively tendered and the licensing of petroleum agreements should be subject to the Public Procurement Concession Act."
The report recommended that the Public Procurement and Concession Act should apply to licensing of petroleum agreements and that all petroleum agreements should be subject to international competitive bidding.
Section 10 (h) of the NOCAL Act allows members of NOCAL's board of directors to set the level of payments they are to receive as a stipend and per diem for travel outside Liberia. This means that the board could allocate themselves a limitless amount. Although there is some oversight of these payments via periodic audits by the Auditor General and audits carried out by an international accounting firm these mechanisms will only highlight any irregularities or excessive payments rather than preventing them from happening.31 The NOCAL Act should be amended to require the approval of stipends and per diems by the Ministry of Finance.
The report noted that while a national consultation was held in 2012 to develop the National Petroleum Policy, which provides the principles to be enshrined in these acts, in September 2013 elements in the government attempted to breach legislative process and secretly pass the two draft laws. "The Liberian Senate passed the acts without public consultation.
However, the House consulted with civil society and chose not to pass the acts at that point. The House then started a nationwide consultation in November 2013. While these efforts to consult and inform the Liberian people are welcomed, the speed of the consultation process does warrant concern. Each county will be given very little time to read, consider and respond to two very complicated and important acts."
Given the potential long-term implications of these laws, the report notes that more substantial consultations are needed. "As the House evaluates the acts in early 2014 it must ensure that it has sufficient time to consider and debate these laws. If they are sufficiently revised, revenues from petroleum could drive the country's post-conflict economic development should there be a significant oil find. Failure to put in place the necessary transparency and accountability mechanisms could lead to a downward spiral of mismanagement in which patterns of corruption and cronyism are entrenched and the economic and governance gains the country has made are undermined."
The Petroleum Act requires that a company's beneficial owners are disclosed in applications for reconnaissance licenses.1 Disclosure is also required when companies are pre-qualified to apply for petroleum agreements and this will be made public in a register of companies.
The inclusion of a provision to require the disclosure of the ultimate beneficial owners of companies is pioneering. It puts Liberia at the forefront of international efforts to require greater transparency within the oil and mining sectors. In May 2013, the Extractive Industry Transparency Initiative (EITI) adopted a new Standard which encourages public disclosure of the real owners of companies bidding for, or operating, natural resource concessions, with plans to make it a requirement by 2016.
GW said the current draft needs to be strengthened. The inclusion of a definition of who constitutes a 'beneficial owner' would be a step forward. Without it companies could report that they are owned by holding companies or trusts. A definition stating that the beneficial owner of a company is, "the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity," could be used for the draft law. Global Witness considers that, "at a minimum, every natural person who owns or controls more than 10% of the company should be considered a beneficial owner."4 The provision could be strengthened further if any politically exposed person or senior military figure or civil servant, who has any percentage holding in the company, is required to declare this. There could also be a requirement on the company to declare if they are similarly part-owned by such a person. A politically exposed person is considered to be a senior politician and their close family and associates.
"They are one of the biggest corruption risks with regard to the awarding of natural resource concessions. These amendments would enable the Liberian Government and its people to know exactly who controls and ultimately receives profits from each company, and help prevent companies with owners who are politically connected from being awarded concessions."
Under Section 15 of the Petroleum Act which governs pre-qualification of applicants, changes of beneficial owners must be disclosed. The Petroleum Directorate will also keep a register of companies who were prequalified alongside the supporting documentation, which would include information on beneficial ownership. The register is open for public inspection.5 These provisions will help to enhance public trust that Liberia's natural resources are being allocated fairly and according to the law. To facilitate independent verification of the data on beneficial ownership, the register must be made available for all to see and should be free to use with information that is searchable on a computer.
The report recommends that the draft be modified to include the definition that the beneficial owner of a company is "the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity." At a minimum, every natural person who owns or controls more than 10% of the company should be considered a beneficial owner."
The report also notes that the register of companies should also include beneficial ownership information of companies that have applied for reconnaissance licenses. "Politically exposed people or senior military figures or civil servants who have any ownership stake in the company should be disclosed with the beneficial owners of the company."
GW also recommends that the register of companies should be made public for all to see, and should be free to use with the data made available in a computer-readable format.
Separation of institutional roles
The draft acts separate the institutional functions of NOCAL, which as "player and referee at the same time"7 is currently responsible for regulating oil operations in which it has a commercial stake. The Petroleum Act creates new Petroleum Directorate8 which would take over the regulatory role and be temporarily housed under the Ministry of Lands, Mines and Energy.9 The Petroleum Directorate will be responsible for managing contract award processes and overseeing the sector, and will be headed by a Director General.
The Petroleum Directorate will transition within 12 months from the 'Act effective date,' to become a new Ministry of Petroleum headed by the Minister of Petroleum.10 Sections 9 and 10 of the Petroleum Act define the functions of NOCAL, which are expanded upon in the NOCAL Act. NOCAL will manage the state's commercial aspects of petroleum activities and the participating interest of the State in petroleum agreements11 and provide technical support to the Petroleum Directorate.12.
GW suggests that the changes to the role of NOCAL will go a long way toward providing proper accountability and oversight of the sector. But cautioned that the National Petroleum Policy proposes the creation of an independent regulator which is separate from the Ministry which is responsible for policy oversight of the sector.13 This appears to have been dropped in the drafts of the acts.
A separate regulator is important given the significant failure of the Liberian Government to effectively oversee the sector when oil contracts have been awarded. The Global Witness and LOGIA report Curse or Cure documents how NOCAL paid members of the Liberian Legislature to facilitate the passage of oil contracts.14 An independent monitor would oversee the allocation of concessions, performance of companies to ensure compliance with contractual obligations to workers, communities and the government, and provide a check on information submitted by companies in the pre-qualification process.
Broad Transparency noted
The GW report establish an independent oversight body with a mandate to oversee all activities in the sector and powers to investigate credible allegations of wrongdoing, compel other government agencies and companies to provide information and commission reports and investigations in collaboration with the Liberian Extractives Industries Initiative and the General Auditing Commission.
A Liberian Oil and Gas Initiative (LOGI) is a coalition of Liberian civil society groups who work to strengthen good governance in oil and gas development through broad-based collaboration and participation, promoting socio-economic and political growth in Liberia.
The GW assessment hailed some broad transparency provisions in the new draft which aims to ensure compliance with the Liberian Extractive Industries Transparency Initiative and also provides a solid basis for creating greater accountability within the sector and will go a long way to improve public trust of the government.
"As outlined in the Chatham House principles of good governance in the petroleum sector: "transparency not only removes the cover for possible corruption, but enables good decisions, allows rapid intervention to correct problems in the system, and builds trust."
Whilst these provisions are certainly progressive, GW says, they could be stronger. For example, the report states that there is no specific reference in the NOCAL act to Liberian Extractive Industry Transparency Initiative (LEITI). "The act should be amended for clarity and consistency to require compliance and cooperation with LEITI. Secondly, there is currently no requirement to ensure that petroleum production data, export volumes or the price that the oil is sold for are published. The key production data would include information on: the total volume of oil produced, cost oil which companies claim back and how the remaining profit oil has been split between companies and the government."
The report says it is important that production and export data be published as well as the price the oil was sold for, and that the data is broken down by company so it can be reconciled against the information disclosed under this act on payments to the government and NOCAL.
"For example, data on the companies' and government's share of profit oil can be compared to export data to ensure that the correct revenues have been paid. Also, scrutiny of revenue data and the claims that companies make of the amounts of cost oil could also help expose any instances of overstated capital and operational costs, thereby maximizing the government's share of production."
GW asserts that the NOCAL act does contain a strong revenue transparency provision. "This is not replicated in the Petroleum Act beyond the commitment to comply with the LEITI. The Petroleum Act should be amended in line with best practice to require transparency of all material payments to the government under petroleum agreements which should then be collated and verified in accordance with the LEITI."